1

Future Communication Regulation Trends facing the

Development of Broadband and Applications

March, 05, 2015

The authors: European Expert(s) Chinese Expert(s)

Chapter “Strengthening Competition”: Fabio de Alisal Shi Lina

Chapter „Broadband Rollout“ by Thomas Hart Zhang Li

Chapter on „The Role of OTT and the

Challenge of Net Neutrality“ by

Bernd Holznagel

Dominik Schomm

Martin Grusczyk

Jin Xiaxia

Shen Ling

The EU-China Policy Dialogues Support Facility (PDSF II) is a project financed jointly by the European Union and the

Government of the People's Republic of China, implemented by a consortium led by Grontmij A/S.

This publication has been produced with the assistance of the European Union. The content is the sole responsibility

of Grontmij A/S and can in no way be taken to reflect the views of the European Union.

2

Summary of assignment

Locations EU and China

Dialogue partners DG CNECT, EU Commission

Ministry of Industry and Information Technology (MIIT), China

Chinese Academy of Telecoms Research (CATR)

Brief description of assignment To identify key challenges and recommendations on future

development of markets for electronic networks and services in

support of the EU-China Information Society (ICT) Dialogue.

Tasked by Chris Brown

Programme Manager, EU-China Policy Dialogues Support

Facility (PDSF)

PDSF activity number 29

3

I. Introduction ............................................................................................. 6

II. Strengthening Competition in the Electronic Communications Markets

10

1 Equity reform and market opening in China ......................................................................... 11

1.1 Background of telecom corporate equity reform in China ............................................... 11

1.2 Ownership structure and governance structure of Chinese telecom enterprises ........... 12

1.3 Opening up of China's telecom industry ........................................................................... 15

1.4 Analysis of Equity reform and market opening ................................................................ 17

1.4.1 Equity reform models of telecom enterprises .......................................................... 17

1.4.2 Main policy tools for market opening ....................................................................... 19

2 European Union’s Approach and Experiences ...................................................................... 19

2.1 Why Competition in Telecommunications ....................................................................... 19

2.2 Liberalization and Privatization ......................................................................................... 21

2.2.1 Definitions ................................................................................................................. 21

2.2.2 Privatization of the incumbents: models, process and current situation ................. 27

2.2.3 Privatization and public control ................................................................................ 29

2.2.4 Regulation adjustment after the privatization. ........................................................ 36

2.3 Market opening. ................................................................................................................ 53

2.3.1 Steps to open up. ...................................................................................................... 53

2.3.2 Methods to open up the electronic communications markets ................................ 62

2.4 Market regulation. ............................................................................................................ 90

2.4.1 The Market-based Regulation Model. ...................................................................... 90

2.4.2 The Ladder of Investment” approach. .................................................................... 109

2.4.3 Wholesale regulation. ............................................................................................. 112

2.4.4 Retail regulation. ..................................................................................................... 123

2.4.5 Future perspective of the implementation of ex-ante regulation in Europe. ........ 125

3 Analysis and Findings .......................................................................................................... 127

III. Broadband Rollout Policies and Measures ........................................ 130

1 Broadband Rollout in the EU .............................................................................................. 130

1.1 Current Level of Broadband Rollout and the rural rollout challenge ............................. 131

4

1.2 The Digital Agenda for Europe ........................................................................................ 141

1.3 Measures to Reduce Investment Costs........................................................................... 143

1.4 Choice of Investment Model and PPP options................................................................ 147

1.5 Choice of Business Model ............................................................................................... 153

1.6 Choice of Finance Tools .................................................................................................. 154

1.7 Member State Examples ................................................................................................. 159

1.8 Additional Information and references .......................................................................... 166

2 Broadband Rollout and Universal Service in China ............................................................. 168

2.1 Connotation and goals of broadband universal service ................................................. 168

2.2 Development status and problems ................................................................................. 170

2.3 Policy Analysis and Recommendations on Universal Service ......................................... 173

2.3.1 The Program of “Extending Telephone Coverage to Every Village” is major measure

of China to promote rural telecom universal service ............................................................. 173

2.3.2 New moves of the government to promote rural broadband penetration in recent

two years 175

3 Analysis and Findings .......................................................................................................... 176

IV. OTT and Telecoms Operators – Redefining Relationship and Dealing

with Network Neutrality ............................................................................ 179

1 Relationship between OTT and basic telecom enterprises in China .................................. 179

1.1 Current development of OTT services in China .............................................................. 179

1.2 Impact of Internet OTT services on traditional telecom industry ................................... 181

1.3 Competition between the telecom operators and OTT enterprises .............................. 184

2 Analysis China: Relationship between OTT and the basic telecom operators ................... 186

2.1 Relationship between OTT enterprises and basic telecom enterprises ......................... 186

2.2 Discussion on supervision of the Government over OTT services .................................. 187

2.3 Suggestions on development and regulation of OTT services ........................................ 189

3 European Union Market Players and Competitive Relationship ........................................ 190

3.1 OTT-Providers as new Players in the Telecom and IT Markets ....................................... 190

3.2 Most important Telcos and OTT-Providers in Europe .................................................... 191

3.2.1 Telcos ...................................................................................................................... 191

3.2.2 OTT-Providers ......................................................................................................... 192

3.3 Competitive Relationship between TC- and OTT-Providers ........................................... 199

3.4 Effects on Revenue ......................................................................................................... 204

3.5 Countermeasures by the Telcos...................................................................................... 206

5

3.6 Net Neutrality: Debate on Regulatory Framework ......................................................... 209

3.6.1 Technological Basics ................................................................................................ 209

3.6.2 Violations of Net Neutrality .................................................................................... 212

3.6.3 Stakeholders’ Positions ........................................................................................... 213

3.6.4 Dimensions of Blocking and Throttling ................................................................... 215

3.6.5 Legal Framework of Net Neutrality ......................................................................... 217

3.6.6 Legal Framework in EU ........................................................................................... 221

3.6.7 Criticism .................................................................................................................. 222

3.6.8 Future plans on Net Neutrality in EU ...................................................................... 224

3.6.9 Outlook.................................................................................................................... 231

4 Conclusion ........................................................................................................................... 231

6

I. Introduction

Background

By way of background, China already features the world’s largest online population, having

surpassed the 500 million online users threshold in 2012. This, however, still represents only a

penetration rate of 40%, and the situation with respect to broadband availability is unsatisfactory.

According to MIIT, 175 million Chinese users had access to fixed broadband services, a penetration

rate of merely 13% in 2012 (in contrast: developed nations average 25.7%). By the end of 2012, the

rural broadband penetration rate was only 6.3% in 2012. Broadband development has reached a

saturation point in the developed areas, while there is only slow development in the rural areas. For

a country in continuous process of economic and social development such as China, the availability

of a high-quality communications network infrastructure is of vital importance: for businesses as

backbone for their operations and international involvement; for government as a channel to

provide more efficient and citizen-oriented services, become more transparent and accessible; for

citizens to have available relevant information and communication services that are relevant to their

professional and private lives.

Promoting broadband rollout is a pressing issue for any country, even more so for countries and

regions with the ambition of technology leadership. There is an abundance of indicators pointing out

the direct relevance a high-quality broadband infrastructure has for a region’s economic

development: The EU Commission estimates: 2 Million jobs and more than 600 Million Euro worth

GDP; Booz & Company: 10% higher broadband penetration leads to 1.5% greater labour productivity

growth over the following five years; World Bank: 1.38 additional percentage points to GDP growth

for every 10-percentage-point increase in broadband penetration; McKinsey: 10% increase in

broadband penetration boosts a country’s GDP between 0.1 to 1.4 percent.

Especially after the recent economic and financial crisis, many countries have introduced (high-

speed) broadband network construction into their economic recovery plans, both in order to benefit

from the perceived contribution of high-quality communication infrastructure to future growth, and

to encourage feasible investment models for its establishment. In 2011, the overall goal of

“facilitating the construction of broadband, compatible, safe and ubiquitous next generation

national information infrastructure” was set in the 12th Five-Year Plan for National Economic and

Social Development of China. In 2013, the State Council published the “Broadband China Strategy”

as a cross-sectoral effort to promote broadband development.

At the same time, the EU member states are facing a policy shift with respect to broadband

deployment. The EU markets have been almost fully liberalised and developments have mostly been

market-driven. Just like the Chinese government found that all-government funded infrastructure

development was unfeasible, the EU member states had to realise that reliance on market forces

alone is insufficient when it comes to the development of next generation networks for everybody.

The most recent Digital Agenda Scorecard indicates that the EU at large and many member states

will face difficulties achieving the broadband goals formulated in the Digital Agenda for Europe and

the member states’ respective national broadband plans.

7

Both the EU and China are currently in the process of identifying the best compromise between

facilitating market forces to roll out better and more affordable networks and services on the one

side, and governments providing financing aides and incentives on the other. Broadband promotion

and rollout strategies are a new challenge where both China and the EU are in decisive stages today,

needing to identify feasible strategies that balance the need for high-speed broadband, market

competitiveness, opportunities for state support and social and economic impact of an improved

broadband infrastructure.

The Broadband Policy Expert Group which resulted from the previous PDSF II activities has identified

key challenges that policy makers, regulators and market players have to tackle in order to reap the

largest possible benefits from the newly emerging market environment, and how to improve EU-

China cooperation in this field, both on a policy and a market level.These results serve as input to the

Information Society (or ICT) Dialogue, where the findings have an additional high-level platform for

discussion and adjustment. Through this approach, the activity is able to yield results that are

perfectly matched to the policy and market environment and to the needs of a maximum of

stakeholder groups.

In the previous activities, EU and Chinese broadband development strategies, policies and market

developments were compared, and joint challenges as well as possible lines of action were explored.

Through this work, a number of current and future challenges were identified that both regions are

facing in order to create an electronic communications infrastructure that contributes to the regions’

competitiveness and innovation.

When discussing the major challenges for policy makers today, apart from the promotion of

broadband networks, another aspect that was deemed crucial was the shifting economic and

business model of communications networks and services, with new (Over-the-top) service

providers eating into the business of traditional telecoms operators, and with service providers

increasingly dominating the economic rules of internet traffic. For both the EU and China, this

requires sound analysis of the current and future technology and market trends, in order to timely

identify necessary policy adjustments.

The necessary and costly upgrade of networks, the new role of over-the-top and internet players in

the communications markets and the general question of how to ensure competitive markets in this

kind of environment form the core questions of this activity. The activity builds on the findings of

PDSF II activities 4 (Broadband Policy Expert Group) and 12 (Broadband Policy Study Assignment to

Europe) initiated by the dialogue partners. The objective of these activities was to analyse the

current market and policy challenges to broadband development in the EU and China, and to

identify current impediments to fast broadband rollout as a key prerequisite to competitiveness and

innovation in both regions.

The previous PDSF analysis showed that the imminent challenges for European and Chinese markets

are quite similar: traditional telecom companies’ business models eroding and new entrants taking

over service markets; commercial incentives for broadband rollout being insufficient to match the

policy targets set out in the EU Digital Agenda or the Chinese Broadband Strategy. The market

players demand more flexibility to adjust to the new challenges, and more liberties to implement

new business models.

8

The European Commission has been in a fruitful exchange with the Chinese government on the

further development and modernisation of China’s and the EU’s Information Society Policy for many

years. Through joint work on topics such as Digital Divide, telecommunication policy, convergence,

e-government and e-commerce in the EU-China Information Society Project (2005-2009) and by

addressing the current and forthcoming achievements and challenges in the EU-China ICT Dialogue

and through other platforms, a long-standing partnership and expert network has evolved.

Broadband promotion and rollout strategies and their implications for the economic and social

environment are a new challenge where both China and the EU are in decisive stages today, needing

to identify feasible strategies that balance the need for high-speed broadband, market

competitiveness, opportunities for state support and social and economic impact of an improved

broadband infrastructure.

The aim was to constantly ensure that the work of the expert team addresses the most relevant

issues as perceived by the policy-makers, and that the work is aligned with the current work

priorities of DG CNECT and MIIT. By following such an interactive, feedback-based approach, it can

be ensured that the activity and its findings are of the most relevance to decision-makers and

experts in the EU and China.

Objectives

Activity 29:

Overall Objectives

Identify key challenges and recommendations on future development of

markets for electronic networks and services in support of the EU-China

Information Society (ICT) Dialogue.

Purpose and

Specific Objectives

• Build on platform for ongoing dialogue and information exchange on

communications policy issues between policy-makers, experts and

industry, as established through previous activities by PDSF II (refer to

Activity 4: Broadband Policy Expert Group and Activity 12: Broadband

Policy Study Assignment to Europe). Specifically the activity will:

• Identify the most disruptive changes of the market environment

through new and forthcoming technologies and services

• Identify impact of these changes on key policy targets: broadband

penetration, industry development, bridging the digital divide

• Describe preconditions for a flourishing market for communication

and internet services to benefit general growth and social / economic

development

• Identify current and future policy and regulatory challenges for the

EU and China emerging from technology and market trends

• Identify strategies to close supply gaps in broadband networks and

provide universal service to disadvantaged regions and societal

groups

• Formulate recommendations for adjusting the policy framework for

telecommunications and internet services to promote growth and

9

Activity 29:

innovation.

Project Steps

The kick-off event on May 16th, 2014 served to discuss the structure of the activity, next steps and in

particular the topics to be analysed for the research part of the activity on “Game Changers”. The

activity started with a collection of materials, information, reports, market analysis about emerging

market trends raised by the internet and mobile internet,business challenges perceived by market

players, policy makers and experts. Through discussions ahead of the meeting, the expert team

agreed to discuss three specific topics as possible focus points:

• Rural Broadband Rollout / Universal Service

• Strengthening competition / market opening

• OTT and Telco Operators

The aim of the activity is to provide an update on current developments with respect to those three

topics as well as to point out critical discussion points for policy reform. Whereas for broadband

rollout and the new OTT / Telco relationship, there is a case to be made for a joint analysis of

challenges and solutions between the EU and China, the strengthening of competition through

opening of the markets (and in particular through the possibility of private sector investment in the

state-owned infrastructure) is a topic that is a specific Chinese challenge at the moment. The request

was to introduce the history of EU market opening and point out crucial liberalisation and reform

steps that contributed to strengthened competition in the EU markets for electronic

communications.

The three topics will be independently addressed in this report, they should be considered stand-

alone reports within this document and can be used without knowledge of the respective other

parts. This implies that some aspects (e.g. universal service, facility sharing, state subsidies) are

addressed in more than one context. This redundancy is intended to make for more convenient use

of the respective reports.

10

II. Strengthening Competition in the Electronic Communications Markets

Market Development

In general, China’s Information and Communication Technology (ICT) industry has entered a new

stage of development dominated by the Internet. In 2014, the revenue from Internet-based

businesses in China's ICT industry exceeded 50% for the first time, a turning point appeared in

mobile voice services, and its contribution to the revenue growth of the industry has changed from

positive to negative. Among them, the mobile Internet has become the most important entrance for

application services and business innovation platform, and its contribution to the revenue growth of

basic telecom enterprises exceeded 100% for the first time. In the first three quarters of 2014, the

traffic growth rate of the mobile Internet was over 50%, and the average traffic rate of 4G users was

four times higher than that of 2G and 3G users, with an enormous growth potential.

At the enterprise level, basic telecom enterprises are actively responding to the changes in the tide

of the Internet and speeding up transformation and innovation.

First, traffic management. Telecom enterprises are trying to increase users’ traffic consumption. The

world has entered the fine traffic operational stage. China has just started, so there is a huge space

in future business models. In 2014, the average traffic per mobile user is expected to reach 190M,

and that per 4G user is expected to reach 700M.

Second, new business operation. IT and system integration services are used to increase the value of

enterprise services. The international operators represented by AT&T are responding to the decline

of traditional services through entering cloud computing, IT services, M2M and other businesses,

and their annual revenues are growing by 13% in average, accounting for over 50% in the enterprise

data services. Domestic operators are positively entering the Internet of Things (IOT), and their

current end-user subscribers have exceeded 40 million, with a growth rate of over 40%.

Third, exploring capital operation. They are acquiring new growth points and competitive

advantages via integration and acquisitions. China Telecom has founded its capital operation

department mainly engaged in Internet applications, government and enterprise ICT and innovation

incubators. In addition, China's Internet enterprises are accelerating to expand businesses and

markets, and their international influence has been significantly enhanced. Among the top 10 global

Internet enterprises by market capitalization last year, the number of Chinese enterprises increased

from 2 to 41, among which Alibaba ranked second. Among the top 30 global Internet enterprises by

market capitalization, there are 8 Chinese enterprises, whose market capitalization is nearly one half

of the total of the 18 U.S. enterprises, with a much smaller gap compared with one-fifth in 2013.

Since 2014, there are many cross-border merger and acquisition activities led by BAT. In the first half

of this year alone, the three enterprises have announced more than 20 merger and acquisition cases

1The newly added are Alibaba listed in September and JD listed in May

11

involving industrial, financial, commercial, cultural and other fields. Internet enterprises made partial

breakthroughs in international development. For example, Sungy Mobile’s smartphone application

“GO Launcher” has 360 million users, among them 70% are from overseas markets.

At present, China’s ICT industry is in a critical period of regulation and reform, which is mainly

reflected in three aspects. First, the broadband layout has entered a critical stage. To meet the

international competition and potential bandwidth requirements of new business development,

China is accelerating the construction of broadband infrastructures with focus on fibre access to

quickly narrow the gap between urban and rural areas and improve the universal service

compensation mechanism involving multiple subjects. With focus on breaking through a number of

core technologies, China is accelerating the transformation and upgrading as well as integration and

innovation of traditional industries, and the information economy has become the core driving force

of economic growth. Second, the process of building the legal system is significantly accelerated.

With the development of cloud computing and big data, Europe, South Korea and other countries

have strengthened personal information protection and management of cross-border data flow

through legislative means. China is carrying out Internet-related legislation orderly and speeding up

to formulate the network security law, the e-commerce law, the critical infrastructure protection law

and other laws and regulations. Third, a market pattern that is uniform but open, orderly and

competitive is being formed. In accordance with the requirements of the 3rd Plenary Session of the

18th CPC National Congress and the government work report of 2014, the telecom industry has

constantly delineated the relationship between the government and the market and fully opened

the telecom charge supervision; introduced virtual operators and opened mobile resale businesses;

promoted broadband access opening and drafted the pilot program; established China Iron Tower

Company, explored the diversified ownership and realized diversification of investment subjects and

market competitors.

1 Equity reform and market opening in China

1.1 Background of telecom corporate equity reform in China

Separation of the functions of the government from those of enterprises promotes the

establishment of the legal person system of state-owned enterprises in China.

China’s telecom equity reform mainly aims to promote the establishment of a modern corporate

system. The Decision Regarding the State Council's Institutional Restructuring Plan was adopted at

the 1st Session of the 9th National People's Congress in 1998 proposes that “we shall transform the

functions of the government to achieve the separation of the functions of the government from

those of enterprises in accordance with the requirements of the socialist market economy.” In

March 1998, the Ministry of Information Industry was established on the basis of the former

Ministry of Electronics Industry and the former Ministry of Posts and Telecommunications. The

Directorate General of Telecommunications was then separated from the Ministry of Information

Industry and re-incorporated into China Telecom Corporation to achieve the separation of the

functions of the government from those of enterprises. After re-incorporation, the Ministry of

Information Industry completely cut the economic and administrative ties with the telecom

enterprises. The Ministry of Information Industry was mainly responsible for industrial regulation

12

and no longer had operation functions, and corporate operation was handed over to China Telecom.

Later, the Chinese government restructured China Telecom Corporation and split the former China

Telecom Corporation into three companies, i.e. new China Telecom, China Mobile and China Satellite

Communications Corporation, and paging services were given to China Unicom. Separation of the

functions of the government from those of enterprises has promoted the formation of the dominant

position of enterprises, taking a big step forward in improving corporate governance ability.

Although the functions of the government are separated from those of enterprises, China has not

yet formed a modern corporate system for state-owned enterprises, and there are still many

problems with the corporate governance structure and governance capacity. First, in the case that

state-owned shareholders have complete control, it is difficult to form a normal agency mechanism.

Influenced by the single property structure, state-owned shareholders and operators of state-owned

enterprises constitute the most direct principal-agent relationship. State-owned enterprises are held

responsible for the State-owned Assets Supervision & Administration Commission and under the

management of a number of government departments. Therefore, there in fact exist two kinds of

principal-agent relationship between the property owners and operators of state-owned enterprises,

namely the administrative principal-agent relationship and the economic principal-agent relationship.

State-owned enterprises are assessed according to double standards, especially for the

administrative principal-agent relationship. The operators of state-owned enterprises often shift

between the roles of entrepreneurs and government officials, so they can hardly deal with business

issues purely from the perspective of enterprises. Second, independent directors and professional

committees often exist in name only. At the early stage of restructuring, a number of telecom

enterprises established their corporate oversight institutions, such as independent directors and

professional committees, but these institutions seldom played a role in actual operation. Taking

China Unicom A Shares for example, 8 independent directors attended 26 meetings during 2000-

2002, but they had raised no objection to the company’s draft resolutions of board of directors or

other draft resolution matters of the years. China Mobile, another example, has set up its audit

committee, remuneration committee and nomination committee, but each committee has only 3

members, and the members of the three committees are completely the same.

1.2 Ownership structure and governance structure of Chinese telecom enterprises

(1) Ownership structure

The ownership structure of the telecom enterprises is still the ownership structure form in which

state-owned capital has absolute control. Among them, China Mobile’s state-owned shares account

for 75%, China Unicom’s state-owned shares account for 61.05%, and China Telecom’s state-owned

shares account for 70.89%.

China Mobile's ownership structure is relatively simple. China Mobile Communications Corporation

indirectly holds 75% of the shares of the listed company (China Mobile Ltd.) through wholly-owned

subsidiary - China Mobile (Hong Kong) Group Limited, while China Mobile (Hong Kong) Group

Limited is a wholly-owned subsidiary established by “China Mobile Communications Corporation in

Hong Kong. In fact, “China Mobile Communications Corporation holds 75% of the shares of the listed

company, and the remaining 25% of the shares are held by the public.

13

China Unicom is listed on the stock exchanges in New York and Hong Kong and has also issued A

shares on the domestic stock exchange. China United Network Communications Corporation

Limited holds 61.05% of the shares of China United Network Communications Limited.

After realizing global placement by issuing additional shares on the stock exchange in Hong Kong in

May 2004 and repurchasing the assets of such telecom companies as Hubei Telecom in 10 provinces

from its parent company in June 2004, China Telecom Corporation Limited holds 70.89% of the

shares of the listed company and other domestic state-owned shareholders hold 11.96% of the

shares, among which Guangdong Rising Assets Management Co., Ltd. holds 6.94%, Zhejiang Finance

Opening Company 2.64%, Fujian State-owned Assets Investment Holdings Limited 1.2%, Jiangsu

Guoxin Asset Management Group Limited 1.18% and the public 17.1%.

(2) Governance structure

With the advancement of equity reform, the three telecom enterprises have gradually improved

their internal corporate governance structures. The three telecom enterprises have established

sound boards of directors, independent director systems, boards of supervisors, remuneration

committees, audit committees, nomination committees and other systems in accordance with the

relevant laws and regulations, laying the foundation for the improvement of their internal

governance mechanisms. Meanwhile, the shareholders' meetings, the board meetings, board of

supervisors meetings and meetings of various professional committees are timely convened in

accordance with the relevant laws and regulations and the actual situation of corporate operation to

discuss issues, and the related persons also positively participate in these meetings.

Taking China Telecom for example, China Telecom's corporate governance structure covers the

shareholders’ meetings, the board of directors and the board of supervisors to ensure standard and

effective operation. The overall framework of corporate governance has a two-tier structure: the

board of directors and the board of supervisors are under the shareholders’ meeting, and the audit

committee, remuneration committee and nomination committee are under the board of directors.

According to the company’s Articles of Association, the board of directors is authorized to be

responsible for making major business decisions and overseeing the daily operation management of

senior management; the board of supervisors is mainly responsible for overseeing the work

behaviors of the board of directors and senior management. Both are made independently

accountable to shareholders.2

2 Refer to the corporate governance page of the official website of China Telecom:

http://www.chinatelecom-h.com/sc/company/governance_overview.php。

14

China Telecom governance structure

Shareholders’ meeting

Board of directors Board of supervisors

Audit Committee Remuneration Committee Nomination Committee

China United Network Communications Corporation Limited, China United Network

Communications Limited (listed on the Shanghai Stock Exchange) and China Unicom (Hong Kong)

Limited (listed on the Hong Kong Stock Exchange and the New York Stock Exchange) have

established their governance structures that explicitly specify the responsibilities of the shareholders’

meeting, board of directors and management, continuously optimized the management system for

the board of directors and information disclosure and improved the decision-making process and

institutional system of the board of directors.3

Corporate governance development of the three major telecom operators

Directors Non-Executive

Directors

Independent Executive Directors

Board of Supervisors

Remuneration Committee

Audit Committee

Nomination Committee

Chin

a

Mo

bile

9 1 3 3 3 3

Chin

a

Un

ico

m

4 4 3

Chin

a

Te

leco

m

8 1 5

Source: the annual reports of the listed companies

3 Refer to the corporate governance page of the official website of China Telecom:

http://www.chinaunicom.com.cn/about/shzr/zrbg10/gszl/。

15

1.3 Opening up of China's telecom industry

(1) Internal opening

In the 20 years and more since 1993, China's telecom industry has changed from a market

monopolized by the government to a relatively open and competitive one that has the three basic

telecom operators and 25,000 value-added telecom operators. Like the opening history of the

telecom industry in most countries, the opening up of China's telecom market is showing the

roadmap of “internal capital first and then foreign capital; value adding first and then foundation”.

In 1993, 9 kinds of telecom services were opened to the public. On August 3, 1993, the State Council

issued the Circular of the State Council for Approving and Transmitting the Opinions of the Ministry

of Posts and Telecommunications Concerning Further Strengthening Market Management (Guo Fa

[1993] No. 55) to open 9 kinds of telecom services to the public: radio paging, 800 MHz wireless

mobile communications, domestic VSAT communications, telephone information service, 450 MHz

radio mobile communications, computer information service, E-mail, electronic data interchange,

videotex and other telecom services. This means that China's telecom market has started to shift

from monopoly to competition.

In 1994, new competitors were introduced into the field of basic telecommunications services. In

December 1993, the State Council issued a document to approve the founding of China United

Network Communications Limited, and China Unicom engaged in operating a variety of basic

telecom services was officially founded in July 1994, marking the beginning of the era of competition

in the market of basic telecommunications services in China. It is a landmark event marking the

breakup of monopoly in the Chinese telecom market and introduction of competition.

Private capital further entered the telecom industry. In June 2012, MIIT promulgated the

Implementation Opinions on Encouraging and Guiding Private Capital to Further Enter into the

Telecom Sector, which proposes to expand the entry of private capital in the 8 areas of

mobile communications resale business pilot, access network business pilot and CPN business,

website custody and value-added telecom business to promote the sustained and healthy

development of the telecom market. According to the aforementioned Implementation Opinions,

MIIT promulgated the Mobile Communications Resale Business Pilot Program to ensure that private

capital can successfully enter the mobile communications market to carry out resale business so as

to promote the innovation of mobile communication business, raise the level of services and provide

users with diverse, convenient and preferential services. At the end of 2014, MIIT openly solicited

public comments for the Implementation Opinions on Encouraging and Guiding Private Capital to

Further Enter into the Telecom Sector and encouraged private enterprises to carry out capital

cooperation with the basic telecom operators through construction and operation of broadband

access network business services, commission maintenance and other forms of cooperation.

(2) Opening up to foreign capital

The telecommunications market started to open up to foreign capital in 2001 when China joined the

WTO. After joining the WTO in 2001, China committed to open up its basic telecom services and

value-added telecom services in the telecom market. The Provisions on Administration of Foreign-

16

Invested Telecommunications Enterprises, which was promulgated in 2001 and revised in 2008,

reduces the minimum registered capital by 50% for providing basic telecommunications services

throughout the country or across different provinces, autonomous regions and municipalities

directly under the Central Government to lower the admittance threshold for foreign investments.

The telecommunications market was opened up to Hong Kong and Macao under the Mainland-Hong

Kong and Mainland-Macao Closer Economic Partnership Arrangement (CEPA) framework. In 2003,

the CEPA was signed. According to CEPA, Hong Kong and Macao investors are allowed to operate 5

kinds of telecom services in the Mainland in the form of joint ventures, including Internet data

center services, store-and-forward messaging services, call center services, Internet access services

and information services. In 2009, the Supplementary Agreement VI to CEPA allowed Hong Kong

service providers to sell in Guangdong the fixed/mobile phone cards that can only be used in Hong

Kong (excluding satellite mobile phone cards). In 2012, the Supplementary Agreement IX allowed

Hong Kong service providers to establish pilot wholly-owned or joint ventures in Dongguan and

Zhuhai in Guangdong Province to operate offshore call center services4, with no restrictions on the

equity proportion of Hong Kong investments.

In 2010, offshore call center services were opened. To implement the Reply of the General Office of

the State Council on Encouraging the Service Outsourcing Industry to Accelerate Its Development

(Guo Ban Han [2010] No. 69) and the Reply of the General Office of the State Council on Agreeing to

Simplify the Examination and Approval Procedures for Pilot Operation of Offshore Call Center

Services by Foreign Investors (Guo Ban Han [2010] No. 127), MIIT promulgated in 2010 the Circular

of MIIT on Encouraging Accelerating the Development of the Service Outsourcing Sector and Simplify

the Examination and Approval Procedures for Pilot Operation of Offshore Call Center Services by

Foreign Investors [MIIT Tong Zi (2010) No. 550], which specifies the 21 demonstrative service

outsourcing cities for operating offshore call center services. The entities involved in the pilot

program include wholly foreign-owned or joint venture telecom enterprises, with no restrictions on

equity proportion of foreign investments. These documents simplify the examination and approval

procedures for pilot operation of offshore call center services by foreign investors and clearly define

the pilot businesses, entities, examination and approval authorities and examination and approval

procedures to promote the smooth development of offshore call center services.

In 2014, Shanghai Free Trade Zone opened part of value-added telecommunications services. In

January 2014, MIIT and the Shanghai Municipal Government jointly issued the Opinions on Further

Opening Up Value-added Telecommunications Business to Foreign Investments in China

(Shanghai) Pilot Free Trade Zone, deciding to further open up value-added telecom services in the

pilot free trade zone on a pilot basis, and the proportion of foreign investment for some commercial

business and communications services can exceed 50%. First, on the basis of China’s opening-up

commitment after its accession to the WTO that the proportion of foreign investment in a foreign

invested telecommunications enterprise providing information services, store and forward services,

data processing services and transaction processing services should not exceed 50%, China further

raised the proportion of foreign investment in these three business categories. Among them, no

4Refer to Circular of MIIT on Encouraging Accelerating the Development of the Service Outsourcing Sector and

Simplify the Examination and Approval Procedures for Pilot Operation of Offshore Call Center Services by

Foreign Investors

17

restrictions are set for application store services and store and forward services in information

services; the proportion of foreign investment for operating e-commerce business in data processing

services and transaction processing services has been raised to 55%. Second, new pilot businesses

are added to open up call center services, domestic multi-party communications services, Internet

access services for Internet users, and domestic Internet VPN services, among which no restrictions

are set for the proportion of foreign investment in the former three business categories; the

proportion of foreign investment in domestic internet VPN services shall not exceed 50%.

1.4 Analysis of Equity reform and market opening

1.4.1 Equity reform models of telecom enterprises

To encourage enterprises to become the legal entities with a sound governance structure, China has

further reformed the property right structure of the state-owned telecom enterprises by means of

restructuring, listing and introduction of strategic investors. Through reform of property rights, social

and social capitals were introduced, which has played a certain role in improving the governance

structure of the state-owned enterprises.

(1) Restructuring and listing

The listing of the telecom operators is an important step of property right reform in the telecom

industry. It not only can effectively change the operating mechanism of the enterprises and improve

the corporate governance structure, but also can effectively build a rational market competition

pattern. In the meanwhile, after listing, the market-oriented innovation capacity of the telecom

enterprises has also increased rapidly. In October 1997, China Telecom (Hong Kong) Limited [later

renamed China Mobile (Hong Kong) Limited] was listed on the stock exchanges in New York and

Hong Kong. In June 2000, China United Network Communications Limited was listed in New York and

Hong Kong and raised a total of 5.65 billion US dollars. In October 2002, China Unicom was listed on

the domestic stock exchange and raised a total of 11.5 billion yuan. In November 2002, China

Telecom was listed on the stock exchanges in New York and Hong Kong, issued a total of 7.56 billion

A Shares with 1.48 HK dollars per share and raised approximately 11.18 billion HK dollars. In

November 2004, China Netcom was listed on the stock exchanges in Hong Kong and New York. In

the new round of market restructuring in 2008, China Unicom and China Netcom were merged, and

China Netcom was delisted in New York and Hong Kong. So far, the four major telecom operators

were all listed, marking that substantive results were achieved in the reform of property rights of the

state-owned telecom enterprises in China.

(2) Introduction of strategic investors

The introduction of strategic investors can bring positive effects to sustainable development of

China's telecom enterprises corporate funds, property right structure, governance structure,

18

operating mechanism and other aspects. Since 2001, China's telecom enterprises began to positively

introduce foreign strategic investors, which not only gained the funds needed to support business

development, but also played a positive role in urging the telecom enterprises to improve their

governance structure and promote strategic and operational cooperation. Since 2012, China has

positively encouraged private capital to enter the railway, electricity, telecom and other monopoly

industries. The Decision adopted at the 3rd Plenary Session of the 18th CPC Central Committee

encouraged state-owned enterprises to carry out the diversified ownership reform, and a number of

investment projects were launched and opened to non-state capitals in the fields of railway, finance

and telecommunications.

In introduction of international strategic investors, China Mobile introduced 2.5 billion US dollars

from Vodafone in 2001, and Vodafone acquired 2.18% of the shares of China Mobile by acquisition

on the secondary market and then added its shares to 3.27%. In 2005, China Netcom introduced

2.18 billion HK dollars from Telefonica, and Telefonica acquired 4.9% of the shares of China Netcom.

In 2007, SK Telecom issued convertible bonds worthy of 1 billion US dollars and officially became

one of the major shareholders of China Unicom.

The process of introduction of private strategic investors has also gradually started with the opening

of the telecom industry to private capital and the diversified ownership reform of state-owned

enterprises. The 3rd Plenary Session of the 18th CPC Central Committee held at the end of 2013

specified the roadmap for the reform in China by 2020. The Decision adopted at the 3rd Plenary

Session of the 18th CPC Central Committee proposes to actively develop a diversified ownership

economy. Diversified ownership integrated by State capital, collective capital and private capital

helped various forms of capitals complement each other to achieve common development. In

accordance with the requirements of the 3rd Plenary Session, since 2014, China Telecom and other

companies have explored the diversified ownership system, mainly including two ways: First,

introduce private capital for some of its subordinate subsidiaries. For example, in June 2014, China

Telecom's gaming company - Dazzle Interactive introduced Shunwang Technology and the Chinese

Cultural Industry Investment Fund as its strategic investors.

As strategic investors, Shunwang Technology and Chinese Cultural Industry Investment Fund

invested 300 million yuan in Dazzle Interactive for 30% of its shares. China Mobile is exploring

corporatized diversified ownership reform for its five content business bases, i.e. music, reading,

game, animation and video, and intends to combine the five bases to establish a new media

company and introduce private capital. Second, restructure by divesting some assets and introduce

private capital. In 2014, the three basic telecom operators established the joint venture - China

Tower Corporation, with China Mobile, China Telecom and China Unicom holding 40%, 30% and 30%

of its shares respectively. As of early December 2014, among the subsidiaries of the Tower

Corporation in the country's 31 provinces, 28 have been put into operation. After the Tower

Corporation was established, the new iron towers needed in the field of mobile communications will

be fully constructed by the Tower Corporation, and the three telecom companies will no longer

construct iron towers by themselves. In addition, the existing iron tower assets will be handed over

to the Tower Corporation by the end of August 2015. Later, the tower corporation will also introduce

private capital, but the equity ratio of private capital should be no more than 49%.

19

1.4.2 Main policy tools for market opening

China's policies for opening up to foreign and private capital focus on restrictions on equity ratio,

which is mainly reflected in the following aspects:

First, the requirements for registered capital. According to Measures for The Administration of

Operating Licenses for Telecommunications Businesses, the minimum registered capital shall be RMB

1 billion yuan for providing basic telecommunications services throughout the country or across

different provinces, autonomous regions and municipalities directly under the Central Government,

or shall be RMB 10 million yuan for providing value-added telecommunications services; the

minimum registered capital shall be RMB 100 million yuan for providing basic telecommunications

services within a province, an autonomous region or a municipality directly under the Central

Government, or shall be RMB 1 million yuan for providing value-added telecommunications services.

Second, the restrictions on proportion of foreign investment. According to Provisions on

Administration of Foreign-Invested Telecommunications Enterprises, the proportion of foreign

investment in a foreign-invested telecommunications enterprise providing basic telecommunications

services (excluding radio paging) shall not exceed 49% in the end; the proportion of foreign

investment in a foreign invested telecommunications enterprise providing value-added

telecommunications services (including radio paging in basic telecommunications services) shall not

exceed 50% in the end.

Third, the qualification requirements for Chinese partners. According to Provisions on

Administration of Foreign-Invested Telecommunications Enterprises revised in 2014, the major

Chinese investor of a foreign-invested telecommunications enterprise providing basic

telecommunications services shall meet the following conditions: (1) being a legally established

company; (2) having the funds and professionals commensurate with its business operation; (3)

complying with due diligence and the requirements for special industries provided by the competent

industry and information technology departments of the State Council. The major Chinese investor

of a foreign-invested telecommunications enterprise mentioned here refers to the investor that has

contributed the largest amount of investment among all the Chinese investors and holds over 30% of

total contribution of all Chinese investors.

2 European Union’s Approach and Experiences

2.1 Why Competition in Telecommunications

The importance of electronic communications today is already widely known and accepted. Virtually

all aspects of human and economic activity are directly affected by, and can strongly benefit from,

the technological advances in this area and the means it allows to all agents in both their private and

publications.

Governments are increasingly aware of the need to promote better and faster access to, and use of,

the electronic communications services and infrastructures. In the beginning of the modern

telecommunications era, during the late XIX century and through most of the XX century, the basic

20

goal was to extend the fixed telephone network as much as possible so that the benefits of the

telephone could increase for more people (social and development effects) and, consequently, more

for each person receiving the service (network effects). The aim to make this service also available

for those customers which due to their low income or to their difficult to reach place of residence

(i.e., rural areas) would not be economically profitable for a private company in normal competitive

conditions led to the widespread creation of legal monopolies in most countries, usually in the hands

of a public owned and managed entity.

However, the end of the XX century brought a technological revolution that has led to a drastic

change in the goals and, therefore, in the means that Governments had. The monopolies, which

were created for the universalization of the telephone service by cross-subsidizing the revenues

obtained in the more profitable areas and/or from the more profitable customers with the losses

required to reach the non profitable areas and customers, proved unable or at the very least

insufficient to achieve and exploit the full potential of the new technological revolution. The aim,

even the need, is today to benefit from the highest possible levels of innovation, and this requires

having the highest number possible of agents participating in the process with their own new ideas

and resources. Thus, those monopolies initially created during the XIX and XX centuries, which either

tended to block or delay possible competing technologies or agents from appearing, or which at the

very least were by definition unable to incorporate them into their own activities, are being

progressively dismantled during the late XX century and beginning of the XIX.

The concern for, and need of, universal access for low income people and rural areas still exists, but

there are new technological, legal and economic tools to achieve it while ensuring universalization

also in the innovation in, and contribution to, the increasingly important electronic communications

sector. In this Report this universal access tools in a competitive environment are shown and

explained while emphasizing the tools and processes to ensure universalization in the innovation

and contribution towards a better and growing electronic communications sectors.

Competition allows for much greater innovation in two ways. First, it increases the number of

participants in the industry and, therefore, the number of ideas and resources of all types –human,

technical, economic, commercial, etc.-. Second, it forces market players to be more efficient, which

leads to cost reductions and allows for further innovation as resources can be employed in new

ideas and projects. One of main achievements of the European model has been to reduce as much

as possible the barriers to entry for new agents in the electronic communications sectors, leasing to

a higher the number of participants and, therefore, higher innovation and efficiency. Network

economies and economies of scale still matter, and importantly, in many areas of the electronic

communications sector, but it is up to market players and consumers now to decide how and when

to achieve them, with authorities working to ensure that entry is possible –and, as shown below,

even promoted- and that concentration will not go beyond the point where the benefit of higher

scale and network economies will be lower than the loss on innovation and efficiency coming from

market pressure and different market players.

This Report shows the main features of the process towards higher innovation and efficiency in the

electronic communications sector through the main steps already briefly presented above:

liberalization (to make competition legally possible), privatization (to make competition fair while

ensuring also short term revenues to the State), regulation (to make competition economically

21

viable in the beginning) and universal access regulations (to make competition and its advantages

compatible with, and accessible for, the inclusion of low income and other type of disadvantaged

customers and areas). The European model has so far proved successful in all the steps mentioned

before and, therefore, serves as the basis for this Report. There have been also some drawbacks,

and lessons have been learnt and presented where appropriate too.

2.2 Liberalization and Privatization

2.2.1 Definitions

Liberalization: the need for competition

Liberalization may be defined as the elimination of legal barriers impeding access to markets. As is

easy to conclude, liberalization is related to but not an equivalent to privatization. The second

concept usually refers to the sale of some or all shares held by a public authority in an entity.

However, the two processes are related. Liberalization implies that private companies are allowed

on a market which often was formerly reserved for a public monopoly.

As a result of liberalization, the former public monopoly is confronted by competition. To maintain a

presence on the market, that latter operator must change its organization, as well as its attitude to

the markets. It must adopt the type of management that is typical of a private company. The

incentive, and even, the possibility of remaining in public hands, then disappears. The next step is

the modification of the capital of the former monopoly to bring in line with that of private

competitors.

This scenario was not uncommon and indeed has appeared to be a natural trend in the European

scenario. As markets open to private undertakings, former monopolies increasingly look like private

companies. The resemblance first concerns the behaviour adopted by the former monopoly on the

market. Then follow the structural resemblance, with part or all of the capital being sold to private

investors.

The reasons for liberalization of the electronic communications markets have been summarized

above. The initial legal basis of the liberalization Member State markets was the application of

European competition law. The same happened in the United States in the early 1980’s. In Europe,

the first indications of the potential use of these rules arose in a Commission decision against the UK

incumbent, British Telecommunications, for an abuse of dominant position. The decision concerned

a “scheme” adopted by BT prohibiting private message-forwarding agencies in the UK from relaying

telex messages received from and intended for relay to another country5. The Commission’s decision

was appealed by the Italian government to the European Court of Justice, whilst the British

government interned in support of the Commission (Case 41/83).

The British Telecom case was the landmark decision in the development of UE policy in the

telecommunications sector and led to further investigations by the competition authorities into the

5Decision 82/861, OJ L 360736, 21 December 1982.

22

activities of European incumbent operators. In 1988, the Commission took the almost

unprecedented step of issuing a directive under Article 86 of the Treaty, on competition in the

market for telecommunications terminal equipments. A further directive followed on

telecommunications services in 1990. The scope of such Commission Directives was viewed by a

number of Member States as an illegal exercise of the Commission s competence and both were

challenged before de ECJ, but were decisively upheld.

The Commission has therefore applied European competition law to the activities of

telecommunications operators through behavioural and structural controls. The former had been

imposed both in ex ante legislative instruments, as well as ex post decisions imposing behavioural

undertakings as conditions for the approval of certain commercial agreement. Structural controls

have been imposed primarily through ex post competition investigations and decisions relating to

agreements, joint ventures, mergers, and even state aids in every aspect of the sector. Such

regulatory intervention has extended to alliances and mergers between national incumbents. In all

these cases, the Commission has been concerned to project the interest of European consumers and

industry against the inevitable commercial pressures created by the developing global economy. In

terms of structural controls through ex ante regulation, undertakings which have special or exclusive

rights in another sector of activity are required, in certain circumstances, to ensure structural

separation with its activities associated with the provision of electronic communication networks

and services under the article 13 of the Framework Directive.

In the past, the Commission has issued guidelines on the applicability of competition law to the

telecommunications sector. Such “soft law” was designed to provide operator with legal certainty,

although they have no formal legal basis. However, under the 2003 Regimen, guidelines have been

issued addressed to national regulatory authorities, to which the authorities are obliged to give

utmost account.

Anyway, during the two phases of telecommunications liberalization in Europe, the process has been

underpinned by the limitation of special o exclusive rights and the necessity of essential

requirements in order to maintain the prohibition of supplying equipment and services except for no

economic reasons in the general public interest.

Liberalization does not necessary mean privatization or public participation in the former monopolist

companies, as it will be explained, but, at the end, in the liberalized European markets privatization

has helped to obtain different goals.

Privatization vs Public ownership

In Europe, a significant number of players active on electronic communications markets are in

private hands. Only a few undertakings remain under certain public control. This is the case,

principally, for some former national operators which have not been privatised (at least not fully),

like in the representative cases of France and Germany. But, in general terms, these operators now

are an exception. The Member States increasingly seek to privatise them. Several reasons may be

found to justify this attitude.

23

In the first place, Governments expect to obtain economic resources and have considered that to

bolster national exchequers selling public assets is an expedient manner. For the same reason (lack

of resources), governments are not in position to provide the financial means necessary for the

development of the undertakings present on the electronic communications markets. Thirdly, in the

current situation, the former national operators have to carry out their activities in a competitive

environment. Measures are taken by management within these operators to ensure they can face

up to competition and generally, governments prefer not being associated with the imposition of

unpopular working conditions. Finally, there is no reason to maintain in public hands an undertaking

which must carry out its activities as if it were private. These public undertakings may no longer be

used to fulfil public policy objectives. Such an obligation would represent a threat for their financial

equilibrium. Some former objectives of the unique provider, as universality, affordability, security or

interoperability can be reached by introducing external obligations and requirements, as it will be

mentioned.

These reasons have led Member States to sell a part, or all, of the shares they hold in their former

national monopolies. The sale of public telecommunications assets started at the beginning of the

1980s, in Britain. The same process occurred in most Member States. The reason some have not yet

sold off all their shares, however, seemed to be contextual (the financial climate), rather than

political.

In principle, the trend towards privatization was not led by the European institutions, who might

base their attitude on the EC Treaty, which provides that European rules do not prejudge the

property rights regime in the Member States. The relevant provision was understood as expressing

the requirement that European law must remain neutral vis-à-vis the concept of public, or private,

ownership. As an implication, European institutions do not have the power to order, or even

encourage, governments to sell public assets (privatization). Conversely, they do not have the power

to discourage, or prohibit, the purchase of shares, or other assets.

That neutrality, in principle, has not prevented the European institutions developing a preference for

privatization. A call for privatization is even currently widespread in economic circles. It is thought

that public management does not provide the best environment for developing efficiency in an

organization. It is also considered that public management is not able to alter the climate within an

organisation, and introduce a spirit of customer-oriented practice. That opinion coincides with

another, that modern States should progressively abandon the exercise of economic activity to

concentrate on core competences such as the exercise of regulatory powers.

Among industrialized countries, the United Kingdom was the leading in privatization until mid-1990s.

Before the year 1979, the UK possessed one of the largest public enterprise sectors in Europe. Since

then, successive Conservative governments undertook an extensive privatization program.

After the pioneering experience of UK and a few other countries in the 1980s, privatisation and

liberalisation have progressively become a distinctive feature of European Union policy during the

1990s. The two main reasons behind this move towards deregulation and the reduction of direct

public intervention in the economy have been: on one side, the adoption of a series of EU

"liberalisation" Directives (on telecommunications, railways, air transport, energy and postal services)

aimed at opening up domestic markets to competition; and, on the other, the progress of Economic

24

and Monetary Union, which, through the pressure exerted by the Maastricht Treaty's convergence

criteria, has encouraged governments to sell state assets and stakes in industrial companies. As a

consequence, privatisation and liberalisation have occurred throughout Europe.

Main privatisation and liberalisation developments in EU and Norway

Country Developments

Austria Partial or complete sale of companies in the competitive sectors (banking, oil and

gas, salt and tobacco monopolies etc). Minority stakes sold in

telecommunications. Railways, post and electricity are undergoing restructuring.

Belgium Companies in competitive sectors have been privatised (banking and insurance,

ferries). Public utilities have been transformed into "autonomous public

enterprises" (telecommunications, post, railways).

Denmark Some firms operating in competitive sectors have been privatised in banking and

transport (bus services)."Corporatisation" (ie taking the form of a company but

remaining in public ownership) of some large-scale public services (Copenhagen

airport, post, state shipping lines). Full privatisation of the telecom company

TeleDanmark. Contracting-out of local-level welfare services is increasing.

Finland "Corporatisation" of some activities (railways, post, air traffic, banking).

Privatisation in competitive sectors and in some utilities (power generation, road

transport in Helsinki and - partially - telecommunications and air traffic).

Contracting-out is very common when reorganising welfare services at local level.

France Privatisation of companies operating in competitive sectors is almost complete.

Public utilities are excluded from full privatisation, with only partial sales having

taken place at France Telecom and Air France. At local level, contracting-out is

extensive, particularly in the water industry. In welfare services, no privatisation

has taken place - there is only a tendency to contract out auxiliary activities

(catering, cleaning etc).

Germany Privatisation of firms in competitive sectors (automobiles, chemicals) and of

eastern German former state-owned enterprises. Some privatisation has taken

place at regional level, as in transport and refuse collection. Liberalisation in some

public utilities (energy and post), with instances of partial privatisation

25

Country Developments

(telecommunications).

Greece Some privatisation in competitive sectors. Privatisation of public utilities under

debate.

Ireland Privatisation is under discussion for state-owned banks, the semi-state airline Aer

Lingus, the airport management company and the state forestry board. Telecom

Eireann has been privatised, while the Electricity Supply Board is facing

liberalisation.

Italy Privatisation has involved a large part of state ownership in competitive sectors

(banks, insurance and the subsidiaries of the Iri and Eni groups), many public

utilities, both at national and local level, and - to a much smaller extent - welfare

services, notably at the local level and through outsourcing.

Luxembourg Some changes in the legal status of some state-owned firms (railways, banks).

Netherlands Privatisation has taken place both in competitive sectors (banking, chemicals,

steel etc) and public utilities (post and telecommunications, regional transport

companies, a few energy companies).

Norway Partial privatisation has taken place in some sectors (grain and pharmaceutical

supply). Partial privatisation of the state-owned oil company and in

telecommunications is under debate. Liberalisation and increased competition

have been introduced in public utilities, such as telecommunications, post,

railways and power supply, while state bodies have been turned into autonomous

companies.

Portugal Privatisation has involved both competitive sectors and public utilities (eg

telecommunications). There are some forms of privatisation in welfare services -

for instance, some hospitals are under private management.

Spain Privatisation has substantially reduced state ownership and involved both

competitive sectors (iron and steel, textiles, chemicals etc) and public services

(electricity, transport, telecommunications). Privatisation processes are now

26

Country Developments

being extended to welfare services.

Sweden "Corporatisation" of state-owned enterprises. Some form of privatisation is under

discussion only for railways and telecommunications.

United

Kingdom

Extensive privatisation has affected firms in the competitive sectors and in public

utilities, where it has been coupled with liberalisation. At local level, legislation

requires competitive tendering for a wide range of ancillary services (cleaning,

catering etc).

(Source: EIRO).

Revenues of the privatization in some European OECD countries:

As a result, in the totality of the EU countries the liberalization process has result in the selling of the

former monopolistic incumbents public-owned.

27

2.2.2 Privatization of the incumbents: models, process and current situation

As a general point of view, it should be noted that various models of privatization can be pursued by

national governments, the motivations for which are as various as the methods themselves.

A. Direct sale of the entire company:

In some instances, countries have chosen to transfer ownership of industries or companies swiftly

and completely and letting the market determine the value of these companies through the bidding

process. In some cases, the auctioning off of a company could reveal a divergence between the

newly-discovered market value and the previous book value of the company as recognized by the

government.

B. Partial sale of the company:

Most privatizations have been gradual. In addition, governments have often sold shares of a state-

owned firm while retaining a portion of the company (a "golden share"), thereby maintaining a

limited degree of control over the company. This practice has become widespread, both in OECD

and non-OECD countries.

C. Sale of the company to another company or consortiums:

Often governments have chosen to sell state-owned utilities directly to other companies -either

foreign or domestic.

28

The OECD remarks that Telecom was the sector where privatizations reached the more elevated

dimension within OECD countries along the 90 s, dropping to US$29 billion from their peak of US$41

billion in 1997. For example, the most important transactions in 1998 included the public offering of

France Telecom, Swisscom and Sonera. In France, privatization activities picked up in 1998, thanks to

the $7 billion second public offering of France Telecom shares in December, which was also the

largest European public offering in 1998. In addition, Deutsche Telecom acquired a 2% stake in

France Telecom as part of the planned strategic alliance between the two companies. This sale of

66.3 million shares, reduced the government stake from 75% to 62%

In any case, ownership changes and “indirect privatizations” (an indirect privatization is the sale of

assets in which the government does not hold a direct stake but where it has a stake in the seller) in

other countries, while not characterized as privatizations by OECD definitions, underscore the

significance of activity in this sector.

The reasons noted linked this strong privatization activity with “supply factors” such as technological

developments and ongoing deregulation. Other reasons have been offered by some observers, who

argue that the industry’s strong growth prospects and lack of exposure to overseas market

turbulence make it highly attractive to investors.

As privatization is not a compulsory requirement under the UE law, variations among the different

states can be found. However, the process consisted basically on the public selling of packages of

shares through a public tender offer. In general prices on the stock markets were considered as to

the timing of privatization in order to obtain a better amount, but had a very limited impact on

privatization decisions. This was, for example, the case of Portugal, where the multi-sector

privatization programme implemented, which included Portugal Telecom, was based as a general

rule on public tenders without discriminatory conditions and leading to the selection of the highest

bidder for a transparent privatization procedure. The offerings were characterised by very strong

support from domestic retail investors, reflected in huge over-subscriptions of retail tranches.

29

As another example, we can make a reference to the Nordic countries, where plans for a merger and

subsequent privatization of the telecommunications companies of Sweden and Norway (Telia and

Telenor) were drafted. However at the end of 1999, this merger fell apart and each company

embarked on its own privatisation plan. Telia’s initial public offering took place during the first half

of 2000, and became the largest ever in the Nordic region. The government kept a 77.7 % of the

company and still remains as the main shareholder. This year (2000) also saw the successful USD 3.6

billion secondary offering of Finland’s telecommunications company Sonera.

In line with the European tendency and in order to promote a competitive market, Spain modified its

Competition Act and enacted a package of economic measures that liberalized economic activities as

telecommunications, energy, water, road and rail transport, among others, through the removal of

the former monopoly status. With this new legal framework, Telefónica, Spain s largest company,

lost its monopoly. New entrants, owned by the French and Italian incumbent, respectively, stated

their operations in December 1998. Although Telefonica still keeps an important market share in all

the telecommunications markets, faces an important competition pressure. Finally, it should be

pointed out that nowadays, a merger process is developing and the number of full operators will be

reduced significantly.

The success of liberalization and privatization is evident: the pricing of telephone service decreases

as new technology and market player come into the market and newer, higher capacity

telecommunications infrastructures are laid down. A significant market growth had been produced

after the liberalization in terms of traffic and lines in service, with a strong decrease of prices.

2.2.3 Privatization and public control

One possible concern of a Government or any other type of public authority is how to keep some

control over the incumbents once they are privatized. As commented above, the European model

imposes clear and mandatory rules to ensure its goals, such as the universalization of access to the

most basic and important services or the protection of consumers. By ensuring the public policy

goals through clear rules there is no need or reason to keep control of the internal and/or day-to-

day management of the operators which is, therefore, left to market forces in order, once again, to

increase innovation and efficiency. As a result, European rules and institutions have acted strongly

against most attempts made by different Member States Governments, however, to keep some

political control over the management of incumbents. In the paragraphs below there is a more

detailed description of the main ways of control and those rejected or accepted by the European

rules and institutions.

2.2.3.1 Limitation on the shares held by foreign investors.

As operators are progressively privatised, an issue that arises is the extent to which foreign investors

may hold shares in the capital of former national operators. The issue is not limited to

telecommunications or electronic communications, but concerns most industries where public

undertakings are privatised, including the energy and transport sectors. In these industries, States

generally want to retain a certain level of control overt the investors holding the shares. They feel

30

such control can be carried out more easily when those investors are nationals. In some instances,

the necessity of residual control is explained by strategic reasons. In other cases, the wish to retain

control is based on the provision of public services. States consider that public services will be

provided in a more satisfactory manner if the shareholders are mainly national investors.

In Europe, this type of limitations is very exceptional. The aim, and general rule, as shown above, is

to allow the maximum number of players and resources in the electronic communications markets

in order to maximize innovation and efficiency. National rules concerning the acquisitions, by

investors, of shares in one or several undertakings fall under the provisions concerning the free

movement of capital under the EC Treaty. In the first place, these national measures may be

assessed as to their compatibility with UE law. The concept of capital movement was further

developed in the secondary legislation. An important instrument in this regard is Council Directive

88/361/EEc of 24 June 1988 for the implementation of Article 67 of the Treaty6. Finally, the

Commission has issued a Communication on certain legal aspects concerning intra-EU investments7.

Therefore, limitations imposed on the ability of Community investors to purchase holdings in the

capital in undertakings located in another Member State (such as the most stringent measure which

is the straightforward imposition of a maximum of shares that can be held by non-nationals) are

considered as being contrary to the internal market8.

Another type of limitations, also initially not allowed under European rules, would be to force those

investors seeking to purchase shares in the capital of a national undertaking to seek previous

authorization of a public authority. Such a regime of preliminary authorisation may be imposed

independently of the participation desired in the capital of the firm or be limited to the acquisition

of a given threshold. The prior authorisation regime might be limited to foreign investors. In any

event, under such regime, foreign investors would be forced to obtain an authorisation prior to

acquiring shares, whereas the requirement does not apply for purchases carried out by national

investors. Although to date no case dealing with this specific situation has been decided, there is a

little doubt that such system would be deemed contrary to the EC Treaty. It introduces a

discrimination based in the nationality and such a result is strictly prohibited under European

Community law.

A final possibility is to apply the regime of prior authorisation to purchases made by all investors

whatever their nationality. Such a measure is said to be equally applicable, as it contains no

distinction based on nationality or residence but clearly constitutes a restriction on the movement of

capital. As a result these measures are normally contrary to the UE Treaty too. Exceptions, however,

may be obtained if the objective sought is legitimate the means used to attain it are proportionate.

The objective is considered to be legitimate when concedes the right for Member States to maintain

a level of control on undertaking, particularly where they are active in markets where services of

general interest are provided or where national strategic interest can be affected. In the case of

Spain, the ECJ considered in several cases that the Government had a non-legitimate objective. The

Spanish Government claimed that it was legitimate to impose controls on the acquisition of shares in

6Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty 88/361/EEC, O. J. L 178 7Commission communication on certain legal aspects concerning intra-EU investment [Official Journal C 220 of 19.07.1997]. 8 Case ECJJ C-367/98.

31

a national tobacco undertaking as well as several commercial banks. The objective was rejected

because there was no indication that those undertaking provided a form of public service or that

control would be justified by strategic reasons. By the contrary, the Commission accepted the

justification founded on public security that the Spanish legislation imposed in the same sense in

other sectors, as telecommunications9.

A third type of measures may be attempted by Member States wishing to control the acquisitions of

shares in national undertakings by imposing the control not prior to the operation but afterwards.

According to the case law, this difference in the timing of the control has an important consequence

for the assessment of the measure. For the ECJ, the ex post character of the control shows that the

decisions concerning the purchase of shares remains, in normal circumstances, in the hands of the

market. In that context, public intervention remains an exception. The status of the intervention is

an element in favour of finding that the control may not be excessive.

2.2.3.2 The Golden share technique.

Through the so called “golden share”, the government retains veto power over changes to the

company's charter and may hold special voting rights, and/or have the ability to block another

shareholder from taking more than a ratio of ordinary shares (shares included in the government s

packing may also be similar to other ordinary shares in profits and voting rights but may include have

the ability to block a takeover or acquisition by another company and ensure the sovereignty of the

company preventing takeovers).

In strategically sensitive sectors or in the case of important or large national companies ("national

champions"), some Member States' governments have tried to retain control of privatised

companies and resorted to holding on to special rights in them. These rights are special in the

sense that they go beyond the rights associated with normal shareholding. One means to install such

special rights is a "golden share", i.e. a preferred stockholding in a company that a public

authority retains after privatisation. But over time, the term "golden share" has become a generic

term for special rights in general, whether those rights are associated with State shareholding or not.

The use of special powers is not in itself prohibited by EU rules, when justified by compelling public

interest reasons and provided they are proportionate and no discretionary. However, in the absence

of such reasons, the Commission considers that golden shares inhibit the integration of the

European financial market. The Court of Justice of the EU has ruled that national rules that impede

or restrict the acquisition of shares in undertakings and that dissuade investors in other Member

States from investing in the capital of those undertakings must be regarded as restrictions to the

free movement of capital.

In the UE jurisdiction, the first judgment of the ECJ concerning golden shares was delivered on 23

May 2000 in a case against Italy (case C-58/99). The case concerned a framework privatisation law

and related decrees ensuring government control in companies of the energy and

telecommunications sector. The Court found that a provision in Italian law giving the government

9Case C-463/00.

32

special powers over privatised companies contravened Article 52 (freedom of establishment), Article

59 (free provision of services) and Article 73B (free flow of capital) of the EC Treaty.

The measure in question provided for "special powers" to be reserved for the State in public service

companies directly or indirectly controlled by the State. The Court ruled that the special powers

attributed to the State in Telecom Italia, including the ability to veto certain corporate decisions,

make fast approvals and appoint board members, could not be justified for reasons of general

interest and could impede the free provision of services and capital between Member States.

The Court also found that a requirement for ministries to give certain tasks to national or

international firms or professionals who had been registered in Italy for at least five years was

contrary to Article 52 and 59 of the Treaty in that it excluded all professionals in other Member

States (as well as professionals recently established in Italy).

Later, the Court has analysed several cases brought against various countries. The table below shows

previous action from the Commission on golden shares in the telecommunications sector.

Country Company Action Outcome

Estonia Eesti

Telekom

- Estonia relinquished the special rights in Eesti

Telekom upon accession to the EU in May 2004

Spain Telefónica Court of Justice of the

EU ruling (C-463/00):

May 13, 2003

Spain adopted measures (Law 13/2006) in May 2006

to comply with the Court ruling.

Ireland Eircom - Voluntary abolition of special rights

Italia Telecom

Italia

Court of Justice ruling

(C-58/99): May 23,

2000

Second referral of Italy

to European Court in

June 2006.

Since May 2010, Italy complies with the ruling.

NL KPN Court of Justice ruling

(joined cases C-282/04

and C-283/04): Sept.

28, 2006

In Sep. 2006 the Netherlands sold its remaining stake

of 7.8%. Therefore, the state is no longer a

stakeholder in KPN. The state also converted its

golden share into two normal shares (subsequently

sold).

33

Sill in the telecommunication field, in 2010, the CJEU ruled10 that Portugal's holding of special rights

in Portugal Telecom was contrary to the free movement of capital. The Portuguese government

holds 500 A shares (shares with special voting rights) in PT since the operator’s privatisation in 2005.

The special rights were based on privatisation legislation of 2005 and were contained in PT’s articles

of association. Based on its special rights, the state appointed at least one third of the company’s

board members and the president, as well as several managers; could issue a veto in a large number

of cases, including on changes in the company’s articles of association, and on strategic and relevant

financial decisions; and could block purchases of more than 10% of shares in PT and the sale or

acquisition by PT of shares in other companies.

The Court found that the golden shares of the state in PT conferred a disproportionate influence on

the management of the company and can discourage investors from other Member States from

making direct investments in the company. The Court also stated that the exercise of the special

rights in PT was a restriction to the free movement of capital, as the state had a capacity to

intervene in a number of important management decisions of the company disproportionate to the

small size of its shareholding. The ECJ rejected the argument of the Portuguese government that the

golden shares are private in nature as their introduction into PT’s articles of association resulted

solely from the will of the company and not that of the state. According to the Court, although the

privatisation law merely authorised the creation of golden shares, their incorporation into the

articles of association took place at a time where Portugal exercised control over PT. In addition, the

Court found that the golden shares could not be justified on the basis of a legitimate interest to

ensure the conditions of competition in a given market or national security in case of crisis, as there

is no clarity about the criteria determining the circumstances in which those special powers might be

exercised.

The golden share of the Portuguese government was used to block Telefónica’s proposal to acquire

50% of Vivo, the Brazilian subsidiary. The decision was taken despite the fact that 74% of the votes

expressed were favourable to the deal.

In all the cases analysed by the EU s institutions, the protection methods applied differed from one

case to another but many provisions that gave the state special privileges were common:

• Limiting foreign participation in privatised companies (Portugal);

• Prior authorisation procedure for investments above certain capital/voting rights thresholds

(France, Portugal, Spain, Italy, UK);

• Right to veto winding-up, demerger or merger of the undertakings (Spain, Italy, UK);

• Right to veto strategic decisions e.g. transfer or use of assets as collateral (France, Spain, UK);

• Right to veto decisions concerning the transfer of technical installations for the conveyance

of energy products as well as related management decisions provided they are necessary to

achieve the Governments objectives concerning the country’s energy supply (Belgium);

• Power to appoint directors to the company's board of Directors (Belgium, France, Italy);

• Veto modification of the company's statutes in a way that implies the suppression or

modification of the special powers (Italy, UK);

10 Case C-171/08.

34

• Suspension of voting rights above a certain threshold in cases of holdings acquired by public

undertakings (Italy).

It should be noted, that the Court ruled in favour of the Commission in all cases except in that

against Belgium. The Court found that the above national measures, whether they limit the

acquisition of capital or veto major strategic decisions on the future of the enterprises, represent a

restriction to the free movement of capital because they are liable to dissuade investors from other

Member States from investing in the capital of the privatised enterprises. In contrast, in this case

against Belgium the Court accepted the compatibility of a right of veto with the Community law.

However, this right of veto does not concern decisions relating to the ownership shares or capital of

the enterprises as in the cases against Italy, Spain, France, Portugal, etc., but refers instead to the

use of means and installations with a view to ensuring compliance with the public service obligations

incumbent on the companies concerned, namely the safeguarding of energy supplies in the event of

a crisis.

The Court rulings confirmed the Commission’s interpretation of the previous ECJ rulings that any

national measures that make the exercise of fundamental Treaty freedoms must be:

• Applied in a non-discriminatory manner;

• Justified by imperative requirements in the general interest;

• Suitable for securing the attainment of the objective which they pursue; and,

• Limited to what is necessary in order to attain it.

The Court rulings set limits to government control over the privatised undertakings and established

principles, which clarify how the exceptions allowed by the Treaty could be implemented in national

measures accompanying the privatisation of public undertakings. Furthermore, in the most recent

ruling, the Court confirmed that the Treaty provisions on the free moment of capital do not draw a

distinction between private undertakings and public undertakings.

In essence, the Court has not ruled out golden shares, but it has set very strict criteria for their use:

• Special powers may not be used to aid economic performance.

• Special powers can only be introduced as a response to overriding requirements of the

general interest, they must not be unduly restrictive and must provide legal certainty.

2.2.3.3 Government keeps to be the biggest shareholders.

In some others cases, the Government keeps a representative (unless decreasing while full

privatization is advancing) percentage of the shares that give it the opportunity to control some

strategic decisions without having to resort to the “golden share” technique and its limits according

to the European background. The ownership can be direct or through public companies full or

partially controlled. In Europe, a paradigmatic case of the State as the biggest shareholder is France:

35

France Telecom shareholders

(source: http://www.orange.com/)

A similar situation is founded in Germany:

Deutsche Telekom shareholder

(source: http://www.telekom.com/).

As it was said before, the Norwegian government is also the major shareholder of the former

incumbent Telenor, with near the 54 of the shares and another 4.66% through the public pension

fund.

The privatisation of the former public sector telecommunications monopolist in Spain, “Telefonica

de España”, had some similarities with the golden share technique used in other countries to retain

some influence over the privatised public utility. Until it became a fully privatized firm in early 1997,

its shares were then owned by more than one of eight Spanish households (because of that is

considered a representative example of the so called “popular capitalism”. However, the Spanish

Government have used administrative law technique as opposed to a corporate law technique in

order to retain certain level of influence and the law provided that State-controlled companies

which provide a service of public interest could be subject to regulation in the event that the State’s

36

participation in such companies was reduced to shareholdings below a threshold figure of 15 per

cent.

The company responded to the challenge of competitive product and capital markets by undertaking

a strategy of diversification and corporate change. Telefonica became one of the European

companies with the highest direct investment in Latin America and a global operator. Its behavior

illustrates the changes that the telecommunications sector faces as it adapts to deregulation,

convergence and globalization.

2.2.4 Regulation adjustment after the privatization.

It is commonly accepted that three stages of market structure can be distinguished, characterised as

(i) monopoly, (ii) transition and (iii) market ruled by real competition. While the first one does not

need any explanation, the last is a stage where markets, apart from a limited number of bottlenecks,

have been successfully opened up to competition. The so called “transition stage” is the rather

elastic period between monopoly and normalization. It has proved elusive to date, but it remains a

useful target for the design of transitional regulation.

It should be pointed out that, from the behavioural regulation point of view, three main tools are

usually considered to be required:

1. Interconnection. In order to maintain end-to-end connectivity in the presence of

competitive networks, operators require interconnection to one another’s network in order

to complete their customer’s calls. This requires the operation of a system of inter-operator

wholesale or network access prices noted above. Especially in the early stages of

competition, entrants will require access to the dominant incumbent’s network and this

relationship will almost inevitably necessitate regulatory intervention. However, as

infrastructure is duplicated, the need for direct price regulation of certain network assets

diminishes.

2. Universal service obligation. Governments have typically imposed a universal service

obligation on the historic telecommunications operator, based upon two requirements: an

obligation to provide service to all parts of the country, and to provide it at a uniform price,

despite the presence of significant cost differences. Entrants coming into the market without

such obligation have a strong incentive to focus upon low-cost, “profitable” costumers,

thereby putting the universal service obligation operator at a disadvantage. Pressure may

therefore built up to equalise the situation, perhaps by calculating the cost borne by the

designed operator in serving loss-making costumers and then sharing the cost among all

operators. There have been concerns, first that such an arrangement would be used as a

pretext for delaying competition, and second that high universal service contributions

imposed on entrants would choke off competitors. In practice, most regulators have

maintained them as an obligation on the fixed incumbent, without introducing cost sharing

obligations, in initial steps of the fully liberalization process. Frequently, funds have been

established.

37

3. Control of prices. Control of retail prices is necessary where the dominant firm exercises

market power at the retail level, since in the absence of retail price control, customers will

be significantly disadvantaged. However, as competition develops at the retail level, possibly

from firms relying largely on infrastructure belonging to the incumbent, the necessity for

retail price controls in competitive markets may disappear, although access price control

may still be necessary.

2.2.4.1 Universal service.

The International Telecommunication Union defines universal access as “widespread availability of

telecoms or Information and Communication Technology (ICT) services” in contrast with the

universal service, –that is, the availability of telecommunications or ICTs in the home-. Access to

telecommunication services has always been the target of universal service policy and was one of

the aims of the public incumbents, who did not condition its provision to economic performance. For

that reason, one of the key aspects of the regulatory framework referred to the delivery of universal

service: in a state monopoly regime, the obligations included in the universal service are granted by

the public operator. But in a liberalised scenario, with increasing competition and choice for

communications services, undertakings will concentrate their efforts in the most rentable part of the

market and consumers, so a part of them would be excluded of the provision of services.

From a social point of view, the universal service is considered to have in Europe a safety net for

social inclusion, as the European Parliament considered in its resolution of 5 July 2011, adopting a

resolution11 underlining the importance of the Universal Service Obligations as a safety net for social

inclusion.

The universal service is therefore linked to the liberalization process and constitutes one of its main

objectives. In other words, the increasing of competition and choice for communications services

can not be separated of the delivery of a range of basic services.

The European Union intends to ensure the availability of a minimum set of high-quality services that

are available to all users at an affordable price, without distortion of competition, and to ensure that

liberalization would not lead to a situation where some social groups would be excluded from basic

telecommunications services.

The regulatory framework established for the full liberalization of the telecommunications market in

1998 in the Community defined the minimum scope of universal service obligations and established

rules for its costing and financing12, although, in fact, this Directive is considered to be a

harmonization Directive:

Article 1, Scope and Aim

1. This Directive concerns the harmonisation of conditions for open and efficient

access to and use of fixed public telephone networks and fixed public

11 Resolution (P7_TA(2011)0306): http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2011-0306&language=EN. 12 Council Directive 98/10/EC of 26 February 1998 on the application of ONP to voice telephony and on universal service for telecommunications in a competitive environment.

38

telephone services in an environment of open and competitive markets, in

accordance with the principles of open network provision (ONP).

2. The aims are to ensure the availability throughout the Community of good

quality fixed public telephone services and to define the set of services to

which all users, including consumers, should have access in the context of

universal service in the light of specific national conditions, at an affordable

price.

The Universal Service Directive13 which is part of the "2002 Telecoms Package”, defines universal

service as the “minimum set of services of specified quality to which all end-users have access, at an

affordable price in the light of specific national conditions, without distorting competition”. In the

same sense, the actual regime lays down obligations with regard to the provision of certain

mandatory services, such as the retail provision of leased lines.

In the Directive s words:

“The aim is to ensure the availability throughout the Community of good-

quality publicly available services through effective competition and choice

and to deal with circumstances in which the needs of endusers are not

satisfactorily met by the market,”

The Universal Service Directive defines the scope of universal service as:

• connection to the public telephone network at a fixed location (capable of supplying

"functional Internet access" but no minimum data rate defined);

• access to publicly available telephone services;

• directories and directory enquiry services, public pay telephones, special measures for

disabled users.

The first note of this definition is the availability of the universal service since Member States must

ensure that the electronic communications services detailed in the Directive are made available to

all users in their territory, regardless of their geographical location, at a specified quality level and an

affordable price.

A fundamental requirement of universal service is to provide users on request with a connection to

the public telephone network at a fixed location and at an affordable price. The connection provided

shall enable end-users to take charge of voice communications, facsimile communications and data

communications, at data rates that are sufficient to permit functional Internet access, the provision

of which may be restricted by Member States to the end-user's primary residence. There should be

no constraints on the technical means by which the connection is provided.

With respect to directory enquiry services and directories, the Directive stated that at least one

comprehensive directory which is updated at least once a year must be available to end-users.

Similarly, at least one directory enquiry service must be available to end-users, including users of

public pay telephones.

13Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive)

39

The national regulatory authorities (NRAs) also must be able to impose obligations on undertakings

to ensure that public pay telephones or other access points to publicly available telephone services

are provided to meet the needs of end-users, whether in terms of geographical coverage, the

number of telephones or other access points, the accessibility of such telephones to disabled users

or the quality of services.

In the Europe framework, the term "universal" means that the Member States must ensure that

disabled users enjoy a service which meets their needs and is of an equivalent standard to those

enjoyed by other users. In order to achieve this, access must be the same at a functional level, such

that disabled end-users can use the same services as other end-users, but through different means.

Member States may require the NRAs to assess the general need and specific requirements of the

type of measures particularly for disabled end-users.

The Member States shall ensure that consumers with low incomes have access to special tariff

arrangements or are given special assistance to enable them to have access to the network and to

use it. The special tariffs must either be provided by the designated undertaking, or already be

available on the market. Furthermore, the Member States may require undertakings which have

universal service obligations to comply with price caps or to apply common tariffs, including

geographical averaging, throughout the national territory.

Finally, with respect to the quality issued, the Directive mention that the national regulatory

authorities must set performance targets for undertakings with universal service obligations and

monitor compliance with these targets by designated undertakings.

The Directive imposed that the designation of the undertakings must guarantee the provision of

universal service. The Member States may also designate different undertakings to provide different

elements of universal service and/or to cover different parts of the national territory.

The issue of the financing of universal services obligations is far from being pacific. In this line, the

Directive states that:

Article 13. Financing of universal service obligations.

1. Where, on the basis of the net cost calculation referred to in Article 12,

national regulatory authorities find that an undertaking is subject to an

unfair burden, Member States shall, upon request from a designated

undertaking, decide:

(a) to introduce a mechanism to compensate that undertaking for the

determined net costs under transparent conditions from public funds;

and/or

(b) to share the net cost of universal service obligations between providers

of electronic communications networks and services.

2. Where the net cost is shared under paragraph 1(b), Member States

shall establish a sharing mechanism administered by the national

regulatory authority or a body independent from the beneficiaries under

40

the supervision of the national regulatory authority. Only the net cost, as

determined in accordance with Article 12, of the obligations laid down in

Articles 3 to 10 may be financed.

The Universal Service Directive recognize that the concept of universal service should evolve to

reflect advances in technology, market developments and changes in user demand and include a

provision of a general review of the scope of universal service in its article 15 in the following terms:

Article 15. Review of the scope of universal service

1. The Commission shall periodically review the scope of universal service,

in particular with a view to proposing to the European Parliament and the

Council that the scope be changed or redefined. A review shall be carried

out, on the first occasion within two years after the date of application

referred to in Article 38(1), second subparagraph, and subsequently every

three years.

2. This review shall be undertaken in the light of social, economic and

technological developments, taking into account, inter alia, mobility and

data rates in the light of the prevailing technologies used by the majority

of subscribers. The review process shall be undertaken in accordance with

Annex V. The Commission shall submit a report to the European

Parliament and the Council regarding the outcome of the review.

In considering whether a review of the scope of universal service obligations should be undertaken,

the Commission is to take into consideration the following elements:

• social and market developments in terms of the services used by consumers,

• social and market developments in terms of the availability and choice of services to

consumers,

• technological developments in terms of the way services are provided to consumers.

Recital 25 and Annex V of the directive set three tests to apply when looking at new candidate

services for inclusion within the scope of universal service. The Commission is to take into

consideration the following three elements:

• Criterion 1: are specific candidate services available to (coverage), and used by (take up), a

majority of consumers?

• Criterion 2: does the lack of availability or non-use by a minority of consumers result in social

exclusion?

• Criterion 3: does the availability and use of specific services convey a general net benefit to

all consumers such that public intervention is warranted?

The elements have been reduced to the next two in the current redaction:

• are specific services available to and used by a majority of consumers and does the lack of

availability or non-use by a minority of consumers result in social exclusion, and

41

• does the availability and use of specific services convey a general net benefit to all

consumers such that public intervention is warranted in circumstances where the specific

services are not provided to the public under normal commercial circumstances?

It is constant the review of scope of universal service undertaken in the light of social, economic and

technological developments, taking into account, inter alia, mobility and data rates in the light of the

prevailing technologies used by the majority of subscribers. The Commission’s focused on whether

to include mobile and/or broadband services within the scope of universal service.

Process for including broadband in the USO scope:

(source: Cullen)

As a result, on April 11, 2006 the European Commission announced the publication of a report on

the results of a public consultation on the review of the scope of universal service that ran between

May and July 2005.

In its May 2005 communication that served as a basis for the consultation, the Commission

advocated a status quo of the scope of universal service and reached the conclusion that industry

and users are backing its approach not to change the scope of universal service. Viviane Reding, the

Commissioner for Information Society and Media at the time, stated that:

42

"This report reflects a broad stakeholder consensus that bringing mobile

and high-speed Internet services to users is best left to the market, except

where structural problems such as geographical remoteness justify specific

public investment to help bridge the broadband gap. However,

stakeholders also generally agree that the concept and provision of

universal service which safeguards access to basic but vital

communications services for disadvantaged users, does need to be

updated for the Internet age. This year's review of the EU's electronic

communications rules will give the opportunity to look at provision of

universal service in an IP world".

Under the Commission s reasoning, Universal service is not a mechanism for rolling-out new services

but rather for providing a safety net for those whose financial resources or geographic location do

not allow them to have basic services already available to, and used by, a majority of citizens.

The second review took place in 2008, with the same result14. In this occasion the Commission

undertook to consult interested parties on several long-term policy issues. Prior to adoption of the

Telecom Package in 2009 the Commission confirmed to the European Parliament that it would carry

out a wide-ranging consultation on the subject.

According to the revision of the scope of the universal service obligations rule, in 23 November 2011,

the Commission published the report on the outcome of the public consultation and the third

periodic review of the scope in accordance with Article 15 of Directive of the Universal Service15.

Attending to the first criterion of the Annex V, the Commission considered the next figures:

Fixed broadband network coverage in the EU as % of the population, 2010

14COM(2005) 203; COM(2006) 163. 15Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Universal service in e-communications: report on the outcome of the public consultation and the third periodic review of the scope in accordance with Article 15 of Directive 2002/22/EC http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52011DC0795

58% 18% 60% 55% 69% 67% 62% 84% 85% 80% 86% 82.8% 89% 90% 86% 96% 45% 91% 93% 94% 92% 94% 99% 99% 100% 100% 100% 100% 100%

77%

81% 82% 83%

89% 89%92% 92% 92%

94% 95% 95.1% 96% 96% 96% 97% 97% 97% 98% 98% 98% 99% 99% 99% 99% 100% 100% 100% 100% 100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PL BG RO SK LT LV EL SI CZ EE IS EU-

27

IE FI IT NO CY DE HU AT SE PT MT NL ES UK BE DK FR LU

Rural DSL coverage National DSL coverage

43

(source: Commission communication / Digital Agenda Scoreboard)

Broadband penetration at home, % of EU households, 2010

(source: Commission communication / Digital Agenda Scoreboard)

The Commission stated that fixed DSL broadband is available to 95% of the EU population as of end

2010. 70% of EU households have internet access and 61% have a wired or wireless broadband

connection. Broadband usage, however, varied among the member states, ranging from 23% of

households in Romania and 83% in Sweden. Therefore, the Commission concludes that although half

of EU households uses broadband, this is not yet a “substantial majority of the population”, as

mentioned in recital 25 of the Universal Service Directive.

Furthermore, inclusion of broadband in the USO scope at EU level would lead to disproportionally

high costs on operators (and ultimately consumers) in countries with low take-up. The

communication refers to a study from 2010 carried out on behalf of the Commission which

estimates that the EU-wide USO net cost of ensuring availability (coverage) and affordability

(subsidised social tariffs) of a 2 Mbps broadband connection through the USO would amount to

€13.6bn over a five-year period or €2.7bn per year. According to the study, this would correspond

0.69% of the turnover of the EU telecoms sector as a whole.

The EU average cost per household would be approximately €14.40 per year in absolute terms,

ranging up to €30 in Romania. This compares with current annual costs per household of between

€0.05 and €4.19 in the seven member states that have established USO funds.

% of households having a broadband connection

Year 2010

0

20

40

60

80

100

Icel

and

Norw

ay

Swed

en

Denm

ark

Neth

erla

nds

Finla

nd

Ger

many

Luxe

mbour

g

Belgiu

mM

alta

Franc

e

Eston

ia

Austri

a

Slove

nia

Europe

an U

nion

- 27

coun

tries

Irela

nd

Spain

Poland

Cze

ch R

epubl

ic

Lith

uani

a

Latv

ia

Hung

ary

Cyp

rus

Portu

gal

Slova

k Rep

ublic

Cro

atia

Italy

Gre

ece

Turkey

Bulgar

ia

Rom

ania

European Commission Digital Agenda Scoreboard

% h

h

44

Mobile subscribers and penetration rate at EU level, 2004- 2010

(source: Commission communication / Digital Agenda Scoreboard)

Mobile subscriber penetration was 124.2% in October 2010. This widespread take-up along with

declining, affordable prices made the Commission conclude there is no risk of social exclusion.

Therefore, mobile services should not be included in the USO scope.

Telephone access at home, % of EU households, 1999-2011.

(source: Commission communication / Digital Agenda Scoreboard)

In the document, the Commission concludes that a change in the basic concept and principles of

universal service as an instrument for preventing social exclusion is not needed and that, at this

stage, it would not be appropriate to include mobility or mandate broadband at a specific data rate

1999*1999*

2003*2003*

2007200770%70%

82%82%

92%92%

81%81%

83%83%

42%42%

FixedFixed MobileMobile

95%95%

97%97%

TotalTotal*) EU-15

20112011 98%98%89%89%

71%71%

45

at EU level. For that reason, decided not to broaden the scope of the universal service obligation to

broadband connections or mobile service during the third review of the universal service obligation

scope.

The Commission also remembered that the 2009 Telecom Package gives Member States the

flexibility, in line with the principle of subsidiarity, to define the appropriate data rate for network

connections delivering ‘functional internet access in the light of national conditions. Basic broadband

access can therefore be part of the universal service obligations at national level in justified cases,

particularly where market forces and other policy tools and financing instruments have not led to

universal broadband coverage. To minimise market distortions, Member States should take full

account of public intervention tools other than universal service obligations to ensure broadband

availability. Member States thus have the possibility, but no obligation, to include access to

broadband connections within the scope of national universal service obligations.

Recital 5 of the Citizens’ Rights Directive amending the Universal Service Directive on functional

internet access has reinforced the capability of member states to define the minimum data rates

beyond narrowband internet access to broadband. The graph below sets out the desired approach

by the Commission.

It should be pointed out that the Commission is currently preparing the fourth review of the

universal service scope. With the objective to provide a factual and solid social-economic assessment

which will allow, together with data to be collected from NRAs, to decide on whether or not, and

how, to change the scope of the universal service at EU level. Therefore the study has inter alia to

assess:

• the socio-economic, direct and indirect benefits and costs of providing a (minimum) quality

of broadband service at EU level;

46

• to what extend the market and policy initiatives (other than Universal Service) are likely to

provide users with broadband connections (e.g. considering LTE deployment and national

broadband plans; EU structural funds; State aid),

• the appropriateness of current universal service requirements and modalities;

• a possible reduction of current universal service obligations to the extent the market

delivers these services (e.g. access to publicly available telephone services, directory and

directory enquiry service, public payphones). In addition to that, the study will assess the

affordability of tariffs within the universal service regime, as well as the possibility of

additional universal service broadband obligations, namely the feasibility and costs of

connecting public places of specific interest such as schools, libraries and health care centers.

Besides that, the positive and negative aspects of the different financing mechanisms for

universal service will be assessed (e.g. by public means, financial contributions from the

electronic communications sector or other beneficiaries, and/or by consumers of fixed-line

and wireless services in form of extra charges).

2.2.4.2 Network construction

Civil engineering, such as digging up ducts to lay copper or fibre, can account for up to 80% of the

costs of deploying high-speed networks according to the European Commission estimations. The

incumbent operators inherited the copper network supporting the fix-telephony services, but the

necessity of upgrading them and facing new and costly investments requires new resources

injections. This is partially the reason that justified the entry of private investors, as we commented

above.

In its Digital Agenda, the Commission expects that all Europeans should have access to internet at

speeds above 30 Mbps; and 50% of European households should have internet subscriptions at

speeds above 100 Mbps. At this respect, in September 201016, the Commission adopted a (non-

binding) communication on European broadband as part of a package of proposals intended by the

Commission to facilitate the rollout and take-up of fast and ultra-fast broadband in the EU, setting

out the need to reduce the significant costs of civil engineering as part of the total costs of

broadband deployment. The communication provides information intended to assist national and

local authorities to meet the 2020 broadband targets set out in the Digital Agenda.

It was followed by a public consultation in April – July 20, 2012 and the draft regulation proposed on

March 26, 2013, the Commission has put forward a number of measures which it calculates could

reduce capital expenditure for operators by 20-30%, saving up to €63bn by 2020 on an estimated

€221bn of total Next Generation Access (NGA) investments. The key features of the proposed

regulation have been maintained, namely to introduce measures to speed up and reduce the cost of

high speed broadband deployment by:

16Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 20 September 2010 – European Broadband: investing in digitally driven growth [COM(2010) 472 final – Not published in the Official Journal]

47

• giving communications providers access to the physical infrastructures of network operators,

for example in the telecoms, electricity or waste water sectors, and to any existing in-

building physical infrastructures;

• mandating the availability of in-building physical infrastructures for new-build and renovated

buildings;

• providing time limits on the process of permit granting for civil works; and

• setting out requirements for the transparency of information on physical infrastructures and

on dispute resolution procedures relating to access to such infrastructures.

With respect to mobile networks, in March 2001, the European Commission published a

Communication where it investigated on the current situation and perspectives of the 3G mobile

telecommunications in the European Union. This report showed that the 3G industry faces two

problems: the difficult financing situation of network operators all over the European Union, and the

high costs associated with infrastructure building.

The European Commission pointed out that these two factors have forced the Commission to allow

infrastructure sharing agreements among operators to build facilities jointly and concluded that as

far as agreements to build facilities jointly are not against the European legislation on Competition,

they should be promoted. Given the legislation on competition, if these agreements are profitable

for network operators as well as for consumers, then they cannot be deemed anticompetitive.

2.2.4.3 Tariff

As it was explained, the purpose pursued by the European authorities in universal service is to make

access possible for all citizens to basic electronic communications services. A consequence of this

principle is that access should not be impeded or hindered by tariffs. At the same time, there is no

readiness of the part of the European institutions to ensure free access for all. This would contradict

another important principle: market forces must be given precedence and public intervention should

be limited. In order to reconcile these sometimes conflicting principles, a compromise has been

sought. The result is that, pursuant to the Universal Service Directive, items included in universal

service are charged to end users. The latter thus have to support the bulk of the expense as regards

their use of electronic communications. However, the Member States have to ensure that the prices

charged by undertaking are not excessive. The must also encourage end users to be able to control

their expenditure and for that reason, the European framework provides them tools to monitor and

limit it.

We cannot find in the Universal Service Directive any specific target as regards affordability, which

must be assessed in the light of national conditions:

Article 3. Availability of universal service.

1. Member States shall ensure that the services set out in this Chapter are

made available at the quality specified to all end-users in their territory,

independently of geographical location, and, in the light of specific national

conditions, at an affordable price.

48

Article 9. Affordability of tariffs.

1. National regulatory authorities shall monitor the evolution and level of

retail tariffs of the services identified in Articles 4, 5, 6 and 7 as falling

under the universal service obligations and provided by designated

undertakings, in particular in relation to national consumer prices and

income.

2. Member States may, in the light of national conditions, require that

designated undertakings provide tariff options or packages to consumers

which depart from those provided under normal commercial conditions, in

particular to ensure that those on low incomes or with special social needs

are not prevented from accessing or using the publicly available telephone

service.

For this reason, considerable differences between tariffs can be found depending on the European

country where users are located. As a result of the internal market, these differences should tend to

decrease over time.

NRAs dispose various tools to ensure affordability. Normally, should resort to market mechanisms in

order to it. These exert pressure on price: as undertakings struggle to gain market share, they lower

prices to gain clients. It should be taken into account that this general idea is in line with the choice

made by the European institutions in favour of a market-oriented strategy:

Article 3. Availability of universal service.

2. Member States shall determine the most efficient and appropriate

approach for ensuring the implementation of universal service, whilst

respecting the principles of objectivity, transparency, non-discrimination

and proportionality. They shall seek to minimize market distortions, in

particular the provision of services at prices or subject to other terms and

conditions which depart from normal commercial conditions, whilst

safeguarding the public interest.

When outcomes are unsatisfactory and excessive prices are charged (this is the case where

undertakings have market power and abuse it), the objective of affordability would not met without

public intervention. Such control can take place on the basis of general competition law. But, in this

regard, the Universal Service Directive provides that Member States have to verify tariff levels, as

the second tool to attain affordability. A first rule us that NRAs have to assess the reasonable

character of tariffs charged by designated undertakings because the sector-specific regulation does

not contain provisions allowing tariff control on non-designated undertakings. This has to be done in

the light of available incomes. A comparison has also to be made with the general level of prices

charged to consumers in al sector in the country according to the article 9.1 of the Directive.

49

The Universal Service Directive includes more technical rules, as that the designated undertaking

should not bundle services and tariffs. Users should at all times have the possibility to choose the

specific service they are interested in and not be forced to contract any service or product where

they do not have a need.

This rule is specifically mentioned in the Universal Service Directive:

Article 10. Control of expenditure.

1. Member States shall ensure that designated undertakings, in providing

facilities and services additional to those referred to in Articles 4, 5, 6, 7

and 9(2), establish terms and conditions in such a way that the subscriber

is not obliged to pay for facilities or services which are not necessary or

not required for the service requested.

Other rules are made applicable through Article 16.1.a) of the mentioned Directive, which refers to

obligations concerning retail tariffs contained in the ONP Voice Telephony Directive. These apply

only where undertakings have significant market power and apply in the context of the regulatory

framework for as long as no decision has been taken to terminate their validity. This decision must

be taken by the NRAs after markets have been reviewed in the same manner as required for the

review of access-related obligations.

Article 16. Review of obligations.

1. Member States shall maintain all obligations relating to:

(a) retail tariffs for the provision of access to and use of the public

telephone network, imposed under Article 17 of Directive 98/10/EC of the

European Parliament and of the Council of 26 February 1998 on the

application of open network provision (ONP) to voice telephony and on

universal service for telecommunications in a competitive environment ;

(b) carrier selection or pre-selection, imposed under Directive 97/33/EC of

the European Parliament and of the Council of 30 June 1997 on

interconnection in telecommunications with regard to ensuring universal

service and interoperability through application of the principles of open

network provision (ONP);

(c) leased lines, imposed under Articles 3, 4, 6, 7, 8 and 10 of Directive

92/44/EEC, until a review has been carried out and a determination made

in accordance with the procedure in paragraph 3 of this Article.

(…).

3. Member States shall ensure that, as soon as possible after the entry

into force of this Directive, and periodically thereafter, national regulatory

authorities undertake a market analysis, in accordance with the procedure

set out in Article 16 of Directive 2002/21/EC (Framework Directive) to

determine whether to maintain, amend or withdraw the obligations

relating to retail markets. Measures taken shall be subject to the

procedure referred to in Article 7 of Directive 2002/21/EC (Framework

Directive).

50

The first of these obligations is that undertaking with market power should in each market base their

tariffs on the cost incurred providing the relevant service, as these operators could, for instance,

include in a tariff for a given service the costs incurred in relation to another service. This obligation

of cost orientation was fundamental when the reform was introduced, as former monopolies at that

time used to set their tariffs irrespective of the expenses they incurred. Nowadays, it has become

less essential as competition has forced all undertakings, included those with significant power

market, to disaggregate their activities and seed profit on each of them separately17.

Where this is not possible, controls may be exercised over tariffs. Special measures may also be

taken to help certain categories of users.

2.2.4.4 Service quality.

Closely linked to the issue of universal service, European telecommunications law also addresses the

quality of services being provided to end-users and related consumer protection issues. The

introduction of competition is generally seen as been of benefit to consumers in terms of choice,

cost ad quality. The concern in respect of quality of services issues would seem to be primarily in

relation to the period of liberalization, before a market is fully competitive and operators with

significant market power are the norm.

Part of the liberalization process, which started with the Equipment and Services Directives, has

been also to establish provisions regarding customers’ contracts. From de Commission’s perspective,

such provisions were necessary to facilitate the opening up of the markets by granting customers of

telecommunications a right to terminate long-term contracts, subject to minimum notification

periods18.

However, the Court of Justice annulled these provisions on the basis that such private contractual

arrangements were not “State measures” to which former article 86(3) was applicable. Any legal

measures against such agreements would need to be the subject of case-by-case decisions.

Subsequently, provisions governing subscriber contracts and quality of service issues were

introduced under the new regulatory framework.

In pursuance of ensuring quality of service, significant powers of intervention have been granted to

NRAs. Under the Open Network Provision Voice Telephony Directive, for example, NRAs were given

a broad right to require alteration of the conditions of contracts, although this right was

subsequently narrowed to particular types of conditions, such as a supply for initial connection. The

issue of compensation provision for failing to meet quality of service levels was the subject of a

17By contrast, the article Directive 98/10/EC of the European Parliament and of the Council, of 26 February

1998 on the application of open network provision (ONP) to voice telephony and on universal service for

telecommunications in a competitive environment, stated that: “2. Tariffs for use of the fixed public telephone

network and fixed public telephone services shall follow the basic principles of cost orientation set out in Annex

II to Directive 90/387/EEC”.

18Respectively, Art. 7 of Directive 88/301 (minimum notice 1 year) and Art. 8 of Directive 90/388 (minimum notice 6 months).

51

disagreement between the Council and the European Parliament, with the Parliament inserting a

general rule in favour of compensation arrangements into the Council’s Common Position.

It should seem questionable whether such powers of intervention should continue to be available in

a competitive market. In fact, the Commission pointed out in the Sixth Implementation Report that

“good quality services are more likely to be provided as a result of competition between suppliers

rather than from regulation, and consumers may demand services of different quality at different

prices”, and concluded that “it is considered prudent to maintain some reserve powers for NRAs to

take action in the event of market failure, particularly to deal with issues of end-to-end quality in a

multi-network environment where no single operator has overall control”.

The latter reference is clearly applicable to the growth of the Internet as a communications

environment. In addition, a report on Member State implementation of the European regulatory

package identified a lack of compliance monitoring on consumers issues by NRAs in most Member

States, the existence of considerable differences in the quality of essential elements of the fixed

telephony service between Member States, and a general rise in the number of consumer

complaints.

Under the 2003 Regime, Chapter IV of the Universal Services Directive addresses end-users interest

and rights. Certain minimum terms must be specified in costumers contracts (Article 20), related

transparency obligations are imposed (Article 21, Anex II), as well as compliance with NRA-specified

quality of service parameters (Article 22, Anex II), noting:

Quality of service

1. Member States shall ensure that national regulatory authorities are,

after taking account of the views of interested parties, able to require

undertakings that provide publicly available electronic communications

services to publish comparable, adequate and up-to-date information

for end-users on the quality of their services. The information shall, on

request, also be supplied to the national regulatory authority in

advance of its publication.

2. National regulatory authorities may specify, inter alia, the quality of

service parameters to be measured, and the content, form and manner

of information to be published, in order to ensure that end-users have

access to comprehensive, comparable and user-friendly information.

Where appropriate, the parameters, definitions and measurement

methods given in Annex III could be used.

Member States are also required to ensure that transparent, simple and inexpensive out-of-court

dispute settlement procedures are established (article 34). It is debatable, however, whether some

of these matters are more appropriately addressed through horizontal measures, such as rules

governing unfair contract terms, distance sales, and electronic commerce, rather than sector-specific

regulation.

52

Directory enquiry services are addresses from a number of different perspectives under the new

regime. The provision of such services is an element of universal service; while the right to be

entered into a directory and access to such services is an end-user right. As personal data, however,

the subscriber data included in a directory is also regulated under the sectorial directive on data

protection, which addresses the different privacy relationships that arise within a communications

environment, including between subscribers and their service providers, subscribers and users, the

caller and called, and the state and users.

2.2.4.5 Technical standards.

Standards can emerge from a number of sources. They can be market-basis, law-based, or

committee-based. Within the telecommunications sector, standards arise from all such sources. For

example, a number of firms can group together, or one firm can innovate, to establish a standard.

Alternatively, telecommunications standards can be developed through the governmental system;

for example, the approach to standardization taken by the EU established a number of essential

requirement standards, concerning health, safety, the environment and general interest which must

be adhered to.

However, we will focus on the particular role in standard developments that is undertaken by

standard committees or standard-setting bodies.

The development of network and services in the European Union requires the use of technical

standards. In the absence of uniformity in the standards used, there is a risk that networks and

services may not be interoperable. To ensure the interoperability, the framework introduces

measures aiming at the determination of common standards.

The European Commission is entrusted with the task of developing standards for electronic

communications activities across the European Union. The standards developed by the Commission

must be published in the form of a list in the Official Journal of the European Communities. As

drawing up standards requires specialised technical expertise, the Commission usually ask standard-

setting organizations to prepare the standards un question. In Europe, these organizations are the

European Committee for Standardisation, the European Committee for Electrotechnical

Standardisation and the European Telecommunication Standards Institute.

Article 17. Standardisation

1. The Commission, acting in accordance with the procedure referred to in

Article 22(2), shall draw up and publish in the Official Journal of the

European Communities a list of standards and/or specifications to

serve as a basis for encouraging the harmonised provision of electronic

communications networks, electronic communications services and

associated facilities and services. Where necessary, the Commission

may, acting in accordance with the procedure referred to in Article

22(2) and following consultation of the Committee established by

Directive 98/34/EC, request that standards be drawn up by the

European standards organisations (European Committee for

53

Standardisation (CEN), European Committee for Electrotechnical

Standardisation (CENELEC), and European Telecommunications

Standards Institute (ETSI)).

A procedure must be followed before the adoption of decisions whereby mandates are given to the

organizations to prepare given standards, and of decisions to draw up standards and published them

in the form of a list. Once are approved, the Member States must encourage the use of the

standards which have been drawn up and published in accordance with the due requirement. These

measures whereby the use of standards is encouraged may appear to some observers as a limitation

imposed on the freedom of economic operators to choose the technology which they see as more

appropriate. It should be recalled in this regard that the framework sees technological neutrality as a

requirement to be complied with by NRAs.

2. Member States shall encourage the use of the standards and/or

specifications referred to in paragraph 1, for the provision of services,

technical interfaces and/or network functions, to the extent strictly

necessary to ensure interoperability of services and to improve

freedom of choice for users. As long as standards and/or specifications

have not been published in accordance with paragraph 1, Member

States shall encourage the implementation of standards and/or

specifications adopted by the European standards organisations. In the

absence of such standards and/or specifications, Member States shall

encourage the implementation of international standards or

recommendations adopted by the International Telecommunication

Union (ITU), the International Organisation for Standardisation (ISO)

or the International Electrotechnical Commission (IEC).

Where international standards exist, Member States shall encourage

the Ruropean standards organisations to use them, or the relevant

parts of them, as a basis for the standards they develop, except where

such international standards or relevant parts would be ineffective.

2.3 Market opening.

2.3.1 Steps to open up.

It is commonly accepted that the opening of the telecommunications markets to competition (which

has been also referred to as the liberalization process in this Report) in the European Union started

with the publication of the Green Paper on the development of the Common Market for

telecommunications services and equipment19. Prior to this moment, the EU s involvement had

been limited to the development of standards and common research programs for the sector.

19Green Paper on the Development of the Common Market for the Telecommunications Services and equipment. COM (87) 290 final.

54

The Green Paper set out a program with the aim of achieving a Community-wide

telecommunications market by 1992 through the opening up of telecommunications markets and a

higher degree of harmonization. The Commission s policy proposals were to a large extent approved

by the Council, which adopted a resolution voicing its general support but envisaged a different path

than the Commission, emphasizing the need for ensuring a high degree of harmonization rather than

highlighting the necessity of withdrawing exclusive or special rights20.

The main objective of the Green Paper is to review the issues concerning the future regulation of

network infrastructure and to offer recommendations regarding the actions to be taken. The rather

long-winded document repeats many of the arguments contained in previous Commission

documents in favor of infrastructure competition. It also discusses action needed in connection with

the information society. The positions proposed by the Commission on future regulation may be

summarised as follows:

1. Basic Principle. According to the Commission, the basic principle is that providers of competitive

services should have a free choice of the underlying infrastructure means that special and exclusive

rights over the use of infrastructure for the provision of telecommunications should be removed.

The Commission maintains its position that the use of alternative infrastructures for non-reserved

services and the provision of links within mobile networks for the provision of mobile services should

be accelerated and should not be included in the timetable for the general liberalisation of

infrastructure.

2. Licensing. The Green Paper assumes three categories of infrastructure owners.

a. Operators of public telecommunications infrastructures. These operators would have

what in UK legislation is referred to as "code powers", which could, for example, be the right

to dig ditches, erect poles and use public land. The Commission accepts that the number of

such operators could be limited because of essential requirements in connection with the

protection of the environment and town planning. Member States should, it argues,

introduce schemes for sharing ducts on a voluntary basis, or if necessary impose mandatory

duct-sharing. Such operators would have public service obligations in the form of "trade

regulations" (the term "trade regulations" was used in the Services Directive to indicate

licensing conditions aimed at ensuring permanence, availability and quality of service). For

these operators, accounting separation would be required between the telecommunications

and non-telecommunications activities.

b. Other providers of infrastructures. Other providers of telecommunications infrastructures

could nevertheless exist without such code powers (no limitation on the numbers of such

operators is envisaged). Such providers would make their own arrangements with private

and public land owners and other holders of rights-of-way. Because lack of code powers

would constitute a competitive handicap, such operators could have less onerous licensing

conditions than those which would be fully licensed. No limitation on the numbers of such

operators is envisaged;

20Council Resolution of 30 June 1988 on the Development of the Common Market for Telecommunications Services and Equipment up to 1992.

55

c. Corporations (or closed user groups). Corporations (or closed user groups) should,

according to the Green Paper, be free to establish their own infrastructures without any

licensing requirements. They would, however, have to depend on commercial negotiations

for any way-leaves (right of access to property) they required. Such infrastructures would

only be subject to conditions based on essential requirements.

The Commission advocates certain principles which should apply to the selection criteria for granting

licenses to infrastructure providers, in particular for those operators to be granted code powers. It

suggests that the awards should be made on the basis of pre-announced criteria - which could

include public service requirements. There should be no discrimination on the basis of nationality -

at least within the European Economic Area.

According to the Green Paper, the licensing conditions, including any licensing fees, should be based

on objective criteria, be transparent, non-discriminatory and should respect the principle of

proportionality.

In the Green Paper, the Commission also assumes a certain degree of international co-ordination for

the licensing of infrastructure in order to facilitate trans-European networks. It again raises the

question of a European regulatory authority (without any supporting discussion) and requests

interested parties to give their comments on this matter.

Strictly speaking, the liberalization process commenced in 1988 with the opening of the terminal

equipment market for competition and the introduction of the principle of full mutual recognition21.

The Directive imposed the withdrawing of exclusive or special rights for the importation, marketing

and connection of telecommunications terminal equipment.

The Terminal Equipment ruling was confirmed by the Court of Justice, which confirmed the

Commission s procedure. As a consequence, a encouraged Commission adopted the Services

Directive22 in which requires the abolition, in a progressive manner, of exclusive and special

monopoly rights for the provision of telecommunication services:

Article 2

Without prejudice to Article 1 (2), Member States shall withdraw all special

or exclusive rights for the supply of telecommunications services other

than voice telephony and shall take the measures necessary to ensure that

any operator is entitled to supply such telecommunications services.

Member States which make the supply of such services subject to a

licensing or declaration procedure aimed at compliance with the essential

requirements shall ensure that the conditions for the grant of licences are

objective, non-discriminatory and transparent, that reasons are given for

21 Commission Directive 88/301/EEC of 16 May 1988 on competition in the markets for telecommunications terminal equipment. 22Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services.

56

any refusal, and that there is a procedure for appealing against any such

refusal.

(…)

A temporary exception for public voice telephony and operation of the basic telecommunications

network was included.

The Services Directive referred to the requirement for a clear separation of regulatory and

operational activities, in the Member States, so the incumbent operator could no longer regulate the

market and compete in it. Finally, the Services Directive restricted the use of licensing and

declaration procedures, to the extent necessary to safeguard certain essential requirements, as

interoperability, integrity of the network and data protection.

Three pillars of the European framework reform can be highlighted. In the first place, a peculiar

regulatory feature of this first phase of liberalization, which proved a crucial impetus for the

subsequent full liberalization of the sector, was the Commission’s successful use of article 90(3) of

the European Community Treaty as the legal basis for enacting legislation. This provision

exceptionally allows the Commission to adopt legislation in the form of decisions and directives

without the approval of either the Council or the Parliament, in contrast to the normal decision-

making procedures which limit the Commission s legislative role to proposing legislation, reserving

to the Council in consultation with the Parliament the role of law-maker.

As regards the second pillar of reforms, namely harmonization, the concept of Open Network

Provision (ONP) was introduced, providing for the application of fair, transparent and non-

discriminatory access conditions to networks and services (including harmonization of technical

interfaces, tariffing principles and usage conditions) through the adoption of the so-called ONP

Framework Directive, further developed through a series of ONP measures relating to leased lines

voice telephony and others. These measures were adopted pursuant to the regular decision-making

procedures and based in the possibility of adopting EU directives for the harmonization of national

laws relating to the establishment and functioning of the single market.

The third pillar envisaged the full application of the EU competition rules of the EC Treaty to all

aspects of the sector, to be developed through the use of guidelines and individual decisions. The

application of the competition rules was seen as necessary supplement to the Directives, given that

these directives, although based on the competition previsions of the EU Treaty, are primarily

directed at the abolition of state measured which grant special or exclusive rights and do not

therefore directly control the unilateral behavior of operators in the sector.

As it was advanced, hand-to-hand of the liberalization process, and concurrent to the legislative

activities of the Commission, harmonization Directives were adopted by the Council in order to

ensure a coherent legal framework in the states. Among these directives, the Open Network

Provision (ONP) Directive23 constituted the most important measure. Basically, the ONP Directive

23 Council Directive 90/387/EEC of 28 Jun.1990 on the establishment of the internal market for telecommunications services thought the implementation of open network provision, amended by Council

57

aimed at facilitating access by private companies to public telecommunications networks and certain

telecommunications services. Furthermore, it sought to achieve harmonization of technical

interfaces and to eliminate discrepancies in conditions of use and tariffs.

The Community applied the ONP principles to more fields, as had already done with liberalization

measures. In 1992, the Leased Lines Directive24 introduced the ONP regimen in the leased lines and

in 1995 the Voice Telephony Directive made so by harmonization conditions for open and efficient

access to, and use off fixed public networks and services. Finally, a new Directive25 adapted Leased

Lines and the ONP Directive to the fully liberalized telecommunications sector.

However, the core instrument of the open network access was the Interconnection Directive

97/33/EC 26 , which established a regulatory framework to ensure the interconnection of

telecommunications networks as an instrument to foster competition, both with regard to the

services to be provided to end users, and in relation to the access to those facilities necessary to

provide them. At the same time, the Community established a harmonized regime for licencing27.

Finally, it should be mentioned that, while the Community had tried to establish a clear distinction

between harmonization and liberalization measures, frequently the boundaries become blurred.

The effects of liberalisation were a fast growing sector of the economy with an overall growth rate of

more than 10 % in 2000. Competition intensified and hundreds of licensed local, long-distance and

international operators for fixed voice telephony entered. According to Commission’s dates, in 2000,

there were also almost 60 licensed mobile operators offering GSM services. Tariffs fell sharply,

especially in international and long distance calls. In that year, incumbents’ tariffs fell by more than

10 % for business users, and almost 5 % for residential users for national calls. For international calls,

the same figures were 15 % for business users and 13 % for residential users. In addition, the tariffs

of new entrants were usually lower. To sum up: competition led to lower prices, more choice and

better quality of service. In addition, liberalisation had a very positive impact on incumbent

operators. In a matter of a few years, most of them evolved from public administrations to

innovative and competitive companies that expand internationally.

Directive 97/51/EC of 6 October 1997 for the purpose of adaptation to a competitive environment in telecommunications. 24 Council Directive 92/448/ECC of 5 June 1992 on the application of open network provision to leased lines. 25. Directive 97/51/EC of the European Parliament and of the Council of 6 October 1997 amending Council Directives 90/387/EEC and 92/44/EEC for adaptation to a competitive environment in telecommunications. 26 Council Directive 97/13/EC of 10 April 1997 on a common framework for general authorization and individual licenses in the field of telecommunications services. 27 Directive 97/13/EC of the European Parliament and of the Council of 10 April 1997 on a common framework for general authorizations and individual licences in the field of telecommunications services.

58

Evolution of price calls form 2000 to 2010

The opening-up of the telecommunications market to competition had acted as a catalyst on a

sector previously reserved for oligopolies. To keep up with these changes, Europe's decision-making

bodies adopted legislation in tune with technological progress and market requirements. These

developments gave rise to the adoption of a new regulatory framework on electronic

communications, the main aim of which is to strengthen competition by making market entry easier

and by stimulating investment in the sector. The “Telecommunications Package” designed to recast

the existing regulatory framework for telecommunications in order to make the electronic

communications sector more competitive. This new regulatory framework consists of the

Framework Directive plus four specific Directives, namely the:

• Directive on the authorisation of electronic communications networks and services (the

“Authorisation Directive”);

• Directive on access to, and interconnection of, electronic communications networks and

associated facilities (the “Access Directive”);

• Directive on the universal service (the “Universal Service Directive”);

• Directive on the processing of personal data (the “Privacy and Electronic

Communications Directive”).

Added to this list, there is also the recent Decision on a regulatory framework for radio spectrum

policy (the “Radio Spectrum Decision”). The “Telecoms Package” was amended in December 2009 by

the two Directives “Better law-making” and the “Citizens' rights”, as well as by a body of European

regulators for electronic communications.

The 2002 package embodies a range of different regulatory initiatives. Perhaps the most significant

of which is the belief that a single regulatory regime should govern all forms of infrastructure,

regardless of the content being communicated. Such a belief was based on technical and markets

59

developments, generally referred to as convergence. A truly converged environment should enable

the removal of certain legacy regulatory concepts, such as the “must carry obligations” in relation to

broadcasting, and yet it may require others to be extended, such as the scope of nature of universal

service.

A second objective of the 2002 Regime was to move from ex ante regulatory intervention towards ex

post reactive regulation. The rationale being that with the successfully introduction of competition,

traditional market mechanisms will control anti-competitive practices, with competition law rules

operating as a backstop against abusive situations. However, during the consultation on the review,

new entrants made it very clear that the market was not yet sufficiently competitive and was

unlikely to be in certain market segments for some time to come. Hence the 2002 Regime continued

to include a range of ex ante measures.

Finally, a unique feature of European Union communications law is the parallel pursuit of the

objectives of liberalization and harmonization. National electronic communications markets

exhibited a high degree of variation along the countries, both in terms of market developments, as

well as regulatory structures and interventions. The new framework attempted to address the worst

of the variabilities and inconsistencies, through greater Commission oversight. However, issues of

subsidiary and Member States political manoeuvring prevented this process from going as far as

initially wished by the Commission.

As the legislative framework of the electronic communications sector is subject to periodic review, in

June 2006 the Commission presented a report to the European Parliament and the Council of the

functioning of the regulatory framework for electronic communication networks and services28. The

report highlighted that the current framework had yielded considerable benefits, but needed

attention in a number of areas in order to maintain effective for the coming decade:

“Over this period, the main technological trends are expected to be a

migration to ‘all Internet Protocol (IP)’ networks, growing use of wireless

communications and wireless access platforms (e.g. 3G, WiFi, WiMAX and

satellite), deployment of fibre in the local access network, and the

transition to digital TV. Far-reaching impacts on existing network

architectures, services and consumer devices can be expected. Market

players are facing new competitors and are seeking new business models

in the face of imminent changes to the electronic communications market

of today.

All of this will lead to new and innovative services for users, with the

current ‘triple play’ services (voice, internet and TV) being precursors of

more sophisticated service bundles to come. Boundaries between

electronic communications products and services will continue to blur; new

forms of mobile and portable devices will appear with interactive and

28Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 13 November 2007 - Report on the outcome on the Review of the EU regulatory framework for electronic communications networks and services in accordance with Directive 2002/21/EC and summary of the 2007 reform proposals [COM(2007) 696 final; Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions on the review of the EU Regulatory Framework for electronic communications networks and services {SEC(2006) 816} {SEC(2006) 817} /* COM/2006/0334 final */

60

broadcasting features. Privacy and security will continue to be a concern

for users.

So far, the framework has shown itself capable of addressing new

technologies like Voice over Internet Protocol (VoIP), with a capacity to

accommodate further technological and market evolutions. However the

provisions governing the management of radio resources, which are critical

to innovative wireless products and services and are shared with many

other sectors, need to be adapted, in order to avoid inappropriate

regulation”.

Because of this diagnostic, and the conviction that due to the fast technical developing, and changes

in the market conditions, but also due to the regulatory fragmentation and inconsistencies detected

in the performance of the National Regulatory Authorities, a substantial reform of the European

framework arose necessary. In that sense, the Commission proposed reducing the regulatory

inconsistencies and obstacles to the single market in order to improve regulation, suggesting that

the 2007 reform proposals should enter into force before the end of 2009. The Commission’s review

proposals were adopted in November 200729 and were based on the following:

• Better regulation for competitive electronic communications. The Commission proposes

improving the existing regulatory framework by maintaining ex-ante regulation, subject to

market trends. It also proposes simplifying access to radio spectrum in order to encourage

investment in new structures and release the economic potential of spectrum;

• Completing the single market in electronic communications, currently segmented and

suffering from a complete absence of coherence. The Commission recommends establishing

an independent “European Electronic Communications Market Authority” which will build

on the increased independence of NRAs and improve the existing coordination mechanisms;

• Increasing the level of consumer protection and facilitating access to and use of

communications, including by disabled users. The proposals aim in particular to strengthen

security and privacy and to promote a high quality of service and unobstructed access to

digital content. The Commission wishes to ensure the independence of regulatory

authorities, whose links with traditional operators are often overly close, so as to ensure

competition and consumer rights.

The reform, including the definition of a strategy for efficient spectrum management, was also

included in the so called “i2010 Initiative”30 as a key challenge in order to create the Single European

Information Space;

29Commission, Proposals COM (2007) 697; COM (2007) 698, COM (2007) 699. COM (2007) 697: Proposal for a Directive of the European Parliament and of the Council amending Directives 2002/21/EC on a common regulatory framework for electronic communications networks and services, 2002/19/EC on access to, and interconnection of, electronic communications networks and services, and 2002/20/EC on the authorisation of electronic communications networks and services {SEC(2007) 1472} {SEC(2007) 30Communication from the Commission of 1 June 2005 to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions entitled “i2010 - A European Information Society for growth and employment”.

61

“Regulation of electronic communications has been transformed in the last

decade. The European electronic communications regulatory framework, in

force since 2003, is an example of best practice. Where it has been

implemented consistently and effectively it has opened up competition,

encouraging lower prices and investment. Regulation must keep pace with

technological and market developments. Therefore, in the 2006 review of

the framework, the Commission will thoroughly examine its principles and

mode of implementation, especially where bottlenecks are delaying the

provision of faster, more innovative and competitive broadband services”.

Example: the Dutch telecommunications liberalization process.

The liberalization process developed in the European States has affected the national market in a

deep manner.

For example, in the Netherlands, the incumbent (KPN Telecom) was a state monopolist until 1989,

when it became a public limited liability company, although still fully owned by the state. In 1994,

a 30 per cent of the shares were sold and another 25 per cent in the following year. When

competition was introduced in 1996, two new entrants obtained licenses for national, fixed

telecommunications infrastructures. The first ono, Enertel, was formed by Dutch energy and cable

consortium, although later was sold to a UK enterprise, Energis, while it developed a long-distance

backbone of more than 1.200 km. It has two switches in Amsterdam and Rotterdam and also

serves in the corporate market by offering voice, data services and Internet access, although it can

indirectly reach about 70 percent of all household in the Netherlands. It has a cable link between

the Netherlands and the UK.

The other entrant, Telford, was constituted as an alliance between the Dutch Railways and British

Telecom. Its fixed infrastructure is based on the network alongside the main railways, consisting of

more than 1000 km of glass fiber, with a connection to BT s international network. Telford was

active in both residential and corporate market and in addition was operating a licence for mobile

telephony.

As an institutional point of view, it should be pointed out that the Netherlands created an

independent post and telecommunications authority (OPTA), which came into existence in 1997.

Policy in the Netherlands was based on the principle that general competition policy will be

enough as soon as the market works in an efficient way and in fact, OPTA was brought under the

competition authority in 2005 as an independent division and finally absorbed by the Consumer

and Markets Authority in April 2013.

The Dutch market was fully liberalized in 1998, in line with the European Union policy. From this

date, several more entrants have appeared and some of them operate their own network.

Newcomers, who did not have their own networks from day one, would initially be entitled to

make use of regulated access to KPN‘s existing infrastructure. Other entrants, especially carrier-

select operators, may be active with minimum investments. Cable operators have entered the

market too. In the meantime, KPN has been actively re-organized and is trying to cope with its

heavy debt, partly caused by its high bid on frequency actions for third-generation mobile

telephony), but its customer’s access network was an essential facility in most parts of the

country.

62

The initial expectations were not accomplished. Enertel and Telfort had failed to develop into

nationwide competitors to KPN. Cable companies initially showed little interest in the market for

voice telephony. The market for fixed-line telephony, characterized by a series of mergers and

acquisitions which were accompanied by changes in strategy, therefore developed in a different

direction than foreseen. Nonetheless, the developments that observed still held out the promise

of growth into a mature market. Various entrants rolled out networks for the business market in a

very targeted manner at well-chosen locations. The city rings in the major cities had lines

branching off to connect directly with large companies. However, the construction of connections

to end users failed to materialize in most parts of the country, and particularly for residential

customers.

In spite of the absence of competition in infrastructure for residential end users, consumers

nonetheless benefited from price competition since OPTA ensured that KPN opened up its

network to competitors without their own network. In this way various players quickly claimed a

share of the voice telephony market. The former monopolist was also obliged to unbundle the

local loop, although competitors made little use of this facility in the first few years. The cause of

this can probably be the relative unattractiveness of the business case that new entrants could

build based on the unbundled offering.

A new phase began around 2008, with the emergence of next generation networks (NGNs) which

make possible very high speed data traffic, for example via fiber-optic links to end users (FTTH), or

cable connections upgraded. In the Netherlands, it was believed that it would not take long, about

five years, for the transition of the telecommunications market to be completed and that

regulation could then be phased out, but the market has since developed considerably differently

than was predicted at the time.

2.3.2 Methods to open up the electronic communications markets

2.3.2.1 Licensing.

License is the act or document which authorizes an entity to provide services and/or to operate

infrastructure/networks on a defined basis. Licenses are considered to be one of the keys to success

in the liberalization process and provide the basic certainty and legal security investors and lenders

need to invest the huge amounts of money necessary to install or to upgrade telecoms

infrastructure. For telecoms liberalization to bring a fully competitive telecoms market, market entry

should be subject to as few barriers and restrictions as possible and avoid using licensing as a tool of

control of market by limiting the number of players or the type of services that they are able to

provide.

Licenses can detail the conditions imposed and rights granted as a substitute for a not enough

developed legal framework. In similar situations, such as where private property rights might be

uncertain, the licence can serve as a contract between the regulator and investors in the incumbent,

a departure from the traditional legal nature of a government licence. As a binding contract, it can

guarantee exclusivity or to ensure due process as well as to impose performance obligations, eg. in

the form of enhanced market penetration or network roll-out requirements. Investors might

otherwise be reluctant to commit the large amounts of capital required to update ageing networks

or roll out new technologies and networks required to improve and update services. Without the

63

performance obligations, countries might be unwilling to involve private parties in the running of the

state-owned incumbent. This is typically the case where substantial strategic investments and

expertise from the private sector is required to modernize large telecommunications infrastructure

and provide new services or substantially improve services but where the government is not ready

to or does not want to privatize of fully privatize the state-owned provider and transfer ownership.

The relationship between the government and the private undertakings with its allocation of risk,

rights and obligations from a continuum of possible options are often spelled out in complex

agreements. Just one example of this is found in build-operate transfer agreements whereby the

private undertakings are given a concession to operate form a fixed time the infrastructure that they

have built that is then turned over to the government at the end of the concession period.

Finally, licensing can also be used as a tool to create competitive markets by imposing obligations on

incumbents in order to level the playing field.

As a limitation on numbers of market entrants, licensing was a common practise in most countries.

The EU reported in 1999 that the hurdle of the individual licence required by the majority of the

Member States with its ensuing complexities and, in some states, delay and expense, lack of

transparency and excessive regulatory discretion was a barrier to market entry31. Licensing had the

effect, if not also de object, of limiting the number of market entrants and, therefore, of protecting

the national incumbent and maintaining the near-monopoly market structure.

Licensing as a control against market entry must be contrasted with licensing as a tool to structure

and promote the market by introducing competition. This can be achieved by granting licences to

new entrants that will offer services in competition with the incumbent. Here, to level the playing

field, the conditions imposed on the incumbent, often via licence, are generally more onerous than

those on the new entrant. These can include, for example, requiring the incumbent to interconnect

on a non-discriminatory basis and a regulated, sometimes cost-bases rates and maintaining separate

accounting to ascertain and verify such cost. We can find a example of a licence as a market-opening

tool in the case of the granted to Mercury in the UK un 1981, where a second fixed network in

competition with British Telecom’s was granted as an “exclusive privilege”. Telecommunications

licensing often involved different licences for different types of networks and services

Licensing may also be a way to impose special rules. Licences are used to impose all sorts of control,

especially in the provision of basic services. They also may impose technical requirements to ensure

safety of equipments attached to or interconnected to the network for the protection of the

network itself, employees of the providers and users, as well as to ensure that equipment will

efficiently use scare resources such radio spectrum. These and other such non-economic reasons in

the general public interest called “essential requirements”, in the EU, that will vary depending on the

nature of the equipment or service at issue, have been the subject of conditions in

telecommunications licensing in many European jurisdictions. Similarly, licenses are used to impose

socially based requirements, such as the funding or provision of some services on a non-competitive

basis to ensure that all citizens have affordable access to at least a basic level of service, and to

31 Commission Communication, “Toward a new framework for Electronic Communications infrastructure and associated services: The 1999 Communications Review” (1999 Communications Review), COM (1999) 539, 10 November 1999. Accord, Commission Communication, 5th Report on the implementation of the Telecommunication Regulatory Package” (1999).

64

ensure consumer protection, such as the provision of emergency service operators on a toll-free

basis. These, and other services, may define the universal service obligation.

Finally, it should be noted that licensing does help ensure that those providing services are on the

radar screen of the regulator who can oversee their compliance with laws and also make certain that

the licensing fee and other payments, such as the contribution to universal service obligations, are

made where required. In the EU, although individual licensing requirements are now prohibited,

under the Authorizations Directive32, a Member State can still have a notification procedure that will

meet the historical purpose of ensuring their being brought under public notice.

One of the most significant changes in the EU framework is that electronic communications

providers need no longer obtain individual licences requiring approvals to provide networks or

services. Instead, there is a scheme of authorizations applied to all providers pursuant the

Authorization Directive and subject only to a defined and limited set of general conditions from

which Member States may elect. States may require individual grants only for scarce resources, now

limited to radio spectrum and numbers. Individual conditions can be applied only in exceptional

circumstances.

Effectively, in 1999 the EU proposed a new framework to ensure equal regulation for converging

markets and technologies. The new Directive does this, basically, by eliminating much of the

discretion that the former one left to Members States.

The Authorisation Directive is not a radically different scheme for permission to provide such

networks and services, from that under the prior Licensing Directive as that was intended to work.

Rather, the Authorization Directive is a further refinement of the Licensing Directive with provisions

to ensure implementation of its intended light-touch regulatory scheme with individual grants of

rights and conditions permitted only when justified.

It applies to the authorization of all public and private electronic communications networks and

electronic communications service. As defined in the Article 2 (definitions) of the Framework

Directive, electronic communications services are:

(c) "electronic communications service" means a service normally provided

for remuneration which consists wholly or mainly in the conveyance of

signals on electronic communications networks, including

telecommunications services and transmission services in networks used

for broadcasting, but exclude services providing, or exercising editorial

control over, content transmitted using electronic communications

networks and services; it does not include information society services, as

defined in Article 1 of Directive 98/34/EC, which do not consist wholly or

mainly in the conveyance of signals on electronic communications

networks;

The aim of the Authorization Directive is to implement an internal market in electronic

communications networks and services through the harmonisation and simplification of

authorisation rules and conditions in order to facilitate their provision throughout the European

32Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive).

65

Union. According to the Directive, "general authorisation" means a legal framework established by

the Member State ensuring rights for the provision of electronic communications networks or

services and laying down sector specific obligations that may apply to all or to specific types of

electronic communications networks and services. The general authorisation system should apply to

all such services and networks regardless of their technological characteristics and should limit

administrative barriers to entry into the market to a minimum.

The Authorisation Directive directs Member States to ensure the freedom to provide electronic

communications network and services:

Recital (8): Those aims can be best achieved by general authorisation of

all electronic communications networks and services without requiring any

explicit decision or administrative act by the national regulatory authority

and by limiting any procedural requirements to notification only. Where

Member States require notification by providers of electronic

communication networks or services when they start their activities, they

may also require proof of such notification having been made by means of

any legally recognised postal or electronic acknowledgement of receipt of

the notification. Such acknowledgement should in any case not consist of

or require an administrative act by the national regulatory authority to

which the notification must be made.

The only procedural requirement permitted by the Directive prior to provider’s entering the market

is a notification that is limited to a declaration of the intent to provide networks or services and the

provision of information to enable the NRA to maintain a register of providers which is restricted to

the information needed to identify the provider, such a company registration numbers, location,

contact details and a brief description of the services and when they start with the activity:

Article 3. General authorisation of electronic communications networks

and services.

2. The provision of electronic communications networks or the provision

of electronic communications services may, without prejudice to the

specific obligations referred to in Article 6(2) or rights of use referred to

in Article 5, only be subject to a general authorisation. The undertaking

concerned may be required to submit a notification but may not be

required to obtain an explicit decision or any other administrative act

by the national regulatory authority before exercising the rights

stemming from the authorisation. Upon notification, when required, an

undertaking may begin activity, where necessary subject to the

provisions on rights of use in Articles 5, 6 and 7.

3. The notification referred to in paragraph 2 shall not entail more than

a declaration by a legal or natural person to the national regulatory

authority of the intention to commence the provision of electronic

communication networks or services and the submission of the minimal

information which is required to allow the national regulatory authority

to keep a register or list of providers of electronic communications

networks and services. This information must be limited to what is

necessary for the identification of the provider, such as company

registration numbers, and the provider's contact persons, the provider's

66

address, a short description of the network or service, and an

estimated date for starting the activity.

These provisions clearly limit the discretion of Member States and remove the possibility of delay

the entry of new operators. This least onerous system is considered as necessary to stimulate the

development of new electronic communications services, specially pan-European services and to

permit the operator to benefit from its economies of scale, not possible under the former regimen

as implemented.

Recital (7) The least onerous authorisation system possible should be used

to allow the provision of electronic communications networks and services

in order to stimulate the development of new electronic communications

services and pan-European communications networks and services and to

allow service providers and consumers to benefit from the economies of

scale of the single market.

This cross-border focus also underlies, in part, the requirement that certain rights be accorded to all

undertakings within the Authorization itself. This harmonization is expected to create greater

certainty about the ability to enter a new national market and, as the Recital points out, ensure a

level playing field throughout the Community.

The rights granted by the authorisations are the next:

• provide electronic communication network and services;

• apply for rights of way to install facilities on/over private or public land;

• to a competent authority separate from any provider;

• pursuant to procedures that are transparent, public, available, and applied in a non-

discriminatory and timely manner buy can differ for public and private communications

networks, and imposes conditions only pursuant to principles of transparency and non-

discrimination.

• negotiate and obtain interconnection with and access to other publicity available networks

as required by the Access Directive.

• eligibility to be designed to provide elements of universal service.

According to this regime, networks and service providers may have three types of conditions

imposed on them.

In the first place, those under the general authorisation as Member States may impose under

general authorisations any conditions from its maximum list of the next 18 included in the Part A of

the Annex of the Authorisation Directive:

A. Conditions which may be attached to a general authorisation.

1. Financial contributions to the funding of universal service in

conformity with Directive 2002/22/EC (Universal Service Directive).

2. Administrative charges in accordance with Article 12 of this Directive.

67

3. Interoperability of services and interconnection of networks in

conformity with Directive 2002/19/EC (Access Directive).

4. Accessibility of numbers from the national numbering plan to end-

users including conditions in conformity with Directive 2002/22/EC

(Universal Service Directive).

5. Environmental and town and country planning requirements, as well

as requirements and conditions linked to the granting of access to or

use of public or private land and conditions linked to co-location and

facility sharing in conformity with Directive 2002/22/EC (Framework

Directive) and including, where applicable, any financial or technical

guarantees necessary to ensure the proper execution of infrastructure

works.

6. "Must carry" obligations in conformity with Directive 2002/22/EC

(Universal Service Directive).

7. Personal data and privacy protection specific to the electronic

communications sector in conformity with Directive 97/66/EC of the

European Parliament and of the Council of 15 December 1997

concerning the processing of personal data and the protection of

privacy in the telecommunications sector(1).

8. Consumer protection rules specific to the electronic communications

sector including conditions in conformity with Directive 2002/22/EC

(Universal Service Directive).

9. Restrictions in relation to the transmission of illegal content, in

accordance with Directive 2000/31/EC of the European Parliament and

of the Council of 8 June 2000 on certain legal aspects of information

society services, in particular electronic commerce, in the internal

market(2) and restrictions in relation to the transmission of harmful

content in accordance with Article 2a(2) of Council Directive

89/552/EEC of 3 October 1989 on the coordination of certain provisions

laid down by law, regulation or administrative action in Member States

concerning the pursuit of television broadcasting activities(3).

10. Information to be provided under a notification procedure in

accordance with Article 3(3) of this Directive and for other purposes as

included in Article 11 of this Directive.

11. Enabling of legal interception by competent national authorities in

conformity with Directive 97/66/EC and Directive 95/46/EC of the

European Parliament and of the Council of 24 October 1995 on the

protection of individuals with regard to the processing of personal data

and on the free movement of such data(4).

12. Terms of use during major disasters to ensure communications

between emergency services and authorities and broadcasts to the

general public.

13. Measures regarding the limitation of exposure of the general public

to electromagnetic fields caused by electronic communications

networks in accordance with Community law.

14. Access obligations other than those provided for in Article 6(2) of

this Directive applying to undertakings providing electronic

communications networks or services, in conformity with Directive

2002/19/EC (Access Directive).

15. Maintenance of the integrity of public communications networks in

accordance with Directive 2002/19/EC (Access Directive) and Directive

2002/22/EC (Universal Service Directive) including by conditions to

prevent electromagnetic interference between electronic

communications networks and/or services in accordance with Council

Directive 89/336/EEC of 3 May 1989 on the approximation of the laws

of the Member States relating to electromagnetic compatibility(5).

68

16. Security of public networks against unauthorised access according

to Directive 97/66/EC.

17. Conditions for the use of radio frequencies, in conformity with

Article 7(2) of Directive 1999/5/EC, where such use is not made

subject to the granting of individual rights of use in accordance with

Article 5(1) of this Directive.

18. Measures designed to ensure compliance with the standards and/or

specifications referred to in Article 17 of Directive 2002/21/EC

(Framework Directive).

Most of these obligations may be implanted only in conformity with requirements under this or

another Directive of the general framework. National Regulatory Authorities may impose conditions

on all providers of electronic communications networks and services under the general authorization,

if justified. However, as the Directive cautions, in the case of networks and services not provided to

the public, it is appropriate to impose fewer and lighted conditions than are justified for public

networks and services.

Conditions must be objectively justified in relation to the service or network concerned, and

proportionate, transparent, and non-discriminatory. General conditions must also be sector-specific

and may not duplicate conditions applicable under national law.

Article 6. Conditions attached to the general authorisation and to the

rights of use for radio frequencies and for numbers, and specific

obligations.

(…)

3. The general authorisation shall only contain conditions which are

specific for that sector and are set out in Part A of the Annex and shall

not duplicate conditions which are applicable to undertakings by virtue

of other national legislation.

This is a change from de Licensing Directive. Although it tried to create an exhaustive list of

conditions, it neither produced this result, not could it have done so. Due to its own jurisdictional

limitation, a Member State was free to include any other licence condition that could be classified as

falling under the very broad categories of defence, public interest, public policy or security. The

Directive provided that it was without prejudice to measures taken by Member States concerning

defence and to measures taken by Member States in accordance with public interest requirements

recognized by the Treaty, in particular Articles 36 and 56, especially in relation to public morality,

public security and public policy. The Licensing Directive’s carve out of these areas was somewhat

broadly stated.

The second type of conditions to be imposed on networks and service providers are those individual

obligations attached to the granting of rights of use of numbers of spectrum when those resources

are necessary. Conditions for numbers are limited to those regarding a service designation for a

number, usage fees, efficient and effective use, providing public directory services and number

portability, the grant’s duration and transfer, and commitments made during competitive selection

procedures. Conditions that Member States may attach to rights of use of spectrum may include

69

only those regarding: service or technology designations for granted frequency, effective and

efficient use including coverage requirements, technical and operational conditions for avoiding

harmful interference and public exposure to electromagnetic fields, usage fees, duration, transfer by

the grantee, and commitments from selection procedures. These individual obligations are required,

like those under the general authorisation, to be objectively justified to the service, proportionate,

transparent and non-discriminatory.

Finally, the third category of conditions to be imposed is specific conditions under the Access and

Universal Service Directive but just in a limited number of reasons. These specific conditions can be

divided into two overarching categories: (a) those imposed on undertakings found to have significant

market power (joint or otherwise) in relevant markets after the analysis and pursuant to the

procedures required by the Framework Directive and (b) those imposed for other public interest

reasons on non-significant market power undertakings.

The Access Directive requires that National Regulatory Authorities impose appropriate conditions on

significant market power operator after a market analysis (complying with Article 16 of the

Framework Directive) concludes that there is not effective competition in the relevant market. These

specific conditions govern, respectively, obligations of transparency, non-discrimination, accounting

separation, access and interconnection, and price controls and cost accounting. Member States must

publish these specific conditions imposed on undertakings pursuant to these Articles, indentifying

the specific product or service. Current and easily accessible, non-confidential information must be

made available to all interested parties.

Where justified, conditions to ensure end-to-end connectivity can be imposed on operators not

declared to have significant market power controlling access to end-users by means of unique

numbers of addresses. These may include mandatory interconnection imposed by NRA where

commercial negotiations, pursuant to the general authorisation conditions, fail as well as conditions

imposing access to electric program guides and application program interfaces by providers of these

associated facilities on fair, reasonable and non-discriminatory terms when needed to ensure end-

user accessibility to digital TV and radio services. Technical and operational conditions to ensure

interoperability and normal operation of networks can be imposed on beneficiaries of significant

market power obligations. The Directive also requires the imposition of conditions imposed on

providers of conditional access services necessary for end-users access to digital TV and effective

competition in such services.

Providers with significant market power in relevant market determined in compliance with the

Framework Directive must have specific conditions regarding retail price controls (with must be

communicated to the Commission), minimum leased line provision and carrier selection and pre-

selection imposed under the Universal Service Directive. These must meet all the Framework

Directive s requirements for transparency, objectivity, proportionality and consultation as described

with other conditions.

While undertakings found to have significant market power in several markets are also likely to be

designated to provide all or a part of the universal service under specific conditions, others may seek

to be considered for this designation. The Authorisation Directive, therefore, allows non-SMP

operators that are designated to provide all or part of the universal service obligations to have

70

specific conditions imposed concerning their provision and tariffing. These non- SMP specific

conditions must also comply with the substantive and procedural requirement for imposing

conditions on the Framework Directive and Universal Service Directive that includes Commission

reporting.

2.3.2.2 Fair allocation of scarce resources

Granting telecommunications services requires to operators the use of scarce resources, specially

spectrum and numbering. A healthy competition demands a fair and transparent allocation process

to ensure applicants understand the basis of the procedural rules and conditions and have the

information required to value the resources needed. In other case, those obstacles can constitute a

barrier to entry or to develop new networks and services.

In the European framework, the only exceptions to the general authorization concerns right to use

spectrum and numbers. This discretion, however, is not unlimited. The Authorization Directive

directs Member States not to make the use of spectrum conditional on an individual grant of rights

where possible but, rather, to include the conditions that would require to such use the general

authorization:

Article 5. Rights of use for radio frequencies and numbers.

1. Member States shall facilitate the use of radio frequencies under general

authorisations. Where necessary, Member States may grant individual

rights of use in order to:

— avoid harmful interference,

— ensure technical quality of service,

— safeguard efficient use of spectrum, or

— fulfil other objectives of general interest as defined by Member

States in conformity with Community law.

The above should be the case especially where the risk of harmful interference is small. If individual

rights might be granted for the use of spectrum and numbers, certain substantive and procedural

safeguards are to be followed. Member States, however, may not restrict the numbers of individuals

rights granted to spectrum unless it is “unavoidable” and dictated by their scarcity or efficient use:

Recital (11) The granting of specific rights may continue to be necessary

for the use of radio frequencies and numbers, including short codes, from

the national numbering plan. Rights to numbers may also be allocated

from a European numbering plan, including for example the virtual country

code ‘3883’ which has been attributed to member countries of the

European Conference of Post and Telecommunications (CEPT). Those

rights of use should not be restricted except where this is unavoidable in

view of the scarcity of radio frequencies and the need to ensure the

efficient use thereof.

According to article 5(2) in order to obtain a really open market, member States must grant rights to

use numbers and spectrum via open, transparent and non discriminatory procedures. They must

inform the grantees of their ability, in any, to transfer such rights to third parties, and as concerns

71

spectrum, specify what conditions attach to that transfer. The time period allocated to grants of

rights of use must be appropriate to the specific service in granted for a limited time:

2. Where it is necessary to grant individual rights of use for radio

frequencies and numbers, Member States shall grant such rights, upon

request, to any undertaking providing or using networks or services under

the general authorisation, subject to the provisions of Articles 6, 7 and

11(1)(c) of this Directive and any other rules ensuring the efficient use of

those resources in accordance with Directive 2002/21/EC (Framework

Directive).

Without prejudice to specific criteria and procedures adopted by Member

States to grant rights of use of radio frequencies to providers of radio or

television broadcast content services with a view to pursuing general

interest objectives in conformity with Community law, such rights of use

shall be granted through open, transparent and non-discriminatory

procedures. When granting rights of use, Member States shall specify

whether those rights can be transferred at the initiative of the right holder,

and under which conditions, in the case of radio frequencies, in

accordance with Article 9 of Directive 2002/21/EC (Framework Directive).

Where Member States grant rights of use for a limited period of time, the

duration shall be appropriate for the service concerned.

The Authorization Directive also stated that decisions to grant right of use should be communicated

and made public as soon as possible. For rights to use numbers from the national plan allocated to

specific uses, three weeks from receipt of a complete application is specified; six weeks un the case

of spectrum.

1. 3. Decisions on the granting of rights of use shall be taken, communicated

and made public as soon as possible after receipt of the complete

application by the national regulatory authority, within three weeks in the

case of numbers that have been allocated for specific purposes within the

national numbering plan and within six weeks in the case of radio

frequencies that have been allocated to be used by electronic

communications services within the national frequency plan. The latter

time limit shall be without prejudice to any applicable international

agreements relating to the use of radio frequencies or of orbital positions.

Spectrum allocation

With regard to spectrum, it should be pointed out that the frequency spectrum serves a wide range

of activities in sectors such as telecommunications, broadcasting, transport, research and public

services. The range is so wide that congestion is almost inevitable, since the demand for frequencies

exceeds the supply.

Auctions are one approach available to government and NRAs to allocate spectrum to operators.

Administrative assignments and beauty contests are alternative approaches that may, in certain

specific market circumstances, be more appropriate for the allocation of spectrum resources.

Market based approaches (auctions) are however generally preferred as a means of allocating

72

spectrum, especially where when there is competition for scarce spectrum resources and demand is

expected to exceed supply.

Auctions are typically designed to meet a number of societal, market and economic objectives and

should not be focused on short term revenue maximisation for the exchequer. The greatest value to

governments is through the effective use of the spectrum to enable mobile and mobile broadband

services. Excessive auction fees, or inappropriate reserve prices, may negatively impact consumer

pricing and inhibit the ability for operators to invest in network deployment, ultimately impacting tn

the growth and innovation in other sectors of the economy.

Specifically with respect to spectrum sharing, various methods are used by NRAs, who are

responding to increasing demands for spectrum resulting from the unstoppable surge in new

services and technologies. The first idea to remark is that spectrum sharing is not a universal trend

for all regulators nor are the approaches taken similar for all regulators. We can distinguish:

• Approaches for managing the unlicensed but regulated spectrum commons range from

imposing license and permit constraints to few if any constraints at all beyond technical

specifications. The allocation of ISM bands for unlicensed use by low power devices such as

Wi-Fi has been encouraged by the ITU across all regions;

• Making changes to encourage spectrum sharing by different services such as fixed and

mobile has shown high benefits but many countries continue to reserve significant amounts

of spectrum for exclusive/government use.

Spectrum sharing encompasses several techniques –administrative, technical and market-based.

Sharing can be accomplished through licensing and/or commercial arrangements involving spectrum

leases and spectrum trading. Spectrum can also be shared in several dimensions; time, space and

geography. Limiting transmit power is also a factor which can be utilized to permit sharing. Low

power devices in the spectrum commons operate on the basis of signal propagation which takes

advantage of power and interference reduction techniques.

A common issue for both innovative technologies and market-based methods is arriving at the right

balance. Resolving interference issues inherent in methods based on the principle of technological

neutrality is an issue of great importance. Interference cannot be eliminated and so identifying

interference management models which support spectrum sharing under either administrative,

market-based or spectrum commons remain as an ongoing requirement and challenge for spectrum

managers.

As the demand for spectrum increases and frequency bands become more congested, especially in

densely populated urban centres, spectrum managers are following diverse approaches to sharing

frequencies: using administrative methods including in band sharing, licensing such as leasing and

spectrum trading, and the unlicensed spectrum commons combined with the use of low power

radios or advanced radio technologies including ultra-wideband and multi-modal radios. This is the

case of Spain, for example.

Spectrum sharing typically involves more than one user sharing the same piece of spectrum for

different applications or using different technologies. When a band already licensed to an operator

is shared with others it is known as overlay spectrum sharing. For example a spectrum band used for

73

TV distribution in one geographical area could be used for an application such as broadband wireless

access in another area without any risk of interference, despite being allocated on a national basis.

Spectrum sharing is required when sufficient demand exists for spectrum, causing congestion, and

the technical means exist to permit different users to coincide; and other means for adjusting

spectrum use and assignment have become burdensome and costly undermining the goals of

economic and technical efficiency. The implications are that spectrum management policies are

evolving towards more flexible and market oriented models to increase opportunities for efficient

spectrum use.

A framework for Radio Spectrum Policy in the EU was launched by the 2002 regulatory framework

for electronic communications, and particularly by the Radio Spectrum Decision33, which defines the

policy and regulatory tools to ensure the coordination of policy approaches and harmonised

conditions for the availability and efficient use of radio spectrum for the internal market.

The Radio Spectrum framework decision concerns the use of electromagnetic waves propagated in

space without artificial guide in certain frequencies, taking into consideration inter alia economic,

safety, health, public interest, freedom of expression, cultural, scientific, social and technical aspects

of European policies as well as the various interests of radio spectrum user communities. Activities

pursued under this Decision take due account of the work of international organisations related to

radio spectrum management, e.g. the International Telecommunication Union (ITU) and the

European Conference of Postal and Telecommunications Administrations (CEPT). As mandated

[Decision 710/97], the CEPT produced a frequency plan and a channel arrangement allowing six

types of preferred applications to share the band in order to meet several European policy needs. A

multiannual radio spectrum policy programme aims at the strategic planning and harmonisation of

the use of spectrum.

In March 2012, the European Parliament and Council adopted a first Radio spectrum policy

programme for the EU34 that puts forward a comprehensive roadmap to contribute to the

functioning of the internal market for wireless technologies and services, particularly in line with

the Europe 2020 strategy and the Digital Agenda for Europe. The programme covers all types of

radio spectrum use that affect the internal market and sets general regulatory principles, policy

objectives and priorities. It aims to enhance the efficiency and flexibility of spectrum use, as well as

to preserve and promote competition. In line with this programme, in September 2012 the European

Commission published a Communication on Promoting the shared use of radio spectrum resources35

which aims to make better use of the limited available capacity of the radio spectrum in the face of

continually growing wireless data traffic; among other points the Communication highlights the need

for technologies that facilitate spectrum sharing and the importance of a regulatory framework to

make such sharing possible.

33Decision No 676/2002/EC of the European Parliament and of the Council of 7 March 2002 on a regulatory framework for radio spectrum policy in the European Community (Radio Spectrum Decision). 34 Decision 243/2012/EU, of the European Parliament and of the Council of 14 March 2012 establishing a multiannual radio spectrum policy programme. 35 COM(2012) 478 final

74

Numbering.

Numbering is another example of scarce resource since the numbering planning establish the type of

numbers that can be used to grant a determinate kind of service. Usually regulators empowered to

control and manage the national numbering plans have to face the numbering allocation issue.

Criterion would depend on jurisdictions. In Spain, the law stated that the general rule of “first

request”, although a limit in the quantity of numbers assigned can be establish in the more scarce

and demanding ranges, as mobile directory numbering, where just 99 numbers have been reserved.

In a monopoly environment, one task historically carried out by the incumbent operator is the

allocation of telephone numbers. In a liberalised environment, control over this critical scarce

resource can obviously result in anticompetitive behaviour. As such, numbering must be part of the

liberalization process and which, under the Services Directive, had to be carried out by an

administrative body independent of the telecommunications organization and under the Framework

Directive is to be controlled by the National Regulatory Authority. In addition, numbering is seen as a

critical access mechanism for European business and citizens and therefore a key enabler in the

development of a competitive market36.

To date, European numbering policy has encompassed several different perspectives, as the

introduction of a European-wide numbering system, the allocation of numbers and number

portability and carrier selection.

The Commission adopted in 21 May 1997 a Communication37 concluding a public consultation on

the Numbering Green Paper, which covers issues of increasing importance with the opening up of

markets to competition, such as equal access and number portability. It also addressed the evolution

towards personal numbers and the creation of a European Numbering Space. Following the wide

support shown in the consultation, an amendment to the interconnection directive was adopted in

September 1998 to introduce carrier pre-selection and numbering portability for customers of all

fixed local access providers with significant market power by January 2000. The need for extension

of carrier pre-selection would be re-evaluated by the end of 1998 regarding mobile operators and by

the end of 1999 in the case of local access providers without significant market power. The possible

extension of number portability to mobile operators was reviewed in the end of 199838.

The Interconnection Directive39 provided that Member States shall ensure the provision of adequate

numbers and numbering ranges for all publicity available telecommunications services. They also

shall, in order to ensure full interoperability of Europe wide networks and services, take all necessary

steps to ensure the coordination of their international organizations for and where numbering

decisions are taken:

36 “Toward a European Numbering Environment”, Green Paper on a Numbering Policy for Telecommunications Services in Europe, COM (96) 590 final, 20 November 1996. Also Framework Directive at article 8 (2) (d). 37 Communication on the results of the consultation on the numbering Green Paper, COM (97) 2003. 38 Directive 98/61/EC of the European Parliament and of the Council of 24 September 1998 amending Directive 97/33/EC with regard to operator number portability and carrier pre-selection . 39 Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in Telecommunications with regard to ensuring universal service and interoperability through application of the principles of Open Network Provision (ONP).

75

Recital (15): Whereas numbering is a key element for equal access;

whereas national regulatory authorities should have the responsibility for

administering and controlling national numbering plans, and those naming

and addressing aspects of telecommunications services where coordination

at a national level is required, so as to ensure effective competition;

whereas in exercising this responsibility, national regulatory authorities

must have regard to the principle of proportionality, particularly as to the

effect of any measures on network operators, resellers and consumers;

whereas number portability is an important facility for users, and should

be implemented as soon as practicable; whereas numbering schemes

should be developed in full consultation with all the parties involved and in

harmony with a long-term Europe-wide numbering framework and

international numbering schemes as being considered in the European

Conference of Postal and Telecommunications Administrations (CEPT);

whereas numbering requirements in Europe, the need for the provision of

pan-European and new services and the globalization and synergy of the

telecommunications market require coordination of national positions in

accordance with the Treaty in international organizations and fora where

numbering decisions are taken;

In the same sense, the Service Directive40 imposed a general obligation upon Member States to

ensure that adequate numbers are available for all telecommunications services and that they are

allocated in an objective, non-discriminatory, proportionate and transparent manner. The ONP voice

telephony rules ensure fair competition and require national telephone numbering plans to be

controlled by the national regulatory authorities. A consolidated set of principles governing

numbering was introduced under the Interconnection Directive and finally, further consolidation

occurred in the 2002 package under the Framework Directive:

Article 10. Numbering, naming and addressing.

1. Member States shall ensure that national regulatory authorities

control the assignment of all national numbering resources and the

management of the national numbering plans. Member States shall

ensure that adequate numbers and numbering ranges are provided for

all publicly available electronic communications services. National

regulatory authorities shall establish objective, transparent and non-

discriminatory assigning procedures for national numbering resources.

2. National regulatory authorities shall ensure that numbering plans

and procedures are applied in a manner that gives equal treatment to

all providers of publicly available electronic communications services. In

particular, Member States shall ensure that an undertaking allocated a

range of numbers does not discriminate against other providers of

electronic communications services as regards the number sequences

used to give access to their services.

3. Member States shall ensure that the national numbering plans, and

all subsequent additions or amendments thereto, are published, subject

only to limitations imposed on the grounds of national security.

4. Member States shall support the harmonisation of numbering

resources within the Community where that is necessary to support the

40 Commission Directive 96/19/EC of 13 March 1996 amending Directive 90/388/EEC with regard to the implementation of full competition in telecommunications markets.

76

development of pan European services. The Commission may, in

accordance with the procedure referred to in Article 22(3), take the

appropriate technical implementing measures on this matter.

5. Where this is appropriate in order to ensure full global

interoperability of services, Member States shall coordinate their

positions in international organisations and forums in which decisions

are taken on issues relating to the numbering, naming and addressing

of electronic communications networks and services.

A critical element in the establishment of a competitive market is the need to lower the barriers to

entry faced by potential new entrants. In the telecommunications sector, one such barrier to entry is

the need for customers to change telephone numbers when moving to a new provider. Changing

telephone numbers is recognized as being expensive and time-consuming, which will dissuade many

customers from moving between operators. In order to overcome such a potential barrier, the

Interconnection Directive called upon the national regulatory authorities to encourage the

introduction of “number portability”. In addition, carrier pre-selection allows a subscriber to access

any interconnected provider of service through the use of a particular number. This feature was also

seen a critical facility to enable customers to move between competing operators with minimum

effort.

Under the 2002 framework, number portability and carrier selection are addressed under the

Universal Service Directive, where number portability is seen as an aspect of end-user rights.

Article 30. Number portability.

1. Member States shall ensure that all subscribers of publicly available

telephone services, including mobile services, who so request can

retain their number(s) independently of the undertaking providing the

service:

(a) in the case of geographic numbers, at a specific location; and

(b) in the case of non-geographic numbers, at any location.

This paragraph does not apply to the porting of numbers between

networks providing services at a fixed location and mobile

networks.

Carrier selection and carrier pre-selection is an ex-ante obligation that may be imposed on an

undertaking with significant market power for the provision of connection to and use of the public

telephone network at a fixed location:

Article 19. Carrier selection and carrier pre-selection.

1. National regulatory authorities shall require undertakings notified as

having significant market power for the provision of connection to and

use of the public telephone network at a fixed location in accordance

with Article 16(3) to enable their subscribers to access the services of

any interconnected provider of publicly available telephone services:

(a) on a call-by-call basis by dialling a carrier selection code; and

77

(b) by means of pre-selection, with a facility to override any pre-

selected choice on a call-by-call basis by dialling a carrier selection

code.

2. User requirements for these facilities to be implemented on other

networks or in other ways shall be assessed in accordance with the

market analysis procedure laid down in Article 16 of Directive

2002/21/EC (Framework Directive) and implemented in accordance

with Article 12 of Directive 2002/19/EC (Access Directive).

The new framework recognized expressly the obligation to handle calls to the numbers of the

European Numbering Space in the Universal Service Directive, whose article 27 (2), applying to all

operators irrespective of whether they have been designated as having significant market power,

states that:

'Member States shall ensure that all undertakings that operate public

telephone networks handle all calls to the European Telephony Numbering

Space, without prejudice to the need for an undertaking that operates a

public telephone network to recover the cost of the conveyance of calls on

its network'.

For its part, recital 27 of the Universal Service Directive recognises:

'(...) In order to ensure interconnection of calls to the ETNS, undertakings

operating public telephone networks should ensure that calls using '3883'

are directly or indirectly interconnected to ETNS serving networks (...).

Such interconnection arrangements should be governed by the provisions

of the Directive 2002/19/EC (Access Directive).

According to this idea, operators should agree between themselves on the terms and conditions for

handling ETNS calls (Article 4 of the Access Directive). In case of dispute, NRAs have powers to

intervene.

2.3.2.3 Facility sharing

Telecommunication sector is considered to developeconomies of scale. In the other hand, activity in

the electronic communications sector generally requires considerable investment in technology and

infrastructures. Those reasons are partially behind the liberalisation process, as we explained:

investments arefixed, sunk and irreversible costs which represent a high risk factor to avoid that can

restrain investments. The necessity of maintaining and upgrading infrastructure due to the

continuous technical advance make this risk even higher. For example, fixed network operators are

migrating to next-generation networks, after most mobile network operators have already deployed

the third-generation infrastructures. Therefore, infrastructure sharing can significantly reduce

entrance and development risk.

Infrastructure sharing also has great impact on competition while is commonly accepted that market

becomes more attractive to new players for decreasedentrance barriers. Such players can enrich the

78

competition and investing effectively. Sharing allows operators to turn their resources to improved

innovation, better customer service and eventually better commercial offerings by alleviating

pressure of network deployment.

It also should be noted that when there is limited access to resources due to the need to protect the

environment, health or public safety or when it is not possible to reproduce infrastructures, Member

States may impose the sharing of facilities or property on an undertaking operating an electronic

communications network. These sharing and coordination arrangements may include rules for

apportioning the costs of facility or property sharing adjusted for risk where appropriate.

Other reasons behind the facility sharing tendency are environmental and technical requirements as

not always it is possible to replicate infrastructure due to limitations of such nature.

For example, in the United Kingdom, Ofcom, the telecommunications regulator, states that it

encourages mobile network operators to share masts and/or sites where possible, in order to

minimise the environmental impact of networks and Operators may enter into site-sharing

agreements where that is an attractive commercial option. However, limitations on site sharing

include:

1. Technology: In some cases, transmission frequencies from co-located antennae might

interfere with each other;

2. Coverage: A particular location may give good coverage for one operator, but not another;

3. Visual impact: Site-sharing necessitates more than one antenna on a mast (or a cluster of

masts), and, often, an increase in the height of the structure. This can be visually obtrusive,

and may not be what the local community wants.

Ofcom requires applicants wishing to apply for Electronic Communications Code powers to illustrate

that they are willing to share their apparatus with other providers of electronic communications

networks. If a dispute was referred to Ofcom by an operator seeking mast sharing, each such referral

to Ofcom would be considered on a case by case basis. If Ofcom concluded that mast sharing was

technically feasible and/or was being refused by the communications provider (mast owner), it could

exercise its powers to require mast sharing.

For their part, operators have dedicated efforts to deal solely with incoming and outgoing sharing

applications and have individually negotiated reciprocal mast share agreements for standard mast

sharing, redevelopment of existing masts and joint development of new masts. Even, operators have

recently introduced a cross industry website operated database for mast and site sharing. Sharing

applications are now handled online, and the progress of all applications can be monitored using the

database

Within these practices, the objective of infrastructure sharing is to limit duplication and gears

investment toward underserved areas, product innovation, and improved customer service.

Notable examples for cooperation agreements for facilities sharing are three cooperation

agreements regarding the development of a competitive 3G mobile networks and service provisions.

The decisions of the Commission on the UK and Germany Network Sharing Agreements fit within the

79

broader policy framework of Decision 129/1999/EC41. Both in UK and in Germany, T-Mobile (the

incumbent in Germany in the mobile market) agreed to share elements of its infrastructures that O2

(a new entrant) needed to provide its customers with country-wide coverage and portfolio of

multiple services. The assessment of the cooperation agreements are mindful that 3G network

construction requires considerable financial resources and might be time consuming. To prevent

delay in the provision of 3G services to consumers and to facilitate the competitive provision of such

services, the Commission was favourable to forms of cooperation between competitors within the

limit proscribed by competition lay. The latter turned out to be necessary for mobile operators

because having spent large sums of money to get 3G licenses in some State Members, telecoms

providers experienced liquidity and investment constraints. Instead of getting a competitive

advantage on a stand-alone basis, the operators are expected to cooperate with their competitors to

prevent further delays in the introduction of 3G services.

The European Commission had no reservations regarding the pro-competitive nature of the network

infrastructure sharing arrangements as they would help the parties to meet their license obligations

regarding coverage within specified time-limits. The Commission took into account that the

desirability of infrastructures sharing was a matter of principle recognized in the sector-specific

regulation as the Framework Directive in its article 12 specifies the public grounds which make

cooperation between competitors desirable.

Where undertaking are deprived of access to viable alternatives, sector-specific regulators can even

impose facility sharing for reasons of environment protection, public security and public health or

the need to meet town and state planning objectives. Despite the availability of this public

enforcement mechanism, the indispensability of negotiated agreements between competitors can

not be questioned as those agreements are a better means to reflect the real needs of market

operators. Regulatory intervention or obligation to supply on essential facility grounds might come

into place only if negotiations between the undertakings have no led to a result.

However, the Commission42 considered that the agreement between T-Mobile and O2 on national

roaming was restrictive because rolling out a parallel competitive networks will be delayed in terms

of scope and speed of coverage. The Commission also pointed out that competition in network

quality and transmission rates was eliminated as the roaming operator depends on the pre-existing

technical and commercial possibilities offered by the visited network.

41 Decision 129/1999/EC of the European Parliament and of the Council of 14 December 1998 on the coordinated introduction of a third-generation mobile and wireless communications system (UMTS) in the Community. In 2001 O2 and T-Mobile, two operators of digital mobile telecommunications networks and services in Germany, concluded a framework agreement concerning infrastructure sharing and national roaming for the third generation of GSM mobile telecommunications (‘3G’) on the German market. T-Mobile and O2 asked the Commission to confirm that the framework agreement that they had concluded did not fall within the scope of the rules on competition or, failing that, to grant them an exemption from those rules. In its Decision of 16 July 2003 the Commission concluded that it had no grounds for action in respect of the provisions of the agreement relating to site sharing. It also granted an exemption, that is to say that it declared the rules on competition to be inapplicable to the provisions of the agreement relating to roaming in respect of the periods which it specified. 42 Commission Decision of July 2003 in case COM 738.369.

80

The Decision was partially overturned by the Court of First Instance43, because the Court considered

that it did not contain an objective analysis of what the competition situation would have been in

the absence of that agreement, which distorts the assessment of the actual and potential effects of

the agreement on competition and that it does not demonstrate, in concrete terms, in the context of

the relevant emerging market, that the provisions of the agreement or roaming have restrictive

affects on competition, but is confined, in this respect, to a petition principia and to broad and

general statements.

As it was advanced, the Frameworks Directive alludes to the imposing of the sharing of facilities or

property in its article 12.1, which literally says:

“Article 12. Colocation and sharing of network elements and associated

facilities for providers of electronic communications networks

1. Where an undertaking providing electronic communications networks

has the right under national legislation to install facilities on, over or under

public or private property, or may take advantage of a procedure for the

expropriation or use of property, national regulatory authorities shall

encourage the sharing of such facilities or property.

2. In particular where undertakings are deprived of access to viable

alternatives because of the need to protect the environment, public health,

public security or to meet town and country planning objectives, Member

States may impose the sharing of facilities or property (including physical

co-location) on an undertaking operating an electronic communications

network or take measures to facilitate the coordination of public works

only after an appropriate period of public consultation during which all

interested parties must be given an opportunity to express their views.

Such sharing or coordination arrangements may include rules for

apportioning the costs of facility or property sharing”.

Nowadays, the focus is also put on ducts in the local access part of the network, which is

traditionally considered the unreplicable part of it due to the high cost of making so. For this reason,

operators can be obliged to reach sharing deals with new entrants under certain circumstances.

The European Commission Recommendation of September 2010 on regulated access to Next

Generation Access Networks (NGA)44 promotes a consistent approach to NGA access obligations

imposed by national regulatory authorities on operators designated as having significant market

power in the wholesale physical network infrastructure access at a fixed location market and in the

wholesale broadband access. Precisely, access to ducts is one of the remedies intended to ensure

more competitive conditions for alternative operators.

43Case T-328/03.Judgment of the Court of First Instance in Case T-328/03 (O2 (Germany) GmbH & Co. OHG v Commission of the European Communities) of 2 May 2006. 44 The Commission tooks into account that the desirability of infrastructures sharing was a matter measures presented by the European Commission in September 2010 (which also includes a Communication on broadband and a Proposal for a Decision of the European Parliament and of the Council establishing a European radio spectrum policy programme).

81

With respect to infrastructure and network sharing by mobile operators, the Commission found that

the site sharing does not raise any competition concerns45 but reserved its position with regards to

radio access network (RAN) sharing, where active elements and network intelligence are no

independently controlled by each mobile network operator. The Commission decision was partly

annulled in 2006, but not the parts dealing with network sharing, as it was explained.

In June 2011, BEREC46 published a report on infrastructure and spectrum sharing in mobile/wireless

networks47. It stated that there are site sharing agreements in all EU-27 member states and the

practice is now considered commonplace, while the sharing of active network components is less

common and usually takes the form of RAN sharing’s.

Few NRAs have so far obliged mobile networks operators with significant market power to share

their infrastructure, although some reserve the right to do so if a requests sharing could not be

reached as a commercial agreement. The BEREC also verifies that many operators are required by

their 3G licenses to cover a minimum percentage of the population with their own network but are

permitted or encouraged to share infrastructure beyond this area. In some countries local or

regional authorities oblige to share sites or mast based on environmental or local planning

considerations. Finally, BEREC considers that where assets are shared they may be owned by one

operator and leased to the others or, alternatively, the assets may be put into a joint venture that

owns and operates the shared assets.

Increasing depth of networks sharing (from left to right)

Site sharing Mast sharing RAN sharing Core networks

sharing

Operators share the

same physical

compound but install

separate mast,

antenna and BTS.

The operators may

A step up from site

sharing, operators

share the same mast.

Each operator install

their owns antenna

onto the shared

mast.

As for site sharing,

Both operators share

all access network

equipment, including

the mast, antenna,

base station and

possibly also

backhaul to a point

of connection with

In addition to RAM

sharing, operator

could also share

some or all parts of

the core networks.

In addition to classic

transmission

functions, the core

45Decision 129/1999/EC, alluded above. 46The Body of European Regulators for Electronic Communications (BEREC) was established by Regulation (EC) No 1211/2009 of the European Parliament and of the Council of 25 November 2009, as part of the Telecom Reform package. It replaced the European Regulators Group for electronic communications networks and services which was established as an advisory group to the Commission in 2002. BEREC aims to ensure a consistent application of the EU regulatory framework and to promote an effective internal market in telecoms sector. Furthermore, BEREC assists the Commission and the national regulatory authorities (NRAs) in implementing the EU regulatory framework for electronic communications. It provides advice on request and on its own initiative to the European institutions and complements at European level the regulatory tasks performed at national level by the NRAs. 47 http://berec.europa.eu/eng/document_register/subject_matter/berec/reports/224-berec-rspg-report-on-infrastructure-and-spectrum-sharing-in-mobilewireless-networks

82

decide to share

supports

equipments,

including shelters,

power supply and air

conditioning.

the operator may

also share support

equipments.

the core networks.

Despite sharing the

same hardware, each

operator keeps

separate “logical”

control over the RAM

by using its own

software.

network includes

databases and

platforms for the

configuration and

provision of services.

2.3.2.4 Public promotion rules and state aids

The application of the rules concerning State aids provides another illustration of a mechanism or

process where an implicit desire to develop the trend towards privatisation and liberalization

appears. As a general rule, State aids are prohibited pursuant Treaty on the Functioning of the EU

(TFEU). However, it leaves room for a number of policy objectives for which state aid can be

considered compatible but the analysis of this issue exceeds the scope of those lines.

Most incumbents had digitised their network infrastructure when the full liberalization arrived and

their size and entrenched dominant position put them in a good situation to compete in the new

liberalized European markets. The revenues flowing from their dominant position in the fixed voice

market allowed them to enter the new neighbouring and expanding markets without State support.

In fact, former incumbents faced more with competition law claims about the abusive exploitation of

their dominant position than claims of unlawful State aid.

In any case, the application of the State aid rules to the electronic communications sector is a recent

phenomenon. Until the starting of the liberalization process, in all the Member States, with the

exception of the United Kingdom, electronic communication networks were operated by State-

owned undertakings with a wide range of exclusive rights. These privileges and the absence of

competitive pressure permitted them to obtain monopoly-based revenues to finance without the

need of State support. In a such situation (legal monopoly), from a legal perspective, even in the

case of public aid, the State aid rules would hardly apply since one of the requirements of the Treaty

was lacking (the distortion of competition and the existence of an open market).

In the present days, state aids analysis is one of the main Commission’s duties in this fields48. The

next figure shows the Approved state aid for broadband per year in the EU:

48Fox example, In 2013, the Commission took 15 decisions regarding member-state public funding schemes supporting broadband rollout. The total amount of the aid approved was approximately €881.5m. In 2012, the Commission approved a total of €6.5bn of state aid for broadband, which was more than three times higher than in the previous year. However, these amounts are quite small compared with the Commission's estimates on the funds needed to achieve the Digital Agenda broadband goals for 2020.

between €38bn and €58bn to achieve the 30 Mbps coverage target;

between €181bn and €268bn to achieve the 100 Mbps target for 50% of European households.

83

(source: Cullen research, based on European Commission data).

The first issue is to determine when a State aid is granted. That question is particularly delicate when

an economic entity is in public hands and the authority grants funds to that entity. The criterion used

in the case law is that a transfer of funds qualifies as an aid when it would not have been made by

ordinary (that is, private) investors. The operation is thus seen through the eyes of the private

investors. This calls into question the reason for public authorities to maintain control over

undertakings. That reason is, precisely, to ask such undertakings to implements objectives which

private undertakings would not fulfil of their own volition. There is no reason for governments to

maintain control over undertakings if the objectives they seek to bring about through their

ownership could be taken over by private undertakings.

However, according with the EU Treaty, full liberalization involves that Member States could no

longer protect or favour incumbents, nor could use the State resources to facilitate restructuration.

The problem arose in the case of fixed-lined incumbents that were not fully privatised or

restructured when full liberalization materialize and they found themselves saddled with a large

number of employees.

Fox example, on August 2004, the Commission decided that France Telecom received illegal

state aid and ordered an amount estimated at between €800m and €1 to be paid back49.

The background of the case is as follow: in December 2001, France Télécom was in great

financial difficulties. It experienced share price losses and a downgrading of its credit rating.

On 12 July 2002, the French minister for economic affairs made the following statement:

“The State shareholder will behave like a prudent investor and would take appropriate steps

if France Télécom were to face any difficulties … I repeat, if France Télécom were to face any

financing problems, which is not the case today, the State would take whatever decisions

were necessary to overcome them.”

49 Case C13a/2003.

84

This statement prevented France Télécom's rating from being downgraded to junk status.

Rating agencies quoted the statement of the French authorities and this was decisive for

their decision to maintain an investment rating for the company. As a consequence, the

price for France Télécom shares soared. On 4 December 2002 the French authorities

announced their intention to grant a shareholder loan of €9 billion in favour of France

Télécom. That proposal was neither accepted nor acted on by France Télécom.

In August 2004, the Commission concluded that this shareholder loan proposal together

with the declarations by the French Minister constituted state aid. The Commission found

that while the proposal in itself would probably not have constituted state aid, the previous

statement, which had the effect of restoring the confidence of the market in France Télécom

and raising the share price, had made it impossible to apply the “market economy investor

principle” to the shareholder proposal.

The General Court50 found that, while the statement of the French authorities did confer a

financial advantage to the company, the Commission had not adduced sufficient proof that

the announcement itself entailed a transfer of State resources and, in particular, that France

specifically envisaged such a transfer or loan already in July 2002, when the statement was

made. Only in December 2002 France considered that all the conditions for a financial

support were fulfilled.

The Commission and the other parties involved appealed the judgment. France and France

Télécom claimed that the Commission should not have qualified the proposal of a

shareholder loan as state aid, but that the behaviour of the French State was that of a

prudent private market investor.

The Court of Justice51 finally found that, although the loan was not accepted by France

Télécom, it conferred an advantage granted through State resources that could potentially

have burdened the State budget. The General Court erred in law in holding that it was

necessary to identify a reduction of the State budget or a sufficiently concrete economic risk

of burdens on that budget, closely linked and corresponding to a specific advantage deriving

either from the announcement of 4 December 2002 or from the shareholder loan offer. Thus

the General Court wrongly required a close connection between the advantage and the

commitment of State resources.

In that regard, the Court of Justice points out that it is clear that the announcement of 4

December 2002 is inseparable from the shareholder loan offered in the form of a €9 billion

credit line which the announcement expressly mentions. In addition, the Commission rightly

considered that the shareholder loan conferred an advantage on France Télécom by

enabling it “to increase its means of financing and to reassure the market as to its capacity to

meet its maturities”.

In any case, the predominant type of aid given to operators is those referred to the development of

new infrastructures and the upgrading of existent networks. Without a monopolistic position,

50 Cases T-425/04, T-444/04, T-450/04, T-456/04 51ECJ Cases C-399/10 P and C-401/10 P, 19 March 2013.

85

incumbents do not tend to face high cost investments if they are forced to share them with

competitors and offer service in no rentable geographic areas.

The last area which claims concerning State aid had given rise is the licensing process to access to

spectrum as some operators considered them tainted in the case of public predisposition when

defining the basis for allocation.

Mention to the public promotion rules, as a special type of State aid, must be fulfilled. It was said

that a tendency of the Governments consisting in the promotion of new services and networks in

order to ensure a range of services to the population or to boosts infrastructures supporting

advance and innovative services with public funds has been detected across many Member States.

That public promotion can be made directory or creating a full-owned entity entrusted to develop it.

In any case, as in the case of owning substantial holdings in incumbent, the criterion stated is the so

called “market economy investor principle” (MEIP). The private investor principle is one concept

built by the jurisprudence of the ECJ and reflects the neutrality towards Member state’s

fundamental choices as to the private or public character of their national economy according to the

Treaty.

The Amsterdam case52 is a relevant example of the use this principle by a municipality to

justify its foray into an otherwise highly competitive broadband market. In this case, the

municipality of Amsterdam was investing in a company building a "fibre-to-the-home"

broadband access network connecting 37,000 households in Amsterdam. The total equity

investment in the project was €18 million. The Amsterdam municipality owned one third of

the shares, two private investors, ING Real Estate and Reggefiber together another third,

while five housing corporations own the remaining third. The wholesale operator of the new

fibre network was selected through a tender procedure and will provide open, non-

discriminatory access to retail operators which offer TV, broadband and telephony services.

In view of preliminary doubts stemming from the viability of the business plan and certain

pre-investments carried out by the municipality of Amsterdam, the Commission opened a

formal investigation in December 2006.

Following observations from third parties and further clarifications from the Dutch

authorities, the Commission concluded that the two private companies active in the sector,

invested on equal terms with the municipality. In particular, all investing parties would have

to support any losses in the event of an underperforming business. The structure of the new

company ensures that the private investors have significant stakes in the project in a setup

where no single shareholder can exert sole control over the company. Together with the

detailed analysis of the business plan, these elements provided sufficient evidence for the

Commission to conclude that the investment is conform to the market economy investor

principle and therefore does not involve state aid.

In its press released, the Commission remembers:

52 Commission Decision of 11 December 2007 on the State aid Case C53/06.

86

“The Commission has assessed over 30 public support measures for broadband services and

networks under the state aid rules. If public intervention is well-justified because the market

alone would not have provided the subsidised service, such as in rural areas with a low

population density and no broadband coverage, state aid is generally considered to be

compatible. The Commission is more cautious when public authorities grant support in

metropolitan areas, such as Amsterdam, where commercial broadband services are already

available at competitive conditions. Such aid may crowd out existing and future investments

by market players. However, in the case at hand, no state aid is involved, as the municipality

acts like a market investor.

“The Commission also highlights that this decision does not mean that public authorities can

engage in projects merely by claiming that they participate in a project like a normal market

investor. The market conformity of a public investment has to be demonstrated thoroughly,

in general by a sound business plan and significant private investment in a project. In

addition, the private parties would have to assume the commercial risk linked to the

investment under the same terms and conditions as the public investor”.

The Commission’s point of view in the issue of public funding for broadband was summarize in the

speech 07/309 of the European Commissioner for Competition Policy at this data, Neelie Kroes,

pronounced the 15th May 2007:

(…)

State funding for broadband

Support measures which involve state aid have to be notified to the

Commission for state aid approval. The Commission then assesses

whether the aid granted is compatible with the State aid rules. How do we

do this in practice? Basically, the Commission applies a three-step test.

First step: defining the rationale for intervention

The first step is to see whether public intervention is justified. Before

granting aid, public authorities need to have a well-defined rationale for

public intervention and identify the problem to be addressed. So, the

Commission checks whether the proposed support scheme seeks to

address either a well-defined market failure or a cohesion objective.

Commercial operators shy away from investing in broadband networks in

rural and remote areas as the expected financial returns are not sufficient.

In these cases, some public funding can help to make private investments

viable.

Second step: selecting the appropriate instrument

The second part of the test is to make sure that the appropriate

instrument has been selected to address the problem. In many instances,

there are other ways to boost broadband coverage. Other options for

public authorities are, for example, to grant faster and cheaper permits or

to give vouchers to potential users. However, in many situations this is not

enough to bring broadband to remote areas. In this case well-targeted

subsidies may well be an appropriate instrument.

87

Third step: appropriate design of an aid scheme

The third and final step of the test is to see whether the authorities have

designed the aid scheme in a way as to minimize the distortion of

competition. For instance, the amount of aid should be limited to the

minimum necessary to leverage private capital. Open tender procedures

are the best mechanism to avoid overcompensation. Moreover, support

schemes should not unduly favor a specific technology and should foresee

open access to subsidized infrastructure for all operators, in order to

promote competition.

White, grey and black areas

Looking back over the schemes assessed by the Commission so far, a

pattern of public intervention is emerging. Most of the projects assessed

under the state aid rules concern “white areas”, which are rural and

scarcely populated zones, with no broadband provision at all. State

support for broadband in these regions is generally deemed to be

compatible if the projects are well-designed and the support well-targetted.

On the other hand, the state may decide to intervene in a “grey area”,

where basic broadband services are already provided in some parts of the

territory concerned. In this case the Commission needs to assess in more

detail whether state intervention is necessary and proportionate. Recent

cases in "grey areas" are the Metropolitan Area Networks in Ireland or the

national broadband project in Greece. In both countries, broadband roll-

out has been hampered by a lack of effective competition.

Finally, the need for state intervention in "black areas" is doubtful. These

are areas where there are broadband services provided over at least two

competing infrastructures (such as telephone and cable TV networks). In

2006, following a complaint, the Commission stopped a project for a fibre

access network in the Dutch town of Appingedam. We were concerned that

the project might have crowded out investments by commercial operators.

After all, broadband is thriving in The Netherlands, which has one of the

most developed broadband markets in the world.

The classification into “white”, “grey” and “black” cases is just for the

purposes of this speech – when we're handling actual cases, the issues are

a little more complex. But it does help to explain the rationale for state

intervention and the rationale for our control. And it also demonstrates the

impact of the state aid on investments and competition in a certain area.

But having said that, each project is considered on its own merits. In this

we take into account the specific market context and the proportionality of

the public intervention.

At this respect, is should be pointed out that the Commission had adopted Guidelines for broadband

networks ruling on how public funding could be provided to build broadband networks in line with

the EU state aid rules. The Guidelines do not only address the funding of traditional broadband

networks (like ADSL, cable, wifi networks) but also provide guidance for governments and public

authorities on how to finance very high speed, so-called next generation access ("NGA") networks.

The main aim of the Guidelines is to facilitate a rapid deployment of such networks in Europe by

providing to all stakeholders (including local and regional authorities, as well as network operators) a

clear, predictable and comprehensive framework for the public financing of such networks.

88

To adapt the first guidelines to fast moving technology markets and to the objectives of its Digital

Agenda and State Aid Modernization initiative, a review process was launched in 2011, with a first

public consultation assessing the submissions; the Commission drafted revised guidelines and

consulted stakeholders again in June 2012. In light of comments received, the Commission has

finalised the new guidelines53.

The revised guidelines limit any state aid for NGA networks to “passive and neutral NGA

infrastructures”, enabling services to be provided to end users by competing operators and ensuring

equal treatment of content providers. An obligation to provide wholesale access remains a

requirement for any subsidised NGA or traditional broadband infrastructure.

The guidelines also stress the importance of avoiding wasteful duplication of infrastructure and

make it a requirement for any operator with existing infrastructure, that wishes to participate in a

tender for a state aid broadband scheme, to make that infrastructure available to other potential

bidders.

The Commission also highlights that member states could choose to support schemes that do not

reach the end user. Such state aid schemes could provide backhaul networks or be limited only to

civil engineering works that would accelerate the deployment of broadband last mile networks.

Lastly, in a substantially expanded section on measures to support broadband rollout that fall

outside the scope of state aid, the guidelines highlight the importance of member state actions that

will reduce the cost of civil engineering work. In particular, member states could require network

operators to share infrastructure and to compile a centralized inventory of available infrastructure,

including alternative infrastructure owned by utility companies.

Finally, a mention to the issue of the municipal wireless networks should be made. At is well known,

to remedy some of the shortcomings of fixed networks, wireless technologies have emerged over

the last years as an alternative technology that could serve the needs of citizens where access and

use of fixed-line networks may not be a viable solution. For this purpose, local wireless networks are

mushrooming all over Europe. Initially deployed in rural areas and remote areas as a complementary

network component to a fixed-line broadband network, wireless networks are now being set up in

cities and towns where broadband technologies may already be in place. Some local authorities have

also been considering playing a significant role in the deployment of such networks in several

European towns and cities. The public funding for such networks often aims to relieve a perceived

gap in broadband supply to enable the provision of services to citizens and businesses. However,

often municipal performance go beyond this goal.

The complaint against the Prague Municipal Wireless Network54 project was the first such

case assessed by Directorate-General for Competition of the European Commission under

the State aid rules and stablished the basis of the analysis. The Commission approved the

project by Prague authorities for a free municipal wireless Internet service, but only after the

53 Communication from the Commission. EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks (2013/C 25/01) 54 State Aid n° NN 24/2007. Czech Republic Prague Municipal Wireless Network.

89

scheme was modified to allow access only to public-sector websites. The European

Commission launched a probe after receiving competition complaints from private operators

about the project, which aims to cover a third of Prague with a WiFi local area Internet

network. Municipal authorities revised their plans after the Commission ruled that the

original project "could have crowded out investment from private operators by providing

unrestricted free or subsidised Internet access to the public. The Commission took into

account:

(31) As stated above (see paragraph (18)), the project will not allow the commercial

exploitation of the new network to provide broadband services to residential or business

users. Moreover, it is highly unlikely that existing broadband users will give up their existing

broadband subscription just because public-sector websites are now available for free via the

municipal wireless network. Hence, the project has no perceived impact on existing

broadband providers, and no advantage is transferred to the selected operator of the

municipal wireless network. Broadband users will still need to use the services of existing

broadband access providers to connect to the internet, in that sense it is highly unlikely that

there is any substitutability between the two forms of access: limited access to the public

sector websites for free and unlimited broadband access to the internet.

The “Wireless Prague” case was regarded by market observers as an important precedent. Following

the decision, several European cities significantly modified their plans to roll out municipal wireless

networks. The decision was in line with the Commission’s policy concerning the public funding of

broadband networks. In areas characterised by adequate broadband coverage over several

competing broadband infrastructures, such as Prague, the justification for State aid is doubtful as

there is a high risk that state intervention crowds out existing and future private investments.

The main concern of the complainants regarding the “Wireless Prague” project had been the

distortive effects of the initially planned commercial exploitation of the wireless network on existing

providers. Given that several competing broadband offers were already provided by private

operators in the area covered by the municipal wireless network, creating a new broadband network

with public funds and making it available for commercial exploitation could have raised serious

questions about the necessity and proportionality of such a measure.

In general, public authorities may provide public support for the provision of (wireless) broadband if

there is no offer by private operators. However, there are also several alternative ways of

encouraging private operators to provide (wireless) broadband which do not involve granting State

aid. For example, local authorities may procure services by means of public tender from broadband

operators for public sector use instead of building their own networks. This would avoid State aid

issues related to the exploitation of excess capacity on such networks from the outset.

Public authorities may help wireless operators to deploy their networks, for instance by granting

antenna permits to operators more cheaply and more quickly. They may also grant non-

discriminatory access to public infrastructure such as lamp posts or municipal buildings for antenna

90

sites. They can actively coordinate the deployment of hotspots or encourage service take up by

providing attractive e-government services.

2.4 Market regulation.

2.4.1 The Market-based Regulation Model.

Under the European telecommunications regulatory principles, competition would be understood as

a means to create economic welfare and, in particular, consumer benefit (lower prices, better

quality and more choice), whereas regulation would be a means to promote sustainable competition

via opening markets in network industries (creating a level playing field).

It is commonly accepted that, in general, regulation in any economic sector should be used only

when it is clear that deregulated markets are likely to fail even in the presence of reasonably strict

antitrust enforcement. The success or failure of a market in the absence of regulation depends on

the demand and cost conditions under the present technology. It is also clear that network

industries, such as telecommunications, are characterised by market entry barriers resulting from

substantial economies of scale that require regulation to overcome those market entry barriers.

The adoption of a market-based regulation approach within the European Union came along in 2002

in the context of the definition of the principles that should guide the next stage of the liberalization

process of the telecommunications sector.

In March and July 2002, the European Institutions adopted a package of legislative acts that tackled

a profound review of the previous legislative framework approved in 1997. The core of this new

regulatory framework, commonly referred to as “2003 telecom package” because of the deadline of

24 July 2003 set to Member States to have been accomplished the transposition to their internal

legal systems55, comprises five Directives56:

• Directive 2002/21/EC of the European Parliament and of the Council of March 2002 on a

common regulatory framework for electronic communications networks and services

(hereinafter, Framework Directive).

• Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the

authorisation of electronic communications networks and services.

• Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on

access to, and interconnection of, electronic communications networks and associated

facilities (hereinafter, Access Directive).

• Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on

universal service and users' rights relating to electronic communications networks and

services (hereinafter, Universal Service Directive).

• Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002

concerning the processing of personal data and the protection of privacy in the electronic

communications sector.

55 In Spain, for example, this transposition took place by the adoption of the General Telecommunications Act 23/2003, of 3 November, at present repealed by General Telecommunications Act 9/2014, of 9 May. 56 The five Directives were amended subsequently in December 2009 without introducing substantial changes regarding the bases of the regulation model adopted in 2003.

91

This general telecommunications legislative framework was completed with other additional

secondary instruments approved by the European Commission with the purpose of guiding national

regulatory authorities on the fulfillment of the objectives and principles that should be taken into

account when implementing the legislative framework. Particularly relevant in relation with the

implementation of the market regulatory model adopted are the two that follow above

• Commission Guidelines on market analysis and the assessment of significant market power

under the Community regulatory framework for electronic communications networks and

services57 (hereinafter, SMP Guidelines).

• Commission Recommendation on relevant product and service markets within the electronic

communications sector susceptible to ex ante regulation in accordance with Directive

2002/21/EC of the European Parliament and of the Council on a common regulatory

framework for electronic communication networks and services.

According to article 15, paragraph 1, of the Framework Directive, the Commission has to adopt, and

regularly review, a Recommendation on relevant product and service markets within the electronic

communications sector that may require ex ante regulation. Under the obligation of regularly

revising the Recommendation, the European Commission has completed three updates of the

relevant markets susceptible of ex ante regulation, dated 11 February 2003, 17 December 2007 and

9 October 201458.

As it has already been remarked, the adoption of a market-based regulatory model within the

European telecommunications regulatory framework is closely linked to an advanced stage of the

liberalization process of the telecommunications sector. After an initial phase starting the decade of

1980, focused on the elimination of the traditional monopolistic structures and the introduction of

the first opening measures to the markets (elimination of exclusive rights regarding the ownership of

telecommunication networks and the provision of telecommunication services), a second phase,

starting the last years of the decade of 1990, prioritized the elimination of any formal or

administrative restraints to the access to the markets and the introduction of an asymmetric

regulation approach (not all operators are subjected to the same level of regulation, combining a

package of general obligations to all operators with an additional second package of specific

obligations just to certain dominant operators).

The third and last stage of the process of opening markets to competition in Europe is represented

by the regulatory model adopted through the 2003 telecom package and seeks to accomplish

effective competition in all the telecom markets and to reduce ex ante sector-specific regulation

progressively as competition in markets develops, so that the telecom sector is ultimately governed

only by competition law.

57Published on the Official Journal of the European Communities on 11 July 2002 (2002/C 165/03). 58 The Recommendation currently in force is the Commission Recommendation of 9 October 2014 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services (2014/710/EU), published on the Official Journal of the European Union on 11 October 2014.

92

In order to pursue these objectives, the 2003 telecom package introduced a new regulatory

approach with more flexible and efficient methodologies influenced by the principles of competition

law, that aims at adapting public intervention to the current real situation of each geographic and

product or service market. This means that under this market-based regulation model any sector-

specific measure will not be imposed automatically, but justified and according to a specific

competition problem identified through a previous market analysis.

The following principles of the current regulatory framework will complete the analysis of this

market-based regulatory model:

• Regulation should provide a single legal framework to both infrastructure and services. The

context of technological convergence, which implies that different technological systems

evolve toward performing similar tasks, leads to the need of updating regulation and policies

to guarantee that any kind of service can be rendered by any type of network.

• Regulation should aim to be technologically neutral. Increasing competition as well as the

need of more flexible regulation in a dynamic environment prompts the demand for a

technologically neutral regulation, which should allow operators to make free and

undistorted market decisions among competing technologies possible59.

• Regulation should provide a stable, transparent and predictable legislative framework for

the market players to take economically rational decisions.

• Regulation should be the minimum necessary to meet the objectives which means it should

be proportional to the objectives pursued, and progressively reduced, or even withdrawn, as

long as the markets are effectively competitive, as expresses article 16.3 of Framework

Directive:“Where a national regulatory authority concludes that the market is

effectively competitive, it shall not impose or maintain any of the specific

regulatory obligations referred to in paragraph 2 of this Article. In cases where

sector specific regulatory obligations already exist, it shall withdraw such

obligations placed on undertakings in that relevant market. An appropriate period

of notice shall be given to parties affected by such a withdrawal of obligations.”

• Regulation should be adopted under flexible methodologies that allow Member States to

impose, modify or withdraw any sector-specific measure on the basis of the specific

competition situation of each geographical and product market. National regulatory

authorities should, according to this model, justify the adoption of any specific measure on a

previous market analysis where it is concluded that a given market it is not effectively

competitive. Under this approach, sector-specific regulation is no longer imposed under

formal and pre-established political or administrative criteria, but under flexible and

objective mechanisms that will reflect the real competition level on a given telecom market.

Relevant markets analyzed and defined for the purposes of sector-specific regulation should

be assessed by national regulatory authorities on a forward-looking basis, including in its

assessment an appreciation of the future development of the market.

• The flexibility given by granting to national authorities the responsibility of adopting their

own sector-specific regulation adapted to the particular geographical and market situation is 59 Recital 18 of the Framework Directive: “The requirement for Member States to ensure that national regulatory authorities take the utmost account of the desirability of making regulation technologically neutral, that is to say that it neither imposes nor discriminates in favour of the use of a particular type of technology, does not preclude the taking of proportionate steps to promote certain specific services where this is justified, for example digital television as a means for increasing spectrum efficiency.”

93

complemented with coordination measures at a European level (the European institutions

approve the framework with the European Commission developing more detailed rules and

guidelines and monitoring its implementation by the different Member States) in order to

avoid the fragmentation of the single market while allowing defining markets according to

national circumstances guarantees efficiency and predictability.

• And finally regulation should be asymmetric or selective, which means that the legal

framework should be different, more or less strict, depending on the market power of each

of the market players. Legal requirements are more severe, including a higher number of

obligations, for those operators with significant market power (hereinafter, SMP) in a given

market. The sector-specific measures (obligations or remedies) that can be imposed by

regulatory authorities constitute this package of more strict obligations addressed to SMP

operators.

Having underlined this basic principles, it should be noted that, precisely, one of the key elements of

the European telecommunications regulatory framework is the definition of the specific and

individual legal framework that applies for every single operator with significant market power, and

its adaptation on a regular basis according to the market competition situation.

The market-based regulation model adopted is based on the principle of designing and adapting the

sector-specific legal framework imposed to SMP operators (connected with the concept asymmetric

regulation model) to the real and actual, and also the expected, circumstances of every market

individually considered and analyzed. This model introduces to sector-specific regulation more

flexibility and objectivity, together with a higher level of efficiency on pursuing the objective of

achieving effective competition.

In addition, the application of a market-based regulation that is adapted regularly to the real

competition situation of the markets and designed taking into account the expected evolution of the

sector provides to markets players predictability and legal certainty.

The Electronic Communications Framework Directive and, additionally, the SMP Guidelines and the

Commission Recommendation of 9 October 2014 on relevant product and service markets within

the electronic communications sector susceptible to ex ante regulation (hereinafter,

Recommendation on relevant markets), establish the procedures that should be follow by national

regulatory authorities (hereinafter, NRAs) to implement sector-specific regulation within their scope.

Under the regulatory framework, any sector-specific regulation decision will be adopted by Member

States according to an administrative procedure that should be structured in the following three

steps or phases:

i. Market analysis and definition.

ii. Assessment of Significant Market Power positions.

iii. Assessment of appropriate regulatory measures (remedies): imposition,

maintenance, amendment or withdrawal of specific obligations.

94

The following chart offers a clear picture of the regulatory process up to this point.

Although presented as separated stages, in practice, these three steps are tackled by NRAs within a

single administrative procedure and a single administrative act (“Resolution”), comprising the

definition and analysis of a given market, and in the case that is not effectively competitive, the

designation of the operator with significant market power and, finally, the proposal of the possible

remedies to be imposed to the designated operator within that market. The administrative act will

be notified to the European Commission, the Body of European Regulators of Electronic

Communications (BEREC) and to the other national regulatory authorities for their consideration.

The European Commission should either approve or provide its comments on the sector-specific

regulation proposed, as it will be detailed in the following section.

95

2.4.1.1 Phase I: Analysis and definition of the relevant market.

Relevant legal framework

• Framework Directive: Articles 15 and 16.

• SPM Guidelines (Section 2: guidance on the criteria for defining the relevant

market).

• Recommendation on relevant markets within the electronic communications sector

susceptible to ex ante regulation.

According to the Framework Directive, the national regulatory authorities must analyse their

national electronic communications markets in consultation with the industry and propose

appropriate sector-specific regulatory measures to address market failures that might be hampering

competition.

In order to fulfil the principle of proportional regulation (minimum possible level of public

intervention), as well as to ensure that the rules are applied consistently in all Member States and to

guarantee harmonization within the European Union, article 15.1 of the Framework Directive

requires the Commission to identify markets within the electronic communications sector whose

specific characteristics may justify the imposition of regulatory obligations in accordance with the

principles of competition law. Competition law principles are therefore used in this

Recommendation to define product markets in the electronic communications sector.

The Recommendation on relevant markets provides a list of markets susceptible to ex ante

regulation, meaning Member States do not imposed automatically regulatory obligations on all of

them, but only on those markets whose characteristics within their geographical scope may be such

as to justify sector-specific measures. In accordance with competition law and taking the utmost

account of this Recommendation, national regulatory authorities shall then define and analyse

relevant markets according to their national circumstances.

On the other hand, as it is expressed in recital 29 SMP Guidelines, “It is considered that markets

which are not identified in the Recommendation will not warrant ex-ante sector specific regulation,

except where the NRA is able to justify such regulation of an additional or different relevant market

in accordance with the procedure in Article 7 of the framework Directive”. The list of markets is

therefore not a closed list, Member States may propose to European authorities additional markets

outside the list that may require regulation according to national specific circumstances.

The Commission Recommendation on relevant markets within the electronic communications sector

susceptible to ex ante regulation should be regularly reviewed. The last revision took place on the 9

October 201460 and sets out the scope of economic regulation in the European's electronic

communications sector for the next years. Under this Recommendation, in defining relevant markets

60 Ref. 2014/710/EU.

96

appropriate to national circumstances in accordance with Article 15.3 of Framework Directive,

national regulatory authorities should analyse the product and service markets that follow:

• Market 1: Wholesale call termination on individual public telephone networks

provided at a fixed location (former Market 3).

• Market 2: Wholesale voice call termination on individual mobile networks (former

Market 7).

• Market 3:

o a) Wholesale local access provided at a fixed location (former Market 4).

o b) Wholesale central access provided at a fixed location for mass-market

products (mainly former Market 5).

• Market 4: Wholesale high-quality access provided at a fixed location (mainly former

Market 6).

The Recommendation on relevant markets adopted in October 2014 continues with the deregulation

trend in the sector due to technological change and developing competition, in line with the

perspective of understanding ex ante regulation as a temporary means to achieve effective

competition in the telecommunications sector. Once effective competition is fulfilled, ex ante

regulation should be withdrawn and the markets should be left to be ruled only by competition law

and controlled only by competition authorities.

The third edition of the Recommendation (after those of 2003 and 2007) reduces the number of

markets proposed to be regulated within the European Union (from initially 18 to 7 and now 4). The

former Markets 1 (Access to the fixed telephone network) and 2 (Wholesale call origination) are in

principle currently considered not susceptible of ex ante regulation. On the other hand, broadband

markets (former markets 4, 5 and 6) will have to be redefined.

97

Main changes introduced by the 2014 Recommendation

Source: European Commission.

The comparative of the different markets’ list included in the three versions of the Recommendation

since 2003 on tables below shows the trend towards deregulation in the European electronic

communications policy.

98

Comparative of the relevant markets in 2007 and 2014 Recommendation:

Source: “Regulatory principles and economics: Regulatory remedies, access, interconnection,

transparency, non-discrimination, and price control”. Dr. Annegret Groebel, BNetzA (Germany).

In practice, the markets (according to the initial list of eighteen markets included in the original

Recommendation of 2003) which have been regulated or deregulated in each Member State can be

seen in the table below, which shows the updated results (until August 2014):

99

Source: European Commission, 12 August 2014

Provisions 15 and 16 of the Framework Directive contain the main rules to be taken into account by

national authorities regarding the market definition procedure:

Article 15

Market definition procedure

1. After public consultation and consultation with national regulatory authorities

the Commission shall adopt a recommendation on relevant product and service

markets (hereinafter "the recommendation"). The recommendation shall

identify in accordance with Annex I hereto those product and service markets

within the electronic communications sector, the characteristics of which may

be such as to justify the imposition of regulatory obligations set out in the

Specific Directives, without prejudice to markets that may be defined in specific

cases under competition law. The Commission shall define markets in

accordance with the principles of competition law.

The Commission shall regularly review the recommendation.

2. The Commission shall publish, at the latest on the date of entry into force of

this Directive, guidelines for market analysis and the assessment of significant

market power (hereinafter "the guidelines") which shall be in accordance with

the principles of competition law.

100

3. National regulatory authorities shall, taking the utmost account of the

recommendation and the guidelines, define relevant markets appropriate to

national circumstances, in particular relevant geographic markets within their

territory, in accordance with the principles of competition law. National

regulatory authorities shall follow the procedures referred to in Articles 6 and 7

before defining the markets that differ from those defined in the

recommendation.

4. After consultation with national regulatory authorities the Commission may,

acting in accordance with the procedure referred to in Article 22(3), adopt a

Decision identifying transnational markets.

Article 16

Market analysis procedure

1. As soon as possible after the adoption of the recommendation or any

updating thereof, national regulatory authorities shall carry out an analysis of

the relevant markets, taking the utmost account of the guidelines. Member

States shall ensure that this analysis is carried out, where appropriate, in

collaboration with the national competition authorities.

2. Where a national regulatory authority is required under Articles 16, 17, 18 or

19 of Directive 2002/22/EC (Universal Service Directive), or Articles 7 or 8 of

Directive 2002/19/EC (Access Directive) to determine whether to impose,

maintain, amend or withdraw obligations on undertakings, it shall determine on

the basis of its market analysis referred to in paragraph 1 of this Article

whether a relevant market is effectively competitive.

3. Where a national regulatory authority concludes that the market is

effectively competitive, it shall not impose or maintain any of the specific

regulatory obligations referred to in paragraph 2 of this Article. In cases where

sector specific regulatory obligations already exist, it shall withdraw such

obligations placed on undertakings in that relevant market. An appropriate

period of notice shall be given to parties affected by such a withdrawal of

obligations.

4. Where a national regulatory authority determines that a relevant market is

not effectively competitive, it shall identify undertakings with significant market

power on that market in accordance with Article 14 and the national regulatory

authority shall on such undertakings impose appropriate specific regulatory

obligations referred to in paragraph 2 of this Article or maintain or amend such

obligations where they already exist.

5. In the case of transnational markets identified in the Decision referred to in

Article 15(4), the national regulatory authorities concerned shall jointly conduct

the market analysis taking the utmost account of the guidelines and decide on

any imposition, maintenance, amendment or withdrawal of regulatory

obligations referred to in paragraph 2 of this Article in a concerted fashion.

101

6. Measures taken according to the provisions of paragraphs 3, 4 and 5 of this

Article shall be subject to the procedures referred to in Articles 6 and 7.

Market definition is not a mechanical or abstract process but requires an analysis of any available

evidence of past market behaviour and an overall understanding of the mechanics of a given sector.

To guarantee that ex ante regulatory obligations are only imposed where there is not effective

competition, the Commission has drawn up guidelines at Community level for national regulatory

authorities to follow in assessing whether competition is effective in a given market and in assessing

significant market power.

Recital 27 of the Framework Directive expresses that …

“National regulatory authorities should analyse whether a given product or

service market is effectively competitive in a given geographical area, which could

be the whole or a part of the territory of the Member State concerned or

neighbouring parts of territories of Member States considered together. An

analysis of effective competition should include an analysis as to whether the

market is prospectively competitive, and thus whether any lack of effective

competition is durable. Those guidelines will also address the issue of newly

emerging markets, where de facto the market leader is likely to have a

substantial market share but should not be subjected to inappropriate obligations.

The Commission should review the guidelines regularly to ensure that they

remain appropriate in a rapidly developing market. National regulatory authorities

will need to cooperate with each other where the relevant market is found to be

transnational.”

The methodology for defining relevant markets and determining the existence or not of effective

competition includes the three criteria test. For a given market, it should be analyse the compliance

of three cumulative criteria61. If the market analysed meets the following three elements, it will be

presumed such market it is not effectively competitive:

a) Presence of high and non-transitory barriers to entry. Given the dynamic character

and functioning of electronic communications markets, possibilities to overcome

barriers to entry within the relevant time horizon should also be taken into

consideration when carrying out a prospective analysis to identify the relevant

markets for possible ex ante regulation.

b) No trend towards effective competition: the market structure is such that the

market is unlikely to tend towards effective competition within the relevant time

horizon considered. The application of this criterion involves examining the state of

infrastructure-based and other competition behind the barriers to entry.

c) Competition law is not sufficient: the application of competition law alone would

not adequately address the market failures concerned. This implies to evaluate the

benefits of ex-ante versus ex-post regulation.

61The main criteria for defining the relevant markets are provided in section 2 of the SMP Guidelines.

102

For the list of relevant markets included in the Recommendation it is presumed that the three

criteria test it is positive and therefore the market is not effectively competitive.

Source: CMT.

2.4.1.2 Phase II: Assessment of Significant Market Power positions.

Relevant legal framework

• Framework Directive: Article 14.

• SPM Guidelines (Section 3: guidance on the criteria for assessing SMP).

Accordingly to the precedent section, NRAs should assess whether the competition is effective in

each of the markets susceptible of ex ante regulation defined in the Commission Recommendation.

A finding that effective competition exists on a relevant market is equivalent to a finding that no

operator enjoys a single or collective dominant position on that market. Therefore, under the new

2003 regulatory framework, effective competition means that there is no undertaking in the

relevant market which holds alone or together with other undertakings a single or collective

dominant position.

103

Market analysis and assessment of SMP positions do not operate independently, on the contrary,

where SMP positions may have been identified there will be assumed there is a no competitive

market and that asymmetric regulation measures need to be adopted on that market. In the same

line, when NRAs conclude that a relevant market is not effectively competitive, they will designate

the operators with SMP on that market and will either impose appropriate specific obligations, or

maintain or amend the obligations where they already exist, in accordance with article 16.4 of the

Framework Directive.

Article 14.2 of the Framework Directive refers to the concept of undertakings with significant market

power. According to this article:

“2. An undertaking shall be deemed to have significant market power if, either

individually or jointly with others, it enjoys a position equivalent to dominance, that

is to say a position of economic strength affording it the power to behave to an

appreciable extent independently of competitors, customers and ultimately

consumers.

In particular, national regulatory authorities shall, when assessing whether two or

more undertakings are in a joint dominant position in a market, act in accordance

with Community law and take into the utmost account the guidelines on market

analysis and the assessment of significant market power published by the

Commission pursuant to Article 15.

104

Finding a dominant position in a market means that, whether single or collective dominance, that

the operator that enjoys such position can have an appreciable effect on the conditions under which

that competition will develop, and in any case can act in disregard of any such competitive

constraint. In an ex-ante environment, market power is essentially measured by reference of the

power of the operator concerned to raise prices by restricting output without incurring a significant

loss of sales or revenues.

The SMP Guidelines includes a list of criteria that can be used when assessing SMP, to measure the

power of an undertaking to behave to an appreciable extent independently of its competitors,

customers and consumers and in particular as a reference for measuring market size and market

shares:

• Overall size of the undertaking,

• Control of infrastructure not easily duplicated,

• Technological advantages or superiority,

• Absence of or low countervailing buying power,

• Easy or privileged access to capital markets/financial resources,

• Product/services diversification (e.g. bundled products or services),

• Economies of scale,

• Economies of scope,

• Vertical integration,

• Highly developed distribution and sales network,

• Absence of potential competition,

• - Barriers to expansion.

As shown above, a dominant position can be evaluated by reference to different criteria, including

those such as market size and market shares that are often used as key elements. NRAs should

undertake a thorough and overall analysis of the economic characteristics of the relevant market

before coming to a conclusion as to the existence of significant market power and this assessment

should be based on a forward-looking market analysis based on existing market conditions but

taking into account also the expected evolution over a 2 years period approximately.

The dominance factor is closely connected with the ease of market entry. Regarding this assessment,

the SMP Guidelines states that “in fact, the absence of barriers to entry deters, in principle,

independent anti-competitive behaviour by an undertaking with a significant market share. In the

electronic communications sector, barriers to entry are often high because of existing legislative and

other regulatory requirements which may limit the number of available licences or the provision of

certain services (i.e. GSM/DCS or 3G mobile services). Furthermore, barriers to entry exist where

entry into the relevant market requires large investments and the programming of capacities over a

long time in order to be profitable. However, high barriers to entry may become less relevant with

regard to markets characterised by on-going technological progress. In electronic communications

markets, competitive constraints may come from innovative threats from potential competitors that

are not currently in the market. In such markets, the competitive assessment should be based on a

prospective, forward-looking approach”.

105

2.4.1.3 Phase III: Assessment and determination of sector-specific regulatory measures (remedies).

Relevant legal framework

• Framework Directive: Article 6, 7, 7a and 16 (3, 4 and 6).

• SPM Guidelines (Section 4: guidance on the imposition of specific obligations

on undertakings designated).

• Termination rates recommendation (2009/396/EC)

• Costing and non-discrimination recommendation (2013/466/EU)

The notion of effective competition means that there is no operator with dominance on the relevant

market. In other words, a finding that a relevant market is effectively competitive is, in effect, a

determination that there is neither single nor joint dominance on that market.

The article 16, paragraphs 3, 4 and 6, of the Framework Directive refers the consequences of finding,

on the basis of the results of those market assessments, that a relevant market is not effectively

competitive. A finding that a relevant market is not effectively competitive is a determination that

there is single or joint dominance on that market. The national regulatory authority will be in this

case entitled to identify and define the remedies that should be necessary to eliminate the specific

competition problems arisen.

“4. Where a national regulatory authority determines that a relevant market is not

effectively competitive, it shall identify undertakings with which individually or

jointly have a significant market power on that market in accordance with Article 14

and the national regulatory authority shall on such undertakings impose appropriate

specific regulatory obligations referred to in paragraph 2 of this Article or maintain

or amend such obligations where they already exist.”

On the other hand, in the event that the national regulatory authority concludes that

the market is effectively competitive, it is establish that (paragraph 3):

“Where a national regulatory authority concludes that the market is effectively

competitive, it shall not impose or maintain any of the specific regulatory

obligations. In cases where sector specific regulatory obligations already exist, it

shall withdraw such obligations placed on undertakings in that relevant market. An

appropriate period of notice shall be given to parties affected by such a withdrawal

of obligations.”

In order to achieve a more efficient telecommunications regulation model, the European

Commission provides Member States a list of possible obligations to be considered, but the ultimate

legal framework to be imposed to a given SMP operator within a particular geographical and service

106

market will be determined by the competent national authority, who will decide which are the most

appropriate for the particular case and will detail the terms of their extent and how exactly to be

implemented.

The Directive sets out the general criteria that should guide the national authority when determining

the appropriate remedies to be imposed on each particular case:

• Obligations should be based on the nature of the problem identified,

• Should be proportionate (in order to comply with the regulatory principle of minimum public

intervention), and

• Should be justified in the light of the pursuit of the policy objectives laid down in article 8 of

Framework Directive.

• The regulatory obligations must also be objective, transparent, and non-discriminatory.

The slide below summarized the catalogue available of remedies according to the current European

Directives, the principles applying to the selection of those remedies and the basic objectives to be

reached through them. As commented above, the imposition of these remedies requires the

previous finding of a significant market power position (and, vice versa, the finding of a significant

market power position requires to impose the remedies necessary to control it).

Source: CMT

Regarding the procedure to be carried out for the imposition, maintenance, amendment or

withdrawal of regulatory obligations, the measures taken in accordance with the provisions of

paragraphs 3 and 4 of article 16 expressed above shall be subject to certain formal requirements in

107

order to foster transparency and to ensure the consistent application of the provisions of the

Directives in all Member States and to guarantee the consolidation of the internal market, which are:

• Public consultation procedure to offer interested parties the possibility to comment on the

proposed draft measure (article 6), and;

• Notification procedure to inform the EC, BEREC and other NRAs (article 7). After this

communication, the EC is, in certain circumstances, entitled to require NRA the withdrawal

of a draft measure which falls within the scope of Article 7 (paragraph 3):

“Article 7. Consolidating the internal market for electronic communications

3. In addition to the consultation referred to in Article 6, where a national regulatory

authority intends to take a measure which:

(a) falls within the scope of Articles 15 or 16 of this Directive, Articles 5 or 8 of Directive

2002/19/EC (Access Directive) or Article 16 of Directive 2002/22/EC (Universal Service

Directive), and

(b) would affect trade between Member States,

it shall at the same time make the draft measure accessible to the Commission and the

national regulatory authorities in other Member States, together with the reasoning on

which the measure is based, in accordance with Article 5(3), and inform the Commission

and other national regulatory authorities thereof. National regulatory authorities and

the Commission may make comments to the national regulatory authority concerned

only within one month or within the period referred to in Article 6 if that period is longer.

The one-month period may not be extended.”

The Commission should, within a month, assess the measure proposed and approve it or make

comments. However, if the Commission considers that the proposal would create a barrier to the

single market or has serious doubts as to their compatibility with Community law, the Commission

opens an in-depth investigation which lasts a further two months. If its concerns are confirmed

following this in-depth investigation, the Commission may veto the proposed market definition or

dominance analysis. It may also comment on the proposals.

The details regarding these two administrative procedures are referred to in articles 6, 7 and 7a of

the Framework Directive.

Additionally, national regulatory authorities are subject to limitation periods regarding the carry out

of an analysis of the relevant market and notification of the corresponding draft measure to the EC.

In accordance with article 16 (paragraph 6), Member States shall carry out the market analysis

procedures within the following time limits:

(a) within three years from the adoption of a previous measure relating to that

market. However, exceptionally, that period may be extended for up to three

additional years, where the national regulatory authority has notified a reasoned

108

proposed extension to the Commission and the Commission has not objected within

one month of the notified extension;

(b) within two years from the adoption of a revised Recommendation on relevant

markets, for markets not previously notified to the Commission; or

(c) within two years from their accession, for Member States which have newly

joined the Union.”

Finally, the SMP Guidelines provide Member States guidance on the action they should take

following the market and the SMP analysis, in other words the imposition, maintenance,

amendment or withdrawal of appropriate regulatory obligations on the telecommunications

operators designated as having SMP. According to Recital 16 of the SMP Guidelines, “The purpose of

imposing ex-ante obligations on undertakings designated as having SMP is to ensure that

undertakings cannot use their market power either to restrict or distort competition on the relevant

market, or to leverage such market power onto adjacent markets”.

Where a national regulatory authority determines that a relevant market is not effectively

competitive, is mandatory for the NRA to, whether impose at least one regulatory obligation on an

operator that has been designated as having SMP, whether decide on the maintenance, amendment

or withdrawal of those obligations already pre-existent.

Overview of the remedies process

Source: “Regulatory principles and economics: Regulatory remedies, access, interconnection,

transparency, non-discrimination, and price control”. Dr. Annegret Groebel, BNetzA (Germany).

109

The remedies to be imposed on operators with SMP, or in other cases maintained, amended or

withdrawn, are in practice “to do” regulatory obligations.

The remedies referred to along this section should only be imposed on operators which have been

designated as having SMP in a relevant market (except in certain related cases as those regarding

obligations to ensure adequate access and interconnection) and can apply both to wholesale and

retail markets. The sector-specific obligations related to telecommunications wholesale markets are

set out in articles 9 to 13a of the Access Directive, whereas the obligations related to retail markets

are set out in article 17 of the Universal Service Directive.

A summary of the main obligations that might be imposed on operators with SMP in a given

wholesale or retail electronic communications market, according to the European framework, is

presented below:

1. Wholesale level/market remedies: - Transparency (art. 9 Access Directive, AD hereinafter) - Non-discrimination (art. 10 AD) - Accounting separation (art. 11 AD) - Access obligation (art. 12 AD) - Price control and cost accounting obligations, including cost orientation (art. 13 AD) - Functional separation (Art. 13a AD) - Voluntary separation (Art. 13b AD)

2. Retail level/market remedies: - Regulatory controls of retail services (Art. 17 Universal Service Directive)

2.4.2 The Ladder of Investment” approach.

Sector-specific economic regulation has been established as a last resort for those markets where it

is clear that competitive outcomes cannot be achieved by market forces. The main reason proposed

for regulating telecommunications has been that a desirable competitive outcome could not be

achieved by market forces62. In this context, the purpose of regulation within the electronic

communications markets is to promote competition and efficient infrastructures in

telecommunications and to guarantee appropriate and adequate services to end-users.

Regarding the pursuit and promotion of competition in regulated telecommunications markets,

regulatory authorities have traditionally considered two means to promote competition: service-

based entry measures and facility-based (infrastructure) entry measures. While service-based entry

promotes competition in the short term, the full benefits of competition would be achieved in the

longer term with facility-based entry to the market.

62"Telecommunications Regulation: An Introduction". Nicholas Economides. Ed. Richard R. Nelson. New York, Russell Sage Foundation Press, 2005. Page 50.

110

In order to explain how service-based entry and infrastructure-based competition interact together,

Martin Cave developed in 2001 the concept of the Ladder of Investment (LOI)63, a new regulatory

approach to promote infrastructure or facility-based competition by assuming that both means,

service-based and facility-based measures, are complements and not substitutes in promoting

competition. This approach has been widely embraced by national regulatory authorities in the

European telecommunications sector.

The basic principle of the LOI regulatory approach consists of gradually provide potential entrants

with different levels of access to the incumbent’s network and inducing them to climb the ladder

from the bottom to the top by setting different access measures for each level, which will be

necessary to comply before getting to the next rung. The entrants begin with acquiring access at a

level which requires little investment to provide their services. Then, as the entrants’ customer bases

grow, they are encouraged to invest in the network elements necessary to move forward towards

the second level of access and so on. This leads to facility-based and a consequent superior potential

for service and product innovations than does service based competition, where entrants rely on the

incumbent’s infrastructure in providing their services. Furthermore, as each operator obtains

complete control over the infrastructure it needs to provide services, facility-based is expected to

lead to a partial deregulation of the sector.

This approach gives regulator the possibility of promoting two forms of competition at a time,

service and infrastructure; while service-based benefits on the short-term, facility-based works for

the longer term.

As facility-based competition is unlikely to develop very rapidly due to high network costs and the

fact that telecommunications markets are dominated by traditionally dominant operators, which

means that transitory entry assistance might be necessary. Service-based competition can play this

role in the meantime then, allowing new entrants to obtain access to the incumbent’s network,

which reduces the entry costs and therefore, competition develops more quickly. The potential

problem with the promotion of a service-based competition is that once entrants enjoy the benefits,

their incentives to invest in their own infrastructures may be hindered, in particular if prices are too

low, because profits obtained under service-based competition represent an opportunity cost to

facility-based entry.

The LOI approach aims at solving this problem, so that service-based competition is promoted in the

short term so that its benefits can be enjoyed without hindering the incentives for facility-based

entry. In the long run, with the LOI approach new entrants are provided with transitory entry

assistance, and they are incentivized to build their own networks in the medium or long term. With

the transitory entry assistance, the regulator takes the necessary measures to ensure that any

significant replacement effect resulting from the service-based competition would be only transient.

A more detailed explanation of the logic of the LOI approach can be found in the research “A critical

review of the ladder of investment approach”, by Marc Bourreau, Pinar Dogan and Matthieu

63The Ladder of Investment regulatory approach was presented with a report to the European Commission in

2001, and was later revised by the author in 2004 and published under the title “Remedies for broadband

Services”.

111

Manant64: “The regulator gives the entrant an initial “lift up” on the investment ladder by ensuring

its access to the incumbent’s infrastructure at reasonable terms. The “lift up” to the second rung

involves not only ensuring its access to the incumbent’s infrastructure but at a higher level but also

burning up the rung on which the entrant was standing (neutralizing the placement effect), so that

the entrant would then make the necessary infrastructure investment to climb up to the next rung.

(……). The process continues until the entrant reaches the top of the ladder (…..). As the entrant’s

investments take place progressively over the time, facility-based is achieved without the entrant

having to incur in very high investment cost at once.

Typically, the first level of access to the incumbent’s infrastructure is set at a level which requires the

lowest investments by new entrants (e.g. resale). The terms of access are regulated to ensure that

phase of service-based competition begins and the entrants start building their customer bases.

When the regulator deems by-passing this part of the incumbent’s infrastructure economically

feasible, it lifts up the entrant to the next rung.”

Source: “Regulatory principles and economics: Regulatory remedies, access, interconnection,

transparency, non-discrimination, and price control”. Dr. Annegret Groebel, BNetzA (Germany).

64“A critical review of the ladder of investment approach”. Marc Bourreau, Pinar Dogan and Matthieu Manant, 26 May 2010.

112

The original description of the LOI methodology relies on the theory that entrants should be

provided access to the incumbent’s infrastructure, ideally at different network levels.

Two key assumptions must be both satisfied in order to achieve the objectives of promoting

competition on services and infrastructure at a time:

• If the replacement effect created by service-based competition is neutralized, then service-

based competition is assumed to serve as a stepping stone to facility-based entry,

• The regulator has the instruments to neutralize the replacement effect: access price

regulation (access prices that increase over time) and sunset clauses.

It should be noted though that despite the strong influence of the LOI approach in the regulation of

the electronic communications sector, there have been as well concerns regarding the feasibility of

its implementation depending on the structure of the market.

Many national regulators have embraced a modified version of the original theory with multiple

access levels are ensure to entrants at any given time. This may be necessary also due to the

geographical differences, and also because it has been understood that different levels of access

may correspond to different business models or phases of market entry.

2.4.3 Wholesale regulation.

As it has already been mentioned in the precedent Section 3.2.1, the key element of the European

market-based regulation model is the asymmetric regulation, meaning the definition of the specific

legal framework that correspond to a given SMP operator by the national regulatory authority,

under the form of the imposition of a specific set of appropriate regulatory obligations individually

considered.

In relation with wholesale markets, national authorities should impose on operators designated as

having a significant market power on a specific market the appropriate obligations in relation to

interconnection and/or access services within those set out in articles 9 to 13b of the Access

Directive. Prior request and Commission’s approval, national authorities may also in certain cases

impose obligations outside this list.

The obligations set out in the Access Directive to be considered by Member States within the scope

of each national wholesale non-competitive markets are the following:

Obligation of transparency (article 9 AD):

1. National regulatory authorities may, in accordance with the provisions of Article 8,

impose obligations for transparency in relation to interconnection and/or access,

requiring operators to make public specified information, such as accounting

information, technical specifications, network characteristics, terms and conditions

for supply and use, including any conditions limiting access to and/or use of services

113

and applications where such conditions are allowed by Member States in conformity

with Community law, and prices.

2. In particular where an operator has obligations of non-discrimination, national

regulatory authorities may require that operator to publish a reference offer, which

shall be sufficiently unbundled to ensure that undertakings are not required to pay

for facilities which are not necessary for the service requested, giving a description

of the relevant offerings broken down into components according to market needs,

and the associated terms and conditions including prices. The national regulatory

authority shall, inter alia, be able to impose changes to reference offers to give

effect to obligations imposed under this Directive.

3. National regulatory authorities may specify the precise information to be made

available, the level of detail required and the manner of publication.

4. Notwithstanding paragraph 3, where an operator has obligations under Article 12

concerning wholesale network infrastructure access, national regulatory authorities

shall ensure the publication of a reference offer containing at least the elements set

out in Annex II.

Obligation of non-discrimination (article 10):

1. A national regulatory authority may, in accordance with the provisions of Article 8,

impose obligations of non-discrimination, in relation to interconnection and/or

access.

2. Obligations of non-discrimination shall ensure, in particular, that the operator

applies equivalent conditions in equivalent circumstances to other undertakings

providing equivalent services, and provides services and information to others under

the same conditions and of the same quality as it provides for its own services, or

those of it subsidiaries or partners.

Obligation of accounting separation (article 11):

1. A national regulatory authority may, in accordance with the provisions of Article 8, impose

obligations for accounting separation in relation to specified activities related to

interconnection and/or access.

In particular, a national regulatory authority may require a vertically integrated company to

make transparent its wholesale prices and its internal transfer prices inter alia to ensure

compliance where there is a requirement for non-discrimination under Article 10 or, where

necessary, to prevent unfair cross-subsidy. National regulatory authorities may specify the

format and accounting methodology to be used.

2. Without prejudice to Article 5 of Directive 2002/21/EC (Framework Directive), to facilitate

the verification of compliance with obligations of transparency and non- discrimination,

national regulatory authorities shall have the power to require that accounting records,

114

including data on revenues received from third parties, are provided on request. National

regulatory authorities may publish such information as would contribute to an open and

competitive market, while respecting national and Community rules on commercial

confidentiality.

Obligations of access to, and use of, specific network facilities (article 12):

1. A national regulatory authority may, in accordance with the provisions of Article 8, impose

obligations on operators to meet reasonable requests for access to, and use of, specific

network elements and associated facilities, inter alia in situations where the national

regulatory authority considers that denial of access or unreasonable terms and conditions

having a similar effect would hinder the emergence of a sustainable competitive market at

the retail level, or would not be in the end-user's interest.

Operators may be required inter alia:

(a) to give third parties access to specified network elements and/or facilities, including

access to network elements which are not active and/or unbundled access to the local loop,

to inter alia allow carrier selection and/or pre-selection and/or subscriber line resale offers;

(b) to negotiate in good faith with undertakings requesting access;

(c) not to withdraw access to facilities already granted;

(d) to provide specified services on a wholesale basis for resale by third parties;

(e) to grant open access to technical interfaces, protocols or other key technologies that are

indispensable for the interoperability of services or virtual network services;

(f) to provide co-location or other forms of associated facilities sharing;

(g) to provide specified services needed to ensure interoperability of end-to-end services to

users, including facilities for intelligent network services or roaming on mobile networks;

(h) to provide access to operational support systems or similar software systems necessary

to ensure fair competition in the provision of services;

(i) to interconnect networks or network facilities.

(j) to provide access to associated services such as identity, location and presence service.

Obligation of price control and cost accounting (article 13):

1. A national regulatory authority may, in accordance with the provisions of Article 8, impose

obligations relating to cost recovery and price controls, including obligations for cost

orientation of prices and obligations concerning cost accounting systems, for the provision

of specific types of interconnection and/or access, in situations where a market analysis

115

indicates that a lack of effective competition means that the operator concerned may

sustain prices at an excessively high level, or may apply a price squeeze, to the detriment of

end-users. To encourage investments by the operator, including in next generation networks,

national regulatory authorities shall take into account the investment made by the operator,

and allow him a reasonable rate of return on adequate capital employed, taking into account

any risks specific to a particular new investment network project.

2. National regulatory authorities shall ensure that any cost recovery mechanism or pricing

methodology that is mandated serves to promote efficiency and sustainable competition

and maximise consumer benefits. In this regard national regulatory authorities may also take

account of prices available in comparable competitive markets.

3. Where an operator has an obligation regarding the cost orientation of its prices, the

burden of proof that charges are derived from costs including a reasonable rate of return on

investment shall lie with the operator concerned.

For the purpose of calculating the cost of efficient provision of services, national regulatory

authorities may use cost accounting methods independent of those used by the undertaking.

National regulatory authorities may require an operator to provide full justification for its

prices, and may, where appropriate, require prices to be adjusted.

4. National regulatory authorities shall ensure that, where implementation of a cost

accounting system is mandated in order to support price controls, a description of the cost

accounting system is made publicly available, showing at least the main categories under

which costs are grouped and the rules used for the allocation of costs. Compliance with the

cost accounting system shall be verified by a qualified independent body. A statement

concerning compliance shall be published annually.

Functional separation (article 13a) and voluntary separation (article 13b).

Article 13a establish that, exceptionally, it may be imposed an obligation on vertically

integrated undertakings to place activities related to the wholesale provision of relevant

access products in an independently operating business entity. In this case, “that business

entity shall supply access products and services to all undertakings, including to other

business entities within the parent company, on the same timescales, terms and conditions,

including those relating to price and service levels, and by means of the same systems and

processes.”

When a national regulatory authority intends to impose an obligation for functional

separation, it should submit a proposal to the Commission including:

(a) evidence justifying the conclusions of the national regulatory authority as referred to in

paragraph 1; (b) a reasoned assessment that there is no or little prospect of effective and

sustainable infrastructure-based competition within a reasonable time-frame;

116

(c) an analysis of the expected impact on the regulatory authority, on the undertaking, in

particular on the workforce of the separated undertaking and on the electronic

communications sector as a whole, and on incentives to invest in a sector as a whole,

particularly with regard to the need to ensure social and territorial cohesion, and on other

stakeholders including, in particular, the expected impact on competition and any potential

consequential effects on consumers; (d) an analysis of the reasons justifying that this

obligation would be the most efficient means to enforce remedies aimed at addressing the

competition problems/markets failures identified.

Under article 13b, SMP undertakings should inform the national regulatory authority in

advance and in a timely manner when they intend to transfer their local access network

assets or a substantial part to a separate legal entity under different ownership, or to

establish a separate business entity in order to provide to all retail providers fully equivalent

access products.

The following tables offer a detailed approach of wholesale obligations implementation,

referring to the specific ex ante regulation policy developed in the scope of the former

markets 4 and 5 by the Spanish telecommunications national regulatory authority.

In market 4 (access to physical infrastructure at wholesale level for the provision of

broadband services at the retail level) has been based mostly on local loop unbundling

(specially until fiber became a reality in the market) and duct access (especially as fiber has

increased its importance in the market).

117

Duct access has increase its importance over time, as it helps to save most of the deployment costs

and disruptions for citizens during the civil works for new ducts deployment. The regulation of duct

access has required intensive work for the regulators and generally required most of the remedies

that the framework allows at wholesale level –commented above-, as shown below:

118

It is important to note that asymmetric regulation/remedies (the ones imposed on the operator with

significant market power and presented in the previous sections of this Report) are not the only

ones that may be necessary to ensure a real competitive market. It may be that bottlenecks exist or

appear even without the existence of a significant market power operator. This is the case, for

instance, in case of deployment of fiber in buildings, where the customers may be reluctant to give

access to a second operator or a second operator may face the additional cost of not having the first

mover advantage. Thus, in Spain, as in other European countries, in-house wiring has been regulated

with all operators being benefited and obligated at the same time:

119

Wholesale obligations/remedies have been also imposed at a higher level of the incumbent’s

infrastructure, in complement to the ones imposed at the physical level and as a starting point for

promoting competition in retail broadband services too. The former market 5, usually known as the

wholesale bitstream access market, allows alternative operators to connect to the network of the

significant market power operators in order to be able to provide services to retail customers

without the need, at least in the short team, of using local loop unbundling and/or duct access

(which require much higher investments in infrastructure). The following slides show the main lines

of this regulation in Spain:

120

The need to adapt to technical evolutions and enhanced new services led to the Spanish regulator to

improve the type of wholesale bit stream services that the significant market power operator has to

provide to its competitors in 2010:

121

As a result, there has been in Spain (similarly to the situation in other European countries) a

reasonably wide choice of wholesale bit stream services for alternative operators over the network

of the incumbent operator (which are added to the ones shown before on market 4 –wholesale

access to physical infrastructure: local loop unbundling, duct access…), as summarized below:

122

The slide below show the different type of wholesale services/remedies available in Spain for an

alternative operator wishing to offer broadband services in competition with those of the incumbent

and using the infrastructure/wholesale services of the incumbent as mandated by the regulator:

The situation, as commented, is similar to the one existing in most European countries, in application

of the European framework already presented, as shown in the table below:

123

2.4.4 Retail regulation.

The European regulatory framework for electronic communications prioritizes public intervention on

the telecommunications sector within the scope of the wholesale markets, basically on the

wholesale provision of services of access and interconnection. However, sector-specific ex ante

regulation at a retail level (the imposition of obligations on SMP operators regarding the provision of

services directly to end-users), it is as well considered under the current legal framework. In

particular the Universal Service Directive, profoundly amended in 2009, is the main legal instrument

regarding the protection of end-users’ rights and, therefore, the obligations of the market players

within the provision of services at a retail level.

Somehow, regarding when it should be considered that a national regulatory authority can intervene

on a retail level and impose retail control mechanisms on SMP operators, it should be taken into

account that public intervention in this case shall be guided by the principle of subsidiarity, as it is

expressed in article 17 of the Universal Service Directive. Under this principle, retail regulation is only

considered appropriate when it has been justified that wholesale regulation only will be insufficient

in order to achieve the telecommunications policy objectives set out in article 8 of the Framework

Directive.

National regulatory authorities should impose appropriate regulatory obligations on operators

identified as having significant market power on a given retail market in accordance with article 14

of the Framework Directive only under the compliance of the two following cumulative criteria:

(a) when as a result of a market analysis carried out in accordance with Article 16(3)

of Directive 2002/21/EC (Framework Directive) a national regulatory authority

124

determines that a given retail market identified in accordance with Article 15 of

Directive 2002/21/EC (Framework Directive) is not effectively competitive, and

(b) when the national regulatory authority concludes that obligations imposed under

Directive 2002/19/EC (Access Directive), or Article 19 of this Directive would not

result in the achievement of the objectives set out in Article 8 of Directive

2002/21/EC (Framework Directive).

This secondary role conferred to retail regulation should be linked to the fact that the latest

Commission Recommendation on relevant product and service relevant markets susceptible of ex

ante regulation, dated 9 October 2014, has eliminated of the list of markets that are considered

susceptible of not having effective competition the only retail market that was initially included

(“Access to the public telephone network at a fixed location for residential and non-residential

customers”).

Article 17 (paragraph 2 and 4) of the Universal Service Directive sets out the regulatory controls that

might be imposed on retail services where there is no effective competition. The retail control

mechanisms that may be imposed by national regulatory authorities, mainly related to tariff setting

regulation, are the following:

a) Tariff regulation: “The obligations imposed may include requirements that the

identified undertakings do not charge excessive prices, inhibit market entry or

restrict competition by setting predatory prices, show undue preference to specific

end-users or unreasonably bundle services. National regulatory authorities may

apply to such undertakings appropriate retail price cap measures, measures to

control individual tariffs, or measures to orient tariffs towards costs or prices on

comparable markets, in order to protect end-user interests whilst promoting

effective competition.”

b) Cost accounting obligation: “National regulatory authorities shall ensure that,

where an undertaking is subject to retail tariff regulation or other relevant retail

controls, the necessary and appropriate cost accounting systems are implemented.

National regulatory authorities may specify the format and accounting methodology

to be used. Compliance with the cost accounting system shall be verified by a

qualified independent body. National regulatory authorities shall ensure that a

statement concerning compliance is published annually”.

In the same manner as has been underlined previously for the wholesale markets, the European

Commission provides a list of possible obligations to be considered, but it will be the national

authority who will define which are the appropriate measures to be impose to a given SMP operator

within a particular geographical and service market. Furthermore, the imposition of retail obligations

are subject to the same general conditions as wholesale controls, such as obligations shall be based

on the nature of the problem identified and be proportionate and justified in the light of the

objectives laid down in article 8 of the Framework Directive.

In most European countries retail regulation is minimal or even already inexistent. Wholesale market

regulation has proven to be successful enough by giving market players the possibility to introduce

125

real competition at retail level and allow regulation and public interventions to be lifted at such level.

Consumer protection, quality rules and some other type of rules and controls continue to exist and

even increase, but the need for price regulation and other type of regulations is not needed any

more as infrastructure competition increases and the action at wholesale level is giving positive

results.

2.4.5 Future perspective of the implementation of ex-ante regulation in Europe.

Under the 2009 revised regulatory framework for electronic communications, the basic principles set

out in the precedent 2003 framework still apply (regulation of the relevant market susceptible to ex-

ante regulation, requiring a market analysis and imposition of sector specific obligations only on SMP

operators), but those principles need to be adjusted to different priorities influenced by, on the one

hand, the situation of economic crisis, and on the other hand, the dynamism and convergence

context present on the telecommunications markets. Regulation should in this context guarantee

open market structures for innovation and cooperation, as well as a level playing field by applying

the principle of technological neutrality and ensuring transparency for consumers to choose

In order to comply with this situation, the main regulatory objectives appointed for the next years in

Europe are, first, maintaining the level of service and infrastructure competition reached under the

2003 framework, but, most importantly, ensuring the investment in Next Generation Networks

(NGN), in line with the European Digital Agenda strategy goal of increasing broadband penetration

with NGA (fibre) investment to become a knowledge-based economy, increase productivity through

better linked production sites and promote the information society.

126

To overcome this objective, the European Commission adopted in September 2010 the

Recommendation on regulated access to Next Generation Access networks (NGA), which sets out a

common EU-wide approach to regulation of fibre-based networks. This regulation falls in the scope

of former markets 4 and 5 (2007 Recommendation).

Particular attention can be made in future Reports to specific services or markets. This Report has

provided a detailed overview of the liberalization and privation processes in Europe, together with

main steps and tools used in Europe to create and increase competition. Electronic communications

markets certainly benefit from innovation and increased competition, which have all the positive

effects commented above. The European model, with public intervention at the regulation level

ensuring the goals and guarantees to be achieved by market players, and private market-based

dynamics ensuring competition, more resources and innovation into the sectors, has provided so far

successful results in this account and can serve as a guide to future reforms in China.

127

3 Analysis and Findings In general, the four main goals of regulation in the electronic communications sector would be:

1. Reach all citizens and enterprises: Extend the network (coverage).

2. Improve the quality and diversity of infrastructures and services (quality & innovation).

3. Increase efficiency (cost reduction) and reduce prices as much as possible (lower prices)

4. As a result, achieve the highest possible number of citizens and enterprises connected to the

infrastructures and using the different services provided (penetration)

The combination of Objectives 1, 2 and 3 is the best (and probably only) way to achieve Objective 4

in its full potential.

In order to achieve these Objectives, the main needs are two:

• High investments, specially needed for Objective 1 (coverage) and 2 (quality and innovation)

• Strong competition, specially needed for Objective 2 (Quality and Innovation) and Objective

3 (cost reduction and lower prices)

From the history of telecom industry market reform of China and the EU, due to the huge difference

in political, economic and social system between the two sides, they also differ substantially in

market openness, property reform and competition policy.

From the perspective of EU, extending the coverage of electronic communications networks is very

expensive in terms of capital and requires really high investments. While public capital may be

possible in countries with important financial and/or commercial surpluses, it is always evident that

adding private investments will always help, as the only option in countries with deficits and an

added strength in those which may be able to use some public capital as well. The same, and even

more, applies to quality & innovation: even though networks are usually based on few and well-

known technologies, the high technological innovation and rotation in electronic communications

requires being open to private initiatives which may sometimes fail (with loss of private investment,

instead of public one) or succeed (with potential benefits for private investment but due to benefits

for the consumers which choose this technology as well). The same, and even more, applies to

electronic communications services, where the possibility and need for innovation multiplies. This

means that both private investment and the competition deriving from it are highly productive in

terms of coverage, quality and innovation. Competition has also proved to lead to higher need for

efficiency, leading to cost reduction and, therefore, lower prices. Competition may mean a loss in

terms of economies of scale, but so far those markets that have moved from monopoly to

competition show that the initial loss in terms of economies of scale has been lower than the gains

derived from higher efficiency, which prices being reduced and this leading frequently to also higher

use of the networks/services and, therefore, increased economies of scale in the long run.

From the experience of telecom’s privatisation and open up in EU, the main and most essential tools

are:

128

i. Attract private capital so that those areas which are commercially viable have

higher investments leading to higher and better quality, innovation, cost

reductions and lower prices.

ii. Use public capital (if available) for those areas which present a market failure

(rural areas, poor citizens). When public capital is not available, use private

capital to subsidize these areas (either by taxation and/or funds from the private

operators which make revenues)

iii. In order to attract private capital, lower entry barriers:

a. Administrative entry barriers are easily eliminated (i.e., moving to an

automatic authorization regime) or reduced (i.e., allocating scarce resources

in a fair and transparent manner, increasing the number of beneficiaries as

much as possible and allowing or even forcing secondary trade/markets)

b. Economic entry barriers are lowered through regulation, for instance by

allowing or even imposing facility sharing, use of existing infrastructures (i.e.

sewers, ducts, etc.) and imposing access and other type of obligations on

those operators which control infrastructures which cannot be replicated or

have strong dominance (market power) in wholesale and/or retail markets.

c. Privatization of the incumbents helps to increase public revenues/capital and

also to lower entry barriers (as the fear of negative discrimination and/or

distortion through state aid tend to reduce private investments).

Private capital (through the privatization of the public operators and/or entry of private operators in

the market) and competition (specially from private operators, which tend to increase efficiency

much higher than public ones as are subject to market and economic pressures in a much stronger

way than public ones) may raise sometimes concerns on a possible loss of control by public

authorities over the market results and/or market players behaviour. However, the fact is that it may

be quite the contrary, as privatization and private capital may increase the easiness of control by

public authorities: it may be easier for public authorities to enforce tougher rules on private agents

than on other public authorities/powers, as the imposition of high fines and/or heavy obligations will

not damage the public budget or stress other public powers. The definition of clear (and may be

tougher rules) together with a good monitoring and enforcement of compliance is more relevant to

achieve the desired results (Objectives 1, 2, 3 and 4 above) than the possibility to appoint certain

positions in a particular company.

China has realized competition through establishing or reshuffling many state-owned telecom

enterprises. Industry competition is achieved through the yardstick competition among state-owned

enterprises. Under the general deployment of Chinese reform, China should speed up the property

reform, promote basic market openness, and accelerate the building of market competition system.

1) Press ahead with mixed ownership reform and accelerate the cultivation of market players

with a sound governance structure. We should encourage more non-state-owned capital to

hold shares in telecom enterprises, revise the Telecom Regulations, reduce the state-owned

shares in the basic businesses, and promote cross-shareholding among different capitals; we

should explore the possibility of letting enterprise staff hold shares in state-owned enterprises;

129

encourage enterprises to take the opportunity of reform to give full play to the other capitals,

speed up the perfection of their own governance structure and cultivate real players for market

competition.

2) Accelerate openness to private capital. We should continue to carry out pilot work for the

mobile resale businesses, support and guide private enterprises to develop resale businesses,

and accelerate the openness of Internet access to private capital. On the basis of business

evaluation, we should open market access to businesses of competitive nature (such as voice

businesses, major network businesses etc) and give full play to the role of market mechanism in

resource allocation.

3) Improve the fair competition supervision system between network and business operators.

We should speed up the formulation of major operator supervision system and strengthen

supervision on pricing, service quality and competitive behaviours for particular parts (e.g.

broadband connection) of spontaneous monopoly nature; build and share the facilities; and

perfect the coordination mechanism between enterprises and solve iron tower problems under

the national deployment. At the same time, we should coordinate with the other urban telecom

pipelines and public building pipelines; continue to strengthen supervision over interconnection

and interworking and intensify the quality-oriented volume expansion.

4) Press ahead with the building of the supervision system. We should carry out supervision

according to law and shift to public and transparent supervision. We should remove ownership-

based prejudices, speed up supervision and transformation, equally treat players with different

ownerships; accelerate the release of Telecom Law, universal service fund, Network Security Law

and Personal Information Protection Law and authorize industry administration.

130

III. Broadband Rollout Policies and Measures

1 Broadband Rollout in the EU This part is intended as an overview on relevant policy and market developments related to

broadband rollout. In particular, it is intended to show what policy measures have been initiated in

order to ensure increased availability of broadband and high-speed broadband to a maximum

number of households. It does not seek to repeat what has been covered in the PDSF II report

“Broadband Policy Expert Group: analysis of situation and policies in China and Europe, October

2013”.

see http://www.eu-chinapdsf.org/EN/pdsf2activity.asp?ActivityId=290

It is rather intended to be a useful reference guide to existing regulatory, policy and guidance

documents, and should point to discussions going on in the EU and China about the next steps. In

most cases there is a focus on information that is of relevance to the EU-China partnership. While

state aid provisions or regional development funds are highly relevant for EU communities seeking

broadband development, their detailing is of less benefit in an EU-China context, as the Chinese

funding and investment provisions and limitations are very different from those in the EU.

The 2013 report is in particular relevant with respect to:

• EU Member State national broadband plans, Annex 2 of that report

The comparison with the Chinese approach to promoting broadband supply and demand shows that

there are some important differences in terms of wording that should be noted. As is mentioned in

the opening of the part on Chinese developments below, in “China, telecom universal service

focuses on supporting construction of telephone and broadband networks, network construction for

poverty-stricken schools and special education institutions and information services access in rural

areas.” In this respect China uses the term Universal Service mostly in a “network development and

rollout” way. This idea of Universal Service means creating a policy framework that guarantees

access and affordability for everybody. This is somehow different from the EU approach, where

Universal Service is a specific instrument that is very sparsely used to fill supply, sometimes demand

gaps. It can be argued that it is rather a social policy rather than an industrial policy instrument, a

measure of last resort if market forces fail to provide affordable supply. Because of this difference,

the EU part of this overview will focus on “broadband rollout” issues rather than “Universal Service”

issues. The specific considerations on universal service, including the question why the EU so far has

decided against declaring broadband internet service part of a possible universal service obligation,

have been introduced in the earlier PDSF II report on Broadband (chapter VII)65 and in the report on

“Strengthening Competition“(chapter “Regulation adjustment after the privatization”) included in

this compilation.

The best method to ensure universal availability of broadband access and services is – at least from

an EU perspective – perceived to be the strengthening of market competition. There is a wide range 65see http://www.eu-chinapdsf.org/EN/pdsf2activity.asp?ActivityId=290

131

of instruments and policy measures that was tested and implemented over the previous decades.

These measures are covered in chapter “II: Strengthening Competition in the Electronic

Communications Markets” included in this compilation

1.1 Current Level of Broadband Rollout and the rural rollout challenge

The Digital Agenda for Europe Scoreboard and the latest figures from Eurostat show that the digital

divide is growing wider, and the differences between member states are considerable. 90% of

households without broadband are located in rural areas. 35 million homes in rural areas are still

waiting for high-speed connectivity.

Digital Agenda Scoreboard: https://ec.europa.eu/digital-agenda/en/scoreboard

Eurostat figures on broadband development:

http://epp.eurostat.ec.europa.eu/portal/page/portal/information_society/data/main_tables

The Study on broadband coverage in Europe (as of 2013), published 15/12/2014, monitors the

progress on the broadband coverage objectives of the Digital Agenda (basic broadband access for all

by 2013 and high speed broadband access with at least 30 Mbps download speed for all by 2020), i.e.

the household coverage of different fixed and wireless broadband technologies with a special focus

on Next Generation Access technologies.

DEA Target Achievement end of 2013

• By 2013: bringing basic broadband to all

Europeans;

100% in 2013

• by 2020: Ensuring that all Europeans

have access to Internet speeds of above

30Mbit/s

62% in 2013

• 50% or more of European households

have subscribed to Internet access above

100 Mbit/s.

3% in 2013

Data Sources:

Broadband coverage in Europe (as of end 2013) –Final report:

http://ec.europa.eu/information_society/newsroom/cf/dae/document.cfm?doc_id=8238

Broadband coverage in Europe (as of end 2013) –Data tables:

132

http://ec.europa.eu/information_society/newsroom/cf/dae/document.cfm?doc_id=8239

Scoreboard 2014 - Trends in European broadband markets 2014

http://ec.europa.eu/digital-agenda/en/news/scoreboard-2014-trends-european-broadband-

markets-2014 (also see E-Annex to this report: “Trends in European broadband markets 2014.ppt”)

“In rural areas, access to fast broadband services remains the major priority at European level. While

at least one broadband access mechanism is available to nearly 97% of households in European rural

areas, fast broadband services are still accessible only to a small percentage of households in such

areas. Nevertheless, with investments in rural NGA deployments, NGA coverage increased during

2013 by 5.7 percentage points, reaching 18.1% of rural households (or 5.8 million rural households)

by the end of the period.”

It is evident that in the EU, rural broadband supply remains a challenge. Rural households continue

to be underserviced by fixed technologies, and particularly by NGA technologies. Governments and

operators have, however, begun to address this deficit by developing dedicated rural coverage plans.

133

134

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BE BG CZ DK DE EE EL ES FR HR IE IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK EU

DSL lines % (VDSL included) Cable modem % (DOCSIS 3.0 included) FTTH/B % Other %

Fixed broadband subscriptions - technology market shares, January 2014

Source: Communications Committee

135

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SK EE PL SI RO BG LV HU IE ES IS FI NO LT HR EU DE CZ IT SE DK AT EL PT FR BE MT UK LU NL CY

Total Rural

Fixed broadband coverage, 2013

Source: IHS and VVA

136

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

IT EL HR FR PL IE SK IS EU CZ ES RO BG AT SE FI SI EE DE NO HU CY UK DK PT LV LU LT NL BE MT

Total Rural

Next Generation Access (FTTP, VDSL and Docsis 3.0 cable) coverage, 2013

Source: IHS and VVA

137

0%

20%

40%

60%

80%

100%

Fixed &

mo

bile

Fixed

NG

A

DSL

VD

SL

FTTP

WiM

AX

Stand

ard cab

le

Do

csis 3.0

cable

HSP

A

LTE

Satellite

End of 2012 End of 2013

Rural coverage by technology at EU level, 2012 - 2013

Source: IHS , VVA and Point Topic

138

139

Speeds of broadband products are advertised as "up to a certain Mbit/s", but there are significant

differences between the advertised speed and the actual speed that consumers receive. In the EU,

the actual download speed is 76% of the advertised speed. DSL delivers only 63.8% of the advertised

headline download speed, compared to 89.5% for cable and 82.7% for FTTx.

Source: DEA Scoreboard 2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FR UK IE EL IT ES CZ NL DE DL FI PT MT NO SI PL

Actual Download Speed of xDSL technology as a Percentage of

Source: Samknows

140

“Broadband access prices remain dispersed across Europe: the median prices (calculated on

Purchasing Power Parity) vary between €22 and €102 for a standalone offer with a download speed

between 30 and 100 Mbps. The median prices were the lowest in Romania (€22), Lithuania (€22)

and Latvia (€23) and the highest in Malta (€102), Cyprus (€91) and Slovenia (€71). In Croatia, Cyprus,

Greece and Italy, fast broadband (at least 30Mbps) is still rare, representing less than 5% of all

subscriptions. The median price of standalone offers of 30 to 100Mbps decreased from €43 in 2009

to €34 in 2014.”

Source: DEA Scoreboard 2014

The regulated wholesale charges giving access for new entrants to the local loop are important to

effective service based competition in the xDSL market. The monthly average total cost (calculated

as the monthly rental + the one time connection charge distributed over a three years period) stood

at €9.35 for full access (provision of both voice and broadband) and at €2.61 for shared access

(provision of broadband only) in October 2013.

Source: DEA Scoreboard 2014

20

25

30

35

40

45

2009 2011 2012 2013 2014

12Mbps-30Mbps 30Mbps-100Mbps

Broadband retail prices (EUR PPP) – Standalone offers, 2009-2014

0

2

4

6

8

10

12

14

October 2005

October 2006

October 2007

October 2008

October 2009

October 2010

October 2011

October 2012

October 2013

Full LLU Shared access

Local Loop Unbundling monthly average total cost (€) at EU level, 2005-2013

Source: Communications Committee

141

1.2 The Digital Agenda for Europe

Looking into policy measures to support broadband rollout, the EU perspective is in principle that

any kind of telecommunications network development should first and foremost be based on

commercial considerations and undertaken by commercial enterprises.

As access to adequate broadband services today is seen to have a substantial positive impact on

economic and social development, there is, however a case for intervention by the public sector if

the private sector does not realise the infrastructure targets formulated on the policy level. In

certain areas some form of public support and / or financing can be deemed necessary and justified.

Where policy makers identify deficits in supply, public sector intervention should be limited and

avoid market distortions. Initial measures should focus on reducing the cost (e.g. sharing of

infrastructure) and risk of investment in infrastructure. Where necessary public funding can be

provided, but should be done so in a way as to incentivise private investment rather than to replace

it.

The significance of broadband development and its importance for a network-based knowledge

society has been recognised by the “Europe 2020” strategy. In order to reap the full benefits offered

by ICT and to keep up with other international markets, Europe needs widely available and

competitively-priced fast and ultra-fast internet access.

More on the EU2020 strategy: http://ec.europa.eu/eu2020/

Similar to the digital markets policy documents of the US (“Information Super Highway”), Japan

(“e!Japan”), Hong Kong (“Digital 21 Strategy”) or Korea (“eKorea Vision”), the EU Commission has

formulated a master document that is intended to provide guidance to the national efforts of

improving information society infrastructure. Among the 13 specific goals set in the Digital Agenda,

the further development and extension of broadband coverage in Europe is explicitly emphasised.

The DEA follows earlier similar documents (in particular “eEurope 2002”, “eEurope 2005” and

“i2010”). Broadband rollout is addressed in Pillar IV of the DEA, and the stated goal is to ensure…

• By 2013: bringing basic broadband to all Europeans;

• by 2020: Ensuring that all Europeans have access to Internet speeds of above 30Mbit/s and

• 50% or more of European households have subscribed to Internet access above 100 Mbit/s.

The other 10 DAE goals are:

• 50 % of the population to buy online by 2015

• 20 % of the population to buy online cross-border by 2015

• 33 % of SMEs to make online sales by 2015

• the difference between roaming and national tariffs to approach zero by 2015

• to increase regular Internet usage from 60 % to 75 % by 2015, and from 41 % to 60 % among

disadvantaged people.

142

• to halve the proportion of the population that has never used the Internet from 30 % to 15 %

by 2015

• 50 % of citizens to use eGovernment by 2015, with more than half returning completed e-

forms

• all key cross-border public services agreed on by Member States in 2011 to be available

online by 2015

• to double public investment in ICT R&D to € 11 bn by 2020

• to reduce energy use for lighting by 20% by 2020.

More on the DEA: https://ec.europa.eu/digital-agenda/

These targets are to be achieved by realising the following actions under Pillar IV of the DEA:

Action 42: Adopt an EU broadband communication Action 43: Funding for high-speed broadband Action 44: European Spectrum Policy Programme Action 45: Foster the deployment of NGA networks Action 46: Member States to develop national broadband plans Action 47: Member States to facilitate broadband investment Action 48: Use structural funds to finance the roll-out of high-speed networks Action 49: Implementing the European Radio Spectrum Policy Programme in

Member States Action 112: Durable regulatory measures on non-discrimination and wholesale

pricing to promote investment and competition Actions 113 and 114: Regulatory measures to promote competition and enhance the

broadband investment environment Action 115: Recommendation on safeguarding the open Internet for consumers Action 116: Update of the 2007 Recommendation on the list of markets relevant for

ex ante regulation Action 117: Reduction of the cost of deploying high speed electronic

communications networks Action 118: Update of guidelines on state aid for broadband by end 2012 Action 119: Pilot project to test project bonds for broadband deployment

see PDSF II report “Broadband Policy Expert Group: analysis of situation and policies in China and Europe, October 2013” for the Member State broadband plans (Annex 2 of that report)

see https://ec.europa.eu/digital-agenda/en/about-broadband for Overview on

national broadband strategies

see http://ec.europa.eu/digital-agenda/en/broadband-best-practices for

broadband rollout best practices by the member states

143

1.3 Measures to Reduce Investment Costs

The roll-out of high-speed fixed and wireless broadband networks across the EU requires substantial

investments. Civil engineering works, such as the digging-up of roads to lay down high-speed

broadband, account for up to 80% of the cost of deploying high-speed networks. Limiting these

works would make broadband roll-out cheaper.

The Directive on measures to reduce the cost of deploying high-speed electronic communications

networks (2014/61/EU) aims at facilitating and incentivising the roll-out of high-speed electronic

communications networks by reducing its cost. It includes measures such as the sharing and re-use

of existing physical infrastructure, which are expected to create conditions for a more cost efficient

network deployment.

On 27 March 2013 the College adopted a

proposal of a regulation concerning

measures to reduce the costs of deploying

high speed electronic communications

networks

https://ec.europa.eu/digital-agenda/news/directive-

201461eu-european-parliament-and-council

(DIRECTIVEEUOFTHEEUROPEANPARLIAMENTANDOFT

HECOUNCIL Cost Reduction.pdf)

Targets: Action 117: Reduction of the cost of

deploying high speed electronic communications

networks

See Factsheet at

https://ec.europa.eu/digital-agenda/news-

redirect/18890

Summary of Provisions of the Directive:

• Access to existing physical infrastructure

• Information on existing infrastructure

• Coordination of civil works

• Permit granting

• In-building equipment

Member States also have to appoint one or more independent body/ies to resolve disputes between

network operators regarding access to infrastructure, access to information and requests for

coordination of civil works. Member States have the flexibility to appoint already existing body/ies,

or create new body/ies ad hoc. Moreover, Member States have to appoint one or more Single

Information Points where information on physical infrastructure and on permits can be made

available.

Any disputes between network operators and broadband service providers concerning their rights

and obligations, will be mediated if necessary by a competent national dispute settlement body: the

NRA or another competent authority.

The regulation would become directly applicable across the EU after agreement by the European

144

Parliament and the Council.

Access to existing physical infrastructure: Every network operator (telecoms or non-telecoms

infrastructure owner66) has the right to offer, and an obligation to meet, all reasonable requests for

access to its physical infrastructure for the deployment of high-speed electronic communications

networks, whether fixed or wireless.

Information on existing infrastructure: Broadband providers will have the right to access, via a

single information point, a set of minimum information concerning the existing physical

infrastructure, and the right to carry-out in-site surveys of existing infrastructure.

The Directive aims at creating a market for physical infrastructure such as ducts, poles, manholes

without covering cables, or dark fibre. Therefore, any electronic communications or utilities operator

may enter this market and offer access to its physical infrastructure. Moreover, any network

operator has the obligation to give access to its physical infrastructure for the deployment of high-

speed broadband networks (30 Mbps and above), upon reasonable request and under fair terms and

conditions, including price. Access may however be refused for objective transparent &

proportionate reasons. A Dispute Resolution Mechanism is foreseen in case no commercial

agreement can be found.

In order to enable access to physical infrastructure, public sector bodies and network operators

must provide on request minimum information including a contact point. They must also consent to

on-site surveys, at the cost of the access seeker. Access to information may be limited for network

security, national defence, public safety or confidentiality reasons.

Coordination of civil works: Every network operator can negotiate agreements to coordinate civil

works with entities authorised to provide elements of high-speed broadband networks. In order to

enable better coordination of works, any network operator shall make available on request

minimum information concerning on-going or planned civil works related to its physical

infrastructure.

Any network operator may negotiate coordination of civil works with electronic communications

providers. In addition, undertakings performing civil works fully or partially financed by public means

have to meet any reasonable request for coordination of civil works, provided that any additional

cost is covered by the communications provider and that the request is made timely.

In order to enable agreements on coordination of civil works, planned civil works have to be made

public 6 months in advance. When an undertaking authorised to provide public communications

networks requests information about the planned civil works, the network operator has to make

available minimum information about the planned civil works. Access may be refused if information

66In the regulation, "network operator" means an electronic communications network provider as

well as an undertaking providing a physical infrastructure intended to provide: a service of

production, transport or distribution of gas, electricity, including public lighting, heating, water,

including disposal or treatment of waste water and sewage; transport services, including railways,

roads, ports and airports

145

is already publicly available or via a Single Information Point. Member States may limit access to the

information in view of the security & integrity of the networks, national security, public health or

safety, confidentiality or operating and business secrets.

Permit granting: Every broadband networks provider can access by electronic means via a single

information point, any information concerning the conditions and procedures for granting permits

for civil works, and submit its application electronically via the same single information point. The

competent authorities shall grant or refuse permits within six months from receiving a request.

All relevant information on procedures for granting permits for civil works must be available via a

Single Information Point. Member States are encouraged to organise the application for permits by

electronic means. In any event, unless national law specifically provides otherwise, any permit

decision should be made in general within 4 months.

In-building equipment: All newly-constructed buildings and buildings undergoing major renovation

shall be equipped with high-speed-ready in-building physical infrastructure, up to the network

termination points.

All new buildings shall be equipped with physical infrastructure, such as mini-ducts, capable of

hosting high-speed networks and with an access point, which can be easily accessed by the providers

of public communications networks. The same is valid for major renovations. Member States may

provide for exemptions on proportionality grounds, such as for monuments or military buildings.

Providers of public communications networks have the right to access the access point at their own

cost and, through it, any existing in-building physical infrastructure. Holders of the rights to use the

access point and the in-building physical infrastructure shall meet reasonable requests for access

under fair and non-discriminatory terms and conditions, including price. Member States may grant

exemptions from this obligation when access to an in-building network is ensured on objective,

transparent, proportionate and non-discriminatory terms and conditions (open access model).

Summary and analysis by “Centrum fuer europaeische Politik”:

• Currently, national regulation authorities can, in certain circumstances, oblige TC network

operators with an unassailable market position to grant access to non-active network

components (Art. 12 (1) a) Access Directive) and oblige TC network operators, irrespective of

whether they have an unassailable market position, to share the use of cabling in buildings,

empty ducts or distribution boxes (Art. 12 (1) Framework Directive).

• In future, all network operators - i.e. including non-TC network operators - will have to grant

such access irrespective of whether they have an unassailable market position.

• Currently, the authorities can decide for themselves whether to keep a record of the "type,

availability and geographical location" of network components and related equipment. They

can then oblige the TC network operators to provide information (Art. 12 (4) Framework

Directive).

• In future, they will be obliged to keep such a record and all network operators will have to

provide information.

146

Conclusion:

• Only TC broadband network operators operating in a defined geographical market who have

an unassailable market position should have to grant access to their physical infrastructure

elements.

• An obligation to grant access applicable to operators of non-TC networks is not justifiable in

any way.

• The creation of central national information points is appropriate; a duty of disclosure

should, however, only apply to monopolistic TC network operators.

• The obligation for house owners, to install high-speed infrastructure when building or

renovating, is patronising and violates the basic right of ownership.

• The right of TC network operators to connect their network inside the private premises of

broadband users represents legitimate interference with the basic right of ownership.

• A Regulation is disproportionate as a legal instrument.

(“ cepPolicyBrief_COM_2013__147_Cost_Reduction_Directive.pdf “)

OPINIONof theEuropean Economic and Social Committeeon the Proposal for a Regulation of the

European Parliament and of the Council on measures to reduce the cost of deploying high-speed

electronic communications networksCOM(2013) 147 final – 2013/0080 (COD) (10 July 2013)

“According to the Communication, civil engineering works can amount to 80% of broadband

deployment costs. The capex savings to network operators expected from the implementation of the

proposed regulation is estimated in the range of 20–30% of total investment costs, i.e. up to EUR 63

billion by 2020. The EUR 63 billion in savings can then be invested in other areas of the economy.”

“Cooperation and sharing by private infrastructure providers is essential for efficiency, speed of

implementation, environmental sustainability and the availability of competitive prices for

end­users. The Committee is pleased to see that the regulation will oblige private infrastructure

providers to publish good information on existing and planned infrastructure, and that network

providers will have obligations to cooperate, so that good planning, cooperation and efficient use of

resources is facilitated.”

At EU level, an impact assessment67 has been completed to achieve costs savings in the

deployment of high-speed broadband networks. Also, public consultation processes have been

undertaken in preparation of the Directive.68

Member States have until 1 January 2016 to transpose the Directive into national legislation. From 1

July 2016 on, Member States shall generally apply those measures. Many stakeholders can

nevertheless already start exploring and preparing synergies in network deployment.

67 see http://ec.europa.eu/digital-agenda/en/news/impact-assessment-accompanying-document-proposal-regulation-european-parliament-and-council 68 see http://ec.europa.eu/digital-agenda/en/news/results-public-consultation-how-reduce-cost-roll-out-high-speed-broadband

147

See also: Workshop on Synergies in rollout of networks by Utilities and Telecoms:

roadmap, obstacles, solutions (26 June 2014): https://ec.europa.eu/digital-

agenda/news-redirect/16577

see also ETNO response to the Public Consultation on an EU Initiative to Reduce the

cost of Rolling Out High Speed Communication Infrastructure in Europe, Position

Paper, see E-Annex “RD381 - CMA EC cost reduction for NGA consultation.pdf”

1.4 Choice of Investment Model and PPP options

While access to public funds and permission to use them for broadband development may be hardly

comparable between the EU and China, the actual process of combining public and private sector

efforts are of interest to both sides. EU member states and local administrations have been using

forms of public-private partnerships for years in order to ensure realising their infrastructure targets

while seeking to rely as far as possible on market instruments.

For the EU, there are several key guidance documents, such as the “EU Commission Guide to High

Speed Broadband Investment” (October 2014). This guide presents the four strategic choices that

need to be made in order to achieve the goals formulated in the broadband plan.

Source: EU Commission, Guide to High Speed Broadband Investment, Release 1.1, 22. October 2014

(see E-Annex “Guide to High Speed Broadband Investment EU.pdf”)

148

Choice of Infrastructure Type http://ec.europa.eu/digital-agenda/en/broadband-

technologies

Choice of Investment Model http://ec.europa.eu/digital-agenda/en/carrier-model-options

Choice of Business Model http://ec.europa.eu/digital-agenda/en/business-models-

broadband-development

Choice of Finance Tools http://ec.europa.eu/digital-agenda/en/broadband-financing-

and-funding

Municipalities, municipal companies, joint ventures, PPPs and private companies can be involved in

one, two or all three stages of the value chain. In regions where neither the public nor the private

sector can or want to implement solutions, so-called bottom-up approaches can be realized

alternatively. Also public-private partnerships (PPP) can take over roles in one or more of the value

chain stages.

“DIFFERENT PPP MODELS: According to the EPEC PPP Guide, we can divide the PPP projects into five

different models:”

Private DBO The private design, build and operate (DBO) model involves a private sector

organisation receiving some level of public funding (often a grant) to assist in its

deployment of a new network offering open wholesale access. Critically, in this

model the public sector has no specific role in the ownership or running of the

network, but it may impose obligations relating to either of these in return for the

funding.

See also http://ec.europa.eu/digital-agenda/en/news/basic-private-design-build-

and-operate-dbo-model

For more details on the development and implementation see E-Annex “BASIC

Private DBO MODEL.pdf” and “ULTRAFAST Private DBO MODEL.pdf”69

Public DBO

(Design,

Build,

Operate)

A public DBO model involves the Managing Authority operating without any private

sector intervention, except at a service provider level (involving either wholesale or

retail service providers). All aspects of network deployment and operation are

managed by the public sector. A network company is formed by the Managing

Authority and typically offers wholesale services, with the potential to offer retail

69This series of documents discusses possible models for designing a public-private partnership (PPP) for the development of broadband projects. Some parts of the document are related to the rules that apply to the member states of the European Union but are suggested as a good practice also to others. The readers can use the document as a template, by filling in specific content in the spaces marked in the document and subsequently deleting the descriptive texts that are present in the model only to assist the user while filling in the content. Some parts of the content that are common to all PPP models are discussed in a separate document, “Guidelines for PPP models”.

149

services (although this is not common).

e.g. City of Stockholm fibre project, Suupohja / Finland, Skanet / Sweden

For more details on the development and implementation see E-Annex “BASIC

Public DBO MODEL.pdf” and “NGA PUBLIC DBO MODEL.pdf”

GOCO

(Government

Owned,

Contractor

Operated)

Government-owned-contractor-operated (Public outsourcing). Under a public

outsourcing model a single contract is awarded to a private sector organisation,

covering all aspects of the design or construction of the network. The key

characteristic of this model is that the network is built and operated by the private

sector, but the public sector retains ownership and some control of the network.

For more details on the development and implementation see E-Annex “ULTRAFAST

GOCO MODEL.pdf”

Joint-venture A joint venture is any agreement where ownership of the network is split between

the public and private sector. Construction and operational functions are likely to be

undertaken by a private sector organisation.

e.g. Nievre / France, Piedmont / Italy

see also Basic Joint Venture Model(25/02/2014):

http://ec.europa.eu/digital-agenda/en/news/basic-joint-venture-model

For more details on the development and implementation see E-Annex “BASIC JV

MODEL.pdf” and “NGA JV MODEL.pdf“ and “ULTRAFAST JV MODEL.pdf”

Bottom-up The bottom-up, or local community, model involves a group of end users (comprising

local residents and/or businesses) organising themselves into a jointly owned and

democratically controlled organisational group (frequently a co-operative) capable

of overseeing the contract to build their own local network. In this model it is likely

that the public sector has no role in owning or running the project, but rather passes

the funding to the group itself to oversee the investment project. Given the

composition of the local group it is likely that the day-to-day running of the network

will be outsourced to a telecoms operator with the necessary expertise. We have

identified example projects which have implemented bottom-up models from both a

local point of view and also as part of larger-scale (regional) initiatives. Bottom-up

funded projects tend to be of a smaller scale than projects that use the other funding

models outlined below.

e.g. “fibre to the farm” Sweden

see also NGA bottom up model for Broadband Development

http://ec.europa.eu/digital-agenda/en/news/nga-bottom-model-broadband-

development

150

For more details on the development and implementation see E-Annex “NGA

Bottom UP.pdf”

The choice of investment model depends on a range of factors, the selection process can be

supported by considerations on various dimensions of the project such as shown in this overview

table

The Guide goes on to advise: “Once [the government body has] chosen the investment model and

your role in the deployment and operation of the NGN broadband infrastructure, important choices

need to be made over three dimensions:

• the infrastructure type,

• the business model

• and the financing model”.

The PPP4Broadband Guide provides this overview as a guidance on the suitability of the respective

model with respect to various network development goals.

“After an intense period of group work and peer review of the work of the other colleagues it was

agreed that out of the 15 possible cases, 9 were most plausible/applicable in practice.”

151

For each of these cases, the respective detailed guidance document is enclosed in the E-Annex to

this report (folder “Investment Models”).

Regarding the NGA networks, the most typical deployment nowadays is the Joint Venture PPP, as

projects usually are about shortening the local loop (telephone and/or cable TV networks) by

pushing fiber to the cabinets. Another possibility is the Bottom-up PPP which is appropriate

especially in rural areas where there is no sufficient access capacity so the residents organise

themselves to build the “last mile”. In cases where there are significant market distortions the public

partner may want to step in directly to grant indiscriminate possibilities to all citizens, so Public DBO

might be the right solution.

Reference:

Guide “How to use public-private partnerships

for building broadband networks in rural areas”

(E-Annex “PPP for rural Broadband .pdf”)

PPP4Broadband, an EU project funded through

South East Europe Transnational Cooperation

Programme, developed a guide “How to use

public-private partnerships for building

broadband networks in rural areas”. The guide is

composed of four parts:

1. the first part discusses topics related to

broadband networks in connection to public

financing;

2. the second part examines possible PPP models

in relation to different broadband

technology/capacity choices;

3. the third part discusses issues related to

various possible business models;

4. the fourth part gives some recommendations

about what could be the most suitable solutions

in different scenarios.

“One of the key political drivers behind the PPP

is the desire to improve the nation’s

infrastructure and to support public services

without placing undue strain on scarce public

funds and without having to increase taxation.”

Advantages of PPP see Guide, chapter 2.3

Disadvantages of PPP see Guide, chapter 2.4

152

Dedicated guidance and template documents

for:

BASIC JV MODEL.pdf

BASIC Private DBO MODEL.pdf

BASIC Public DBO MODEL.pdf

NGA Bottom UP.pdf

NGA JV MODEL.pdf

NGA PUBLIC DBO MODEL.pdf

ULTRAFAST GOCO MODEL.pdf

ULTRAFAST JV MODEL.pdf

ULTRAFAST Private DBO MODEL.pdf

EIB, “The Guide to Guidance: How to Prepare,

Procure and Deliver PPP Projects”

http://www.eib.org/epec/g2g/index.htm

The Guide to Guidance is principally aimed at

public procuring authorities considering the use

of public-private partnership (PPP)

arrangements.

While each project requires specific design,

there are some required steps that can be

identified:

Model definition and project identification (e.g.

Overall specification of the output; Technical

design of the output)

Model assessment (e.g. model affordability

(business model) with respect to investment

financing and operating / maintenance

financing)

Risk allocation (e.g. risk identification, risk

assessment, risk allocation)

Cost-Benefit Analysis

PPP Project tender preparation

PPP procurement process

153

Regulatory conditions for PPP

“According to official development recommendations, public funding should be – as a general rule –

increasingly focused on NGA and Ultrafast networks as only they enable the necessary performance

for the future.

The draft Regulation that is being approved in the European Parliament70 more specifically deals

with the definition of broadband for future BB projects that will be entitled to EU funds and other

aid measures is based on the Connecting Europe Facility document that allows for the financing of

only NGA and Ultrafast networks projects. It defines broadband as follows: “Broadband networks’

means wired and wireless access networks, ancillary infrastructure and core networks capable of

delivering very high speed connectivity, thereby contributing to the broadband targets of the Digital

Agenda for Europe”

Note the “very high speed” requirement, which is understood as “ultrafast” according to the

definitions of the PPP4BB project.

“Lower speeds (albeit financed by other public sources) will be admissible only if able to technically

proof to reach 30Mbps within 2020.”

There could be cases of really low density populated and rural areas lacking even the most basic

telecommunication services, where little or no commercial interest of service providers to build own

networks exists. In such cases a pragmatic approach from the public partner should be taken and

public (co)funding should not be excluded. Especially in such cases the sharing of building costs (with

other public infrastructure) and reusing of existing infrastructures (ducts, poles, etc.) is a must.

Public DBO and Joint Ventures are the usual practice, but in cases an existing infrastructure operator

(power utility for example) is also willing to develop a telecommunication network a private DBO

could be the solution.

1.5 Choice of Business Model

With respect to business models, four different models can be distinguished:

• Fully integrated (where one market actor is physical infrastructure provider PIP,

network provider NIP and service provider SP)

• Open network model (where the three roles are separated)

o Passive-layer open model PLOM: broadband network is open at passive

layer, e.g. because the public administration has built it and is operating it,

offering it to all NP and SP

70 register.consilium.europa.eu/pdf/en/13/st10/st10201.en13.pdf

154

o Active-layer open model ALOM: e.g. public administration deploys and

operates both passive and active infrastructure, serves as PIP and NP, offers

access to SP.

o Three-layer open model 3LOM: three levels are separated, administration

has built and is operating PI, NP role is procured to external company, NP

installs and operates active equipment, builds network infrastructure

through which all SP can offer their services

Which business model fits to which investment model needs to be carefully analysed. The guide

provides an overview table that helps making this decision. Questions to be addressed include “how

densely populated is the area?”, “are there sufficient actors seeking to become NP?”, or “Is

significant amount of infrastructure owned by an operator already active as a service provider?”

For more details see http://ec.europa.eu/digital-agenda/en/business-models-broadband-

development

1.6 Choice of Finance Tools

In order to achieve the targets formulated in the DEA, the Commission has identified a funding gap

of ca. EUR 62bn to meet the 2020 targets (see Study on the socio-economic impact of bandwidth by

Analysis Mason for the European Commission, 2012).This funding is expected to primarily come

from the private sector, but special measures are deemed necessary to support private investment

in rural areas where population density is too low to attract investment.

155

The general system of state subsidies and state aid is very dissimilar between China and the EU, so

there are not too many lessons to be learned. Below are key documents that specify the rationale

and the procedure for permitting EU governments on various levels to use public funds for fostering

broadband rollout.

Main financing tools available are in principle

• Revenue-based financing: self-financing through re-investment of revenues from

network operating fees etc

• Private capital and financial markets: raised on financial markets or contributed by

private sector partners

• Government-backed bank loans and bonds: guarantees

• Public funds: soft loans, project bonds, grants, sovereign funds, e.g. in the EU

European Structural and Investment Funds / ERDF, Connected Europe Facility

• Bottom-up community financing: from end users or associations

Projects usually rely on a variety of funding sources that can be combined. EU funding will often be

combined with national or local public sector funding and should also aim to leverage private sector

investment where possible.

A key distinction is to be made between two forms of public intervention:

• On the one side, grants or subsidies can be given to cover (parts of) the costs of

network rollout.

• On the other hand, public entities can support projects through so-called financial

instruments such as loans, guarantees, and project bonds. These instruments can be

an effective means of support for infrastructure projects which have potential for

commercial revenues but which face constraints in accessing usual sources of

financing. In providing support through financial instruments, public authorities

cooperate with promotional banks such as the European Investment Bank.

EU Broadband Investment Guide

https://ec.europa.eu/digital-

agenda/en/news/broadband-investment-guide

EU Broadband Investment Guide has been

developed to help local, regional and national

authorities to develop long-term development

plans to bring fast internet to their communities.

The handbook gives practical tips to support

public authorities in the preparation of

broadband investment projects, including those

co-financed from the European Structural and

Investment Funds and the Connecting Europe

Facility.

The handbook

156

• lists the investment alternatives when

developing broadband;

• advises public authorities how to take a

long-term investment perspective when

they develop a broadband plan;

• provides a list of choices when choosing

a type of infrastructure, an investment

model, a financial model and the

financing tools available;

• suggests how to involve citizens,

collaborate with other broadband

developers, neighbouring municipalities

and regions, and how to monitor and

evaluate broadband investment.

The European Commission can offer support and guidance from the following sources:

• European Investment Bank: The Commission has provided seed money for the EIB, as part

of its Connecting Europe Facility, to deliver tailored financing for broadband projects, backed

by the banks AAA credit rating.

• JASPERS: the technical assistance scheme set up to support major projects under the

European Regional Development Fund.

• European Structural and Investment Funds (ESIF, European Regional Development Fund

ERDF and European Agricultural Fund for Rural Development EAFRD) can contribute to the

financing of broadband infrastructure, in particular in rural areas. ESIF for 2014-2020 have

identified ICT as one of four thematic objectives. For thematic concentration of the ERDF

which will support the development of NGN in all type of regions. The Rural Development

Fund EAFRD will also play a role in financing of small and large projects. Art. 20 of 1305/13

specifically names broadband. The regulation names two requirements for access to regional

support funds: 1) Formulation of a digital growth strategy to finance measures on services

and to support demand, 2) Development of an NGN plan for measures to support high speed

and very high speed networks.

The new EU Commission President right after taking office announced an Investment Plan for

Europe as a Commission Priority, with a volume of at least 315 billion Euro. These investments are

intended for improving infrastructure, including broadband networks. The aim is to combine public

and private resources to create incentives for private investment. The basis for the investment plan

will be a European Funds for strategic Investments EFSI, with guaranteed capital stock of 16 Bn Euro

from the EU Commission budget and additional 5 Bn Euro from the EIB. The assumption is that each

Euro provided through the fund can leverage 15 Euro of private capital.

157

http://ec.europa.eu/priorities/jobs-growth-investment/plan/index_en.htm

CEF and EIB – European Instruments

Besides the Structural Funds there are also EU level financial instruments for broadband roll-out.

Digital infrastructures represent one of the priorities of the Connecting Europe Facility (CEF) which

spans the transport, energy and ICT sectors. For broadband, the Connecting Europe Facility will

provide seed funding for a limited number of broadband projects, together with the European

Investment Bank (EIB), as well as technical assistance.

CEF: Connecting Europe Facility - Programme Brochure:

https://ec.europa.eu/digital-agenda/en/connecting-europe-facility

http://ec.europa.eu/information_society/newsroom/cf/dae/itemdetail.cfm?item_id=14779

With a proposed budget of €50 billion between 2014 and 2020, the Connecting Europe Facility will

be a key instrument to promote growth, jobs and competitiveness through targeted infrastructure

investment at European level. It will support the development of high-performing, sustainable and

efficiently interconnected trans-European networks in the fields of transport, energy and digital

services.

The Connecting Europe Facility Telecom Work Programme for 2015 has been adopted on 15

December 2014:

https://ec.europa.eu/digital-agenda/en/news/connecting-europe-facility-telecom-work-

programme-2015

158

Limits to the Use of State Aid for Broadband Development

Some forms of support by public authorities are referred to as “state-aid”. In the broadband market,

where investment should generally come from private operators, state aid by national, regional, and

local authorities is in principle prohibited. It would be deemed an illegal distortion of the markets.

However, in areas where the market does not provide the necessary infrastructure investment, state

aid can be permissible if certain conditions are met. The relevant conditions are laid down in general

state aid rules which are complemented by broadband specific state aid rules and guidelines

(notably the EU Guidelines for the application of State Aid rules in relation to the rapid deployment

of broadband networks).

The Commission has defined special rules (the 2013 Broadband Guidelines – see IP/12/1424) to

make sure that State aid granted by Member States for broadband infrastructure is well-targeted,

technologically neutral and does not harm competition through crowding out private investment.

The rules ensure that public aid measures are targeted at market failures and provide open access

to State funded infrastructure.

A new EU block exemption regulation has also been introduced to exempt from notification certain

categories of aid supporting the deployment of broadband infrastructure.

Broadband: (http://ec.europa.eu/competition/state_aid/legislation/specific_rules.html )

Overview: Sector-specific rules for state aid

application, incl. broadband sector

http://ec.europa.eu/competition/state_aid/legislatio

n/specific_rules.html

EU Guidelines for the application of state aid

rules in relation to broadband deployment

Guidelines: http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:20

13:025:0001:0026:EN:PDF

E-Annex of this report:

“EURegulationonStateAid.pdf”

Press release on state aid guidelines:

http://europa.eu/rapid/press-release_IP-12-

1424_en.htm

List of Commission decisions on State aid to

broadband:

http://ec.europa.eu/competition/sectors/telecommu

nications/broadband_decisions.pdf

Commission regulation declaring certain

categories of aid compatible or incompatible

with the internal market incl. aid for

broadband infrastructure

http://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX:32014R0651

(see E-Annex: “EURegulationonStateAid.pdf”)

159

EU Regulation on State Aid (25 February 2014):

http://ec.europa.eu/information_society/newsroom/

cf/dae/itemdetail.cfm?item_id=14776

Example Romania: Commission decision on

State Aid relevance for Romanian

broadband development project

(28/03/2014)

https://ec.europa.eu/digital-

agenda/en/news/commission-decision-state-aid-

relevance-romanian-broadband-development-

project

Related Document (PDF):

http://ec.europa.eu/information_society/newsroom/

cf/dae/document.cfm?doc_id=5035

1.7 Member State Examples

EU Member States High

Speed Broadband Policies

and Investment

Programmes

At the EU Commission page, an overview over the achievements of

the member states can be found, with each member introduced

according to this structure:

• Summary

• National Broadband Strategy and Policy

• National and Regional Broadband Financial

Instruments

• Broadband Development and Technologies

• National Publications and Press Documents

• Contact information

https://ec.europa.eu/digital-agenda/en/high-speed-

broadband

EU Member States

Broadband rollout best

practice examples

Click on a country to see selected examples of Best Practices in the

Member States.

https://ec.europa.eu/digital-agenda/en/broadband-best-practices

ENGAGE- development of

High Speed Broadband

networks and services

throughout rural Europe

(20/03/2014)

Report/Study: 20/03/2014

https://ec.europa.eu/digital-agenda/en/news/engage-

development-high-speed-broadband-networks-and-services-

throughout-rural-europe

ENGAGE: cost-efficient deployment

The ENGAGE (“Enhancing Next Generation Access Growth in Europe”)

project aims to help rural regions across Europe to better understand

160

and address the building of high speed broadband networks at

efficient cost, translating best practice into effective and efficient

policies. The investments required are significant and the technical

issues are really complex.

More information: http://www.engage-interreg.eu/

Within the ENGAGE project, running since January 2012 until

December 2014, a Good Practice Guide has been developed. The

guide presents Good Practices from the Partner countries France,

Germany, United Kingdom, Slovenia, Finland, Poland, Spain, Portugal,

Slovakia, Czech Republic and Italy. The ENGAGE project is an

INTERREG IVC project undertaken in order to gather interesting Good

practice which illustrate the development of High Speed Broadband

networks and services throughout rural Europe.

Document (PDF):

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4917

List and description of 30 best practices for high speed broadband

development throughout Europe. The Best practices have been

collected in the frame of the INTERREG IVC project ENGAGE.

Document (PDF):

High-speed Broadband for Rural Europe - Best Practices from ENGAGE

project:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4976

High-speed Broadband for Rural Europe - List of Best Practices from

ENGAGE project:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4975

Other Examples

Estonia: Wideband

Infrastructure Network -

Strategy Implementation

Pre-Study (25/03/2014)

https://ec.europa.eu/digital-agenda/en/news/estonia-wideband-

infrastructure-network-strategy-implementation-pre-study

Presentation of study results, conducted in preparation of implement

the "Estonia Wideband Infrastructure Network" project.

Related Documents:

161

Estonia Wideband Infrastructure Network - Strategy Implementation

Pre-Study:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4978

Latvia: Fiber to the Home

Case Study - Record

breaking roll-out speeds in

Latvia (25/03/2014)

https://ec.europa.eu/digital-agenda/en/news/fiber-home-case-study-

record-breaking-roll-out-speeds-latvia

Short report on transformation of Latvian broadband internet market

by Lattelcom.

Related Documents:

FTTH Case Study - Record breaking roll-out speeds in Latvia:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4981

UK: Broadband Wireless

Access for Rural Areas: The

Tegola Project Experience

(25/03/2014)

https://ec.europa.eu/digital-agenda/en/news/broadband-wireless-

access-rural-areas-tegola-project-experience

The Tegola project is dedicated to research into the provision of high-

speed internet access to remote and rural areas. As part of the

project, a test bed was build which demonstrates that it is now

possible to provide the most remote parts of the Scottish mainland

with speed and quality of service better than what is available in most

UK cities.

Related Documents:

Broadband Wireless Access for Rural Areas: The Tegola Project

Experience:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4984

Broadband for Rural Scotland: a white paper:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4985

Finland: Successfully

Bringing Fibre to Rural

Finland (20/03/2014)

https://ec.europa.eu/digital-agenda/en/news/successfully-bringing-

fibre-rural-finland

http://s3platform.jrc.ec.europa.eu/documents/10157/334751/Suupo

hja%20FTTH%20network.pdf (Suupohja Finland FTTH network.pdf)

In Finland's Suupohja County a municipality-owned fibre network to

public places and village has been established between 2005 and 2013

162

(and continuing) in order to revitalise the countryside.

The network has been built by Suupohjan Seutuverkko Oy (SSV), a

non-profit limited company owned by seven municipalities in Western

Finland.

Related Documents:

Finnish FTTx Network owned by the municipalities:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4919

Successfully Bringing Fibre to Rural Finland:

http://ec.europa.eu/information_society/newsroom/cf/dae/documen

t.cfm?doc_id=4918

Sweden: Rural

Development Programme

(2007-2013)

http://s3platform.jrc.ec.europa.eu/documents/10157/242379/Broadb

and%20infrastructure2.pdf

The Swedish RDP has foreseen EAFRD support for broadband

infrastructure. The initial EAFRD allocation was increased almost 5-

fold to reach EUR 136.4 million due to high demand for NGN

connectivity from rural areas. Despite Sweden’s sparse rural

population (two people per km2 in some areas), the supported

broadband scheme has provided basic and NGA coverage to

approximately 25,000 premises, out of which80% are citizens and 20%

are companies. A major part of the investments came from non-paid

voluntary work (e.g. through village associations) and was eased by

access to existing infrastructure such as fibre ducts or copper lines.

The scheme contributed to the Swedish EU-leading position of having

53% of all households and businesses connected with at least 100

Mbps Internet and 93% of all Swedish households and businesses

having access to mobile broadband via 4G networks (LTE) with 79% in

rural areas to be compared with just 10% before the project.

163

Lithuania: RAIN project

The objective of the project is to improve access to broadband with

ERDF in rural areas and achieve 98% broadband coverage in Lithuania

by 2014. Some 4,400 km of broadband cables have been laid, with

network infrastructure and 775 sub-district and municipal connection

points installed.

As a result, 660,000 citizens (20.6% of the country’s population), 2,000

businesses and 9,000 public institutions can now benefit from

broadband. The creation of backhaul networks (i.e. middle-mile) in

not-served areas has reduced the entry barriers (by lowering

investment costs) for commercial operators thereby encouraging

them to extend their broadband network coverage in last mile in rural

areas.

The rain project is providing connectivity to many public institutions

(e.g. 524 public libraries), contributing to increased digital literacy

among rural communities and sectors of the population at risk of

exclusion, by making Internet access centres publicly available and

supporting rural businesses (e.g. declaration of agricultural lands and

crops).

Netherlands

Extracts are reproduced from Lemstra and Melody (forthcoming, 2014)

'The Dynamics of Broadband Markets in Europe', Cambridge University

Press. see E-Annex “Lenstraat_europeanagenda.pdf”

The housing corporation ‘Portaal’ wished to enhance the value of its

property by connecting its homes with fibre, providing ultra-fast

Internet access to new residents. VolkerWessels Telecom, the

designated contractor, recognized a wider business opportunity to

164

develop open-access fibre networks on the basis of demand

aggregation, provided by, among others, the housing corporations.

Private equity funding helped establish the firm Reggefiber for that

purpose. Demand aggregation using pre-subscription became the

leading principle for fibre deployments. In that way the critical issue of

assuring a minimum level of take-up to create a profitable business

case was resolved.

A more detailed comparison of Belgium-Flanders and the Netherlands

shows that the two countries had much in common, including a lack of

fibre deployments, but differ in respect of housing corporations, being

absent in Belgium-Flanders. This means that a natural point of

demand aggregation is missing.

France Extracts are reproduced from Lemstra and Melody

(forthcoming, 2014) 'The Dynamics of Broadband Markets in

Europe', Cambridge University Press. see E-Annex

“Lenstraat_europeanagenda.pdf”

A typical example of market failure is the lack of supply of broadband

in rural areas. In most of the case studies there is attention to closing

the coverage gaps, largely through subsidies targeted at the so-called

white areas. Often the incumbent, as sole supplier in these areas, is

the recipient of these subsidies. The case of France is an example of a

more holistic approach and reflects the developmental role of

governments. The case shows ‘the vision’ of the government in

recognizing the differences between high urban, urban, regional and

rural areas, and it differentiates its broadband policies accordingly.

In the highly developed urban areas the policy calls for private supply

in competition. Regulation is tuned toward facilitating deployments

through, e.g., the sharing of ducts. In the deep rural areas it is

recognized that private supply is not economically feasible and hence

a strong role is assigned to the municipal government to coordinate

the roll-out of broadband using public funding.

The case describes the overall ‘vision’ as follows: “The Government

has set goals for the deployment of very high data rates on the whole

territory - 70% of the population to be covered in 2020 and 100% by

2025 - and made it a priority of the program of investments for the

future. To achieve these objectives the Government introduced in

June 2010 a national “high speed” plan to concomitantly stimulate

investment by operators beyond the densest areas and to support

digital development projects driven by local authorities. The State has

mobilized €900 million in subsidies for future investments through the

165

National Fund for the Digital Society to support public initiative

networks that are complementary to private initiative deployments.”

The ‘implementation vision’ suggests a leading role for government

entities: “First, very early, [the local authorities] develop, usually at

the Departmental level, the digital territorial development master

plan. These indicative documents are essential. They make an

inventory of digital coverage and existing networks and identify

projects in progress or planned. They also give the vision of the

territory in matters of digital coverage and action scenarios and how

to achieve it according to a strategy to promote consistency between

private investment and public intervention. Then local authorities are

consulted by operators while they are deploying their networks.

Finally local authorities may decide to make public initiative networks

such as the law allows in accordance with the regulatory framework.”

Romania Over the year 2015, Romania’s Ministry for Information Society will

build broadband networks connecting 783 municipalities, the ministry

announced in January. The RON 378 million project (about EUR 84

million) will receive RON 56 million (about EUR 56 million) from the

European Regional Development Fund.

The project will concentrate on some of the smallest towns and

villages in Romania, says project manager Corneliu Mănescu,

responsible for the project since 2012. “The biggest 100 villages have

just over 1,000 inhabitants, the smallest have just over 30

households.”

“Two things really helped us to develop this project” Mănescu says.

“First, we decided to have a public consultation of 9 months instead of

30 days. This way we made sure the villages that we selected were

really ‘white areas’ with no Internet access. Second, we published the

draft tender documentation two months early, to make sure every

potential operator could study the request and prepare themselves.”

According to the project manager, these two steps helped move the

project along, avoiding objections and complaints.

The RoNet project aims to build and operate a national infrastructure

for broadband, offering electronic communications services to

disadvantaged rural areas that currently lack high-speed internet

access. The aim is to create economic growth and jobs.

RoNet is part of Romania’s national broadband plan, which is being

implemented by the country’s Ministry for Information Society. The

plan’s objectives include getting public administrations online,

promoting the use of electronic communications, and supporting

166

small and medium sized enterprises in using digital infrastructure and

services.

https://joinup.ec.europa.eu/community/epractice/news/romania-

bring-broadband-783-municipalities

• Basic information

• Duration of the project

• Number of households supplied

• Technology

• Building up Organisation

• Financing

• Average price of standard service

http://ec.europa.eu/digital-agenda/best-practice-%E2%80%93-

development-broadband-infrastructure-romania-ronet-project-ro

1.8 Additional Information and references

Multiple Trajectories to Realize the Digital Agenda for Europe, Dr. Ir. Wolter Lemstra (with

comparison of approaches from EU, Australia, Korea, US, Japan) ( see E-Annex

“Lenstraat_europeanagenda.pdf”)

EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband

networks, EC (2013). 2013/C 25/01 Brussels: European Commission.

Guide to Broadband Investment: this document sets out best practice examples in planning an

investment of public funds in broadband projects.

Broadband - Delivering next generation access through PPP: This publication has been

prepared for the benefit of the European PPP Expertise Centre (EPEC) members (European

Investment Bank (EIB), the European Commission, Member States of the European Union, Candidate

States and certain other states) to facilitate the sharing of experiences in the field of public-private

partnerships (PPPs).

EU Commission, Guide to High Speed Broadband Investment, Release 1.1, 22. October 2014

(Guide to High Speed Broadband Investment EU.pdf)

EU State Aid Guidelines on Broadband

Broadband in the Digital Agenda for Europe (DAE)

Mapping of Broadband Infrastructures and Services (on-going study)

EU Regulation on Measures to Reduce the Cost of Deploying High-speed

Networks(Commission proposal to the European Parliament and Council)

167

Broadbandforall: a webpage with information from the European Satellite Operators Association

on satellite based broadband solutions

Information on how to design voucher schemes for satellite broadband, developed by the

European Satellite Operators Association

Broadband Coverage in Europe 2013: Mapping progress towards the coverage objectives of the

Digital Agenda,

http://ec.europa.eu/information_society/newsroom/cf/dae/document.cfm?doc_id=8238

(“-BroadbandcoverageinEuropeasofend2013finalreportpdf.pdf”)

http://ec.europa.eu/information_society/newsroom/cf/dae/document.cfm?doc_id=8239

(“BroadbandcoverageinEuropeasofend2013datatablesxlsx.xlsx”)

Measuring the Information Society Report 2014, ITU 2014, (ITU MIS2014_without_Annex_4.pdf)

The Measuring the Information Society Report features key ICT data and benchmarking tools to

measure the information society, including the ICT Development Index (IDI). The IDI 2014 highlights

the relationship between ICT development and the MDGs, a contribution to the ongoing discussions

on the potential of ICTs as development enablers. The report includes the results of the ICT Price

Basket (IPB) and new mobile-broadband price data for over 140 economies. The report also looks at

new ICT data sources for measurement and examines the possible role of ICT big data for monitoring

and development.

• Download the publication (pdf format): http://www.itu.int/en/ITU-

D/Statistics/Documents/publications/mis2014/MIS2014_without_Annex_4.pdf

• Executive summary: English (pdf format)

• Press release in Chinese, English,

• Key charts from this year's report

• Report Highlights (pdf format)

• Report Overview (ppt format)

168

2 Broadband Rollout and Universal Service in China In 2004, China began to introduce universal telephone service and included broadband into telecom

universal service later in 2006 on the basis of achieving some success in phone popularization.

Thanks to the hard work of the entire industry, a major breakthrough was made in communications

infrastructure in the rural areas of China, and the rural communications capacity building and rural

communications service levels continued to improve. The practice of “dividing up the work and

assigning a part to each individual or group” has become an effective way to achieve universal

telecom services with Chinese characteristics.

2.1 Connotation and goals of broadband universal service

From the international perspective, the so-called “universal service” refers to the practice of

providing telecom service to any citizen without geographical, quality or charge discrimination at

affordable rates. The term “universal service” was first proposed in 1907 by Mr. Weill, President of

AT&T in the United States, and the slogan then was: “One network, One policy, Universal service”.

Telecom universal service aimed originally to popularize telephone service, and later, with the

development of the society and information technology, the scope of telecom universal service

gradually expanded from telephone service to broadband service on the basis of basically realizing

universal telephone service so that residents in rural and low-income areas have access to

broadband. In China, telecom universal service focuses on supporting construction of telephone and

broadband networks, network construction for poverty-stricken schools and special education

institutions and information services access in rural areas.

China started to implement telecom universal service at the beginning of 2004, and the program of

“extending telecom coverage to every village” promoted telephone popularization in rural and low-

income areas and completed the communications development goal for rural areas of the “10th Five-

year Plan”. In 2006, the goal of the program of “extending telecom coverage to every village” was

further expanded and the goal of providing Internet access to every town was added on the basis of

ensuring every village’s access to telephone. Since then, the implementation of broadband universal

service was officially kicked off in China, and later the goal of broadband universal service has been

constantly raised.

Specifically, the development goals of telecom universal service were included in China's “11th Five-

Year Plan (2006-2010)”, the 12th Five-Year Development Plan for the Communications Industry and

the Development Plan for the Information Industry. In August 2013, China officially promulgated the

“Broadband China” Strategy and Implementation Plan, which clearly defines broadband as a

strategic public infrastructure and proposes the technical roadmap, timetable, key tasks and

guarantee measures for broadband development by 2020. The “Broadband China” Strategy and

Implementation Plan further clearly proposes the phased strategic goals of broadband development

in rural areas:

169

• By 2015, the fixed broadband penetration rate of households in rural areas will reach 30%,

and 95% of administrative villages will have access to broadband services. Broadband access

capacity of rural households will reach 4Mbps;

• By 2020, the fixed broadband penetration rate of households in the whole country will reach

70% (about 55% in rural areas), 98% of administrative villages will have access to broadband

services, and a variety of techniques will be used to extend broadband coverage to natural

villages where conditions permit. Broadband access capacity of rural households will reach

12Mbps.

Meanwhile, the “Broadband China” Strategy proposes that we should further promote the

development of broadband in rural areas and improve the universal service mechanism, including

the following core contents:

• Include broadband into the scope of telecom universal service and focus on solving the issue

of extending broadband coverage to every village. China will accelerate to extend the

coverage of broadband network from every township to every administrative village and

natural village by making use of a variety of techniques such as optical fiber, copper wire,

coaxial cable, 3G/LTE, microwave, satellite etc. In rural areas with a relatively dense

population, optical fiber will reach every village. In rural areas with a relatively sparse

population, various types of wireless techniques will be used flexibly to expand the coverage

of the broadband network. We will accelerate the development and promotion of low-cost

intelligent terminals that meet farmers' demands. We will strengthen the development of all

types of agriculture-related information resources and improve rural information service

platforms and service centers to raise the overall level of network information services.

Column 1 - The “Rural Broadband” Program

According to rural economic development levels and geographical natural

conditions, access techniques will be selected flexibly to extend broadband

coverage to administrative villages and natural villages where conditions permit

by categories and stages. In developed areas, on the basis of extending

broadband coverage to administrative villages, optical fibre connection will

reach all administrative and natural villages. In less developed areas, we will

focus on ensuring broadband coverage to administrative villages. In remote

areas, mountainous areas and islands where construction costs are too high,

mobile, satellite and other wireless broadband techniques can be used to solve

the problem of information silos. In dispersedly populated pastoral areas with a

vast territory, wireless broadband coverage will be promoted. In newly-built

housing projects for low-income rural and pastoral families, the construction of

“Fibre to the Home (FTTH) and Fibre to the Building (FTTB)” will be positively

promoted.

170

• Increase the application level of broadband network. Establish rural public broadband

Internet service centers and carry out skill training in broadband access to the Internet and

applications.

Column 2- Broadband Demonstration Project for Poverty-Stricken Schools and

Special Education Institutions

Support flexible use of different broadband access techniques, build broadband

network infrastructures according to local conditions for primary and secondary

schools and special education institutions for disabled persons in rural areas

(especially poverty-stricken areas and ethnic minority areas), develop easy-to-

use Internet terminals, enrich feature applications, strengthen information

teaching assistant and make greater efforts to support the disabled and the

poor to narrow the digital divide.

• Strengthen financial support. Improve the telecom universal service compensation

mechanism and form the long-term mechanism to support broadband development in rural

as well as central and western regions. Use various special funds of the central government

to guide local funds to invest in broadband network research and development and

industrialization as well as broadband network development in rural areas, former

revolutionary base areas, areas inhabited by ethnic groups, remote and border areas and

poverty-stricken areas.

2.2 Development status and problems

Under the promotion of the Program of “Extending Broadband Coverage to Every Village” and the

efforts of the whole industry, China has made major breakthroughs in communication infrastructure

construction in rural areas, the communications capacity and rural communications service levels in

rural areas building continue to improve, and the practice of “dividing up the work and assigning a

part to each individual or group” has become an effective way to achieve universal telecom services

with Chinese characteristics..

In 2013, centering on the “Broadband China” Strategy, the Ministry of Industry and Information

Technology (MIIT) organized the three basic telecom enterprises of China Telecom, China Mobile

and China Unicom to directly invest more than 6 billion yuan to further promote the implementation

of the Program of “Extending Broadband Coverage to Every Village”. An additional 19,000

administrative villages had access to broadband services in the whole year, an increase from 88% at

the beginning of the year to 91%; an additional 8,870 natural villages had access to telephone

services, an increase from 95.2% to 95.6%; an additional 5,200 primary and secondary schools in

remote rural areas had access to broadband services; an additional 1,026 towns implemented the

program of “Information to the Countryside”, with a township coverage of up to 85%.

In the first three quarters of 2014, there were 3.107 million new rural broadband users in China, and

the total number of rural broadband users was 48.395 million, with a penetration rate of up to 7.7%.

171

Rural broadband users accounted for 24.2% of the broadband users in the whole country. Rural

Broadband network support capacities continued to improve, and the number of newly-added fixed

broadband access ports was 22.072 million, and the total number of fixed broadband access ports

was 102 million, a year-on-year increase of 11.3%.

The fixed broadband penetration rates in the eastern regions are higher than those in the central

and western regions. In the first three quarters of 2014, there were 5.169 million, 2.959 million and

2.731 million new Internet broadband subscribers and 106.226 million, 51.294 million and 42.247

million new fixed broadband subscribers in the eastern, central and western regions respectively,

with the penetration rate reaching 18.9%, 12.0% and 11.4% respectively.

Broadband users in urban and rural areas in 2010-2014

But at the same time, we also see that broadband development is unsustainable in rural and remote

areas by only relying on the market mechanism due to harsh natural conditions, decentralized

population, low economic level and high network deployment costs. Data show that by the end of

September 2014, the broadband penetration rate of rural population was only 7.7%, 13.0% lower

than that of urban areas, and the digital divide gap further expanded by 1.8% over 2010. The

broadband penetration rates in the central and western regions were 6.9% and 7.5% lower than that

in the eastern regions respectively, and the gap was widening.

Although 91% of administrative villages had access to broadband services by 2013, but there was

still a large gap with the objective of the rural broadband strategy. Insufficient investment incentives

and big investment gap are major factors restricting the subsequent redevelopment of universal

service. This is mainly reflected in three aspects:

172

First, lack of motivation for corporate investment. Due to high investment costs and poor economic

effects in rural areas, enterprises are unable to achieve breakeven, and the malfunction of the

market mechanism objectively exists. The three basic telecom enterprises, as the market players, are

faced with the dual pressure of market competition and SASAC’s performance assessment, and have

no incentives for investment in broadband construction in rural areas. Taking Dulongjiang Township

in Gongshan County, Yunnan, as an example, there are a total of 1,066 broadband users, with an

average ARPU value per user of 14.9 yuan, and the annual income is 190,000 yuan, but the annual

operating expenses are more than 500,000 yuan. The income is even far less the operation and

maintenance costs, and the construction costs are completely at a loss, with the expected static

payback period of more than 50 years.

Second, the ability of telecom enterprises to invest again in rural areas through internal cross-

subsidies has declined. First, the net profit margin of the basic telecom sector is declining year by

year. The businesses of basic telecom enterprises are being widely replaced by various types of

Internet services, such as WeChat which is replacing SMS and voice services. The profit-making

ability of basic telecom enterprises is declining while the pipeline trend is increasing, so their ability

to further invest in rural areas by relying on internal cross-subsidies is significantly weakened. In

2013, although the profit margin of the basic telecom sector was higher than the net profit margin

level of all the central state-owned enterprises (5.5%), but the gap was narrowed from 7.7% in 2012

to 3.8%. Second, the profit margin of China Mobile is declining year by year, while the profit margins

of China Telecom and China Unicom are less than 5%, lower than the average profit margin of

central state-owned enterprises, ranking near the bottom in the SASAC’s performance assessment.

In addition, 4G will also face substantial investment in the future, and operators’ cross-subsidies for

universal service are unsustainable.

Third, there is a larger gap of investment in broadband development in the central and western

regions. First, to achieve the objectives of the “Broadband China’ Strategy to increase the rural

household penetration rate and capacity in rural areas, a substantial increase in investment is

needed. Currently, the actual penetration rate and access rate of the program of “extending telecom

coverage to every village” are low. 1) The indicator for assessing broadband coverage to every

administrative village is that one or two households in an administrative village have access to

broadband services, which is far lower than the strategic objective of “the rural household

penetration rate will reach 55% by 2020” (an average of around 100 households in each village have

access to broadband services). 2) At present, the standard speed of broadband in administrative

villages in China is 512Kbps, and accessing the Internet via the 2.5G mobile phone network is also

regarded as access to broadband services. This is far below the objective of the “Broadband China”

Strategy: “the rural household access rate will reach 12Mbps by 2020.” Second, the remaining 9%

administrative villages that do not have access to broadband are mainly in remote areas in the

central and western regions, where the contradiction between high cost and low income is more

serious and the challenges are more severe. With broadband coverage further extending to villages,

the villages where broadband services are not currently accessible are mostly in remote areas. The

construction costs are increasing while the economic level is getting lower and lower, resulting in

serious mismatch between broadband investment spending and revenue and more serious

challenges. Third, a large sum of investment in operation and maintenance is needed each year for

the 106,000 administrative villages that gained access to broadband from 2004 to the end of 2013.

173

In general, under the current system, there is no broadband universal service fund in China and the

funds allocated by the state for public services are utterly inadequate, which are mainly used to

encourage basic telecom enterprises to shoulder their social responsibilities. It is relatively difficult

for telecom enterprises to make long-term sustainable large-scale investments in this aspect.

Telecom enterprises as market players are faced with the dual pressure of market competition and

performance assessment, so their investment motivation and investment amounts in rural

broadband infrastructure are clearly inadequate.

2.3 Policy Analysis and Recommendations on Universal Service

2.3.1 The Program of “Extending Telephone Coverage to Every Village” is major measure of China to promote rural telecom universal service

In 2004, as the universal service compensation mechanism has not been established, in accordance

with the provisions of Telecommunications Regulations of the People's Republic of China, MIIT

designated the six basic telecom operators, i.e. China Telecom, China Netcom, China Mobile, China

Unicom, China Satcom and China Railcom, to assume the universal service obligation and promote

the development of rural communications by means of “dividing up the work and assigning a part to

each operator”. The action was named the Program of “Extending Telephone Coverage to Every

Village”. Since then, the construction of rural communications infrastructures in China, including

telephone and broadband infrastructures, has been implemented by the program, so no fund or

mechanism for universal service has been established.

In this context, broadband universal service in China is promoted under the Program of “Extending

Telephone Coverage to Every Village”. In the program, the government authorities are responsible

for making uniform planning by regions, allocating the tasks uniformly and verifying the amounts

that have been completed. The basic telecom enterprises assume their universal service obligations

based on the assigned tasks and carry out construction, management and maintenance

independently through raising funds by themselves.

In specific implementation mode, the existing basic telecom enterprises undertake the Program of

“Extending Telephone Coverage to Every Village” in some provinces. That is, MIIT is responsible for

dividing the 31 provinces (autonomous regions and municipalities) in China into different parts, and

the three operators are responsible for implementing the program separately.

• Principle for work division: assign the telephone extension tasks of all the provinces in

proportion to the enterprises by comprehensively considering the business incomes and

other economic indicators of all relevant enterprises and taking into account the

geographical features of their existing networks,.

• Method for work division: plan and determine the number of villages where telephone

coverage will be extended to under the program (hereinafter referred to as “the number of

targeted villages”) according to the number of villages where telephone services are

inaccessible, and calculate the number of targeted villages to be undertaken by each

enterprise based on its revenue share and other economic indicators at the end of 2002 as

174

its proportion of telephone extension tasks. Assign the telephone extension tasks of all the

provinces to the enterprises according to the number of targeted villages to be undertaken

by each enterprise and the number of existing targeted villages in all provinces.

• Independent adjustment range of enterprises: the enterprises undertaking the program can,

based on the voluntary principle, negotiate with each other on exchanging or transferring

the tasks for the provinces or administrative villages. The changes must be reported to MIIT

for recording. In each province, the enterprises can independently determine the sequence

and timetable of the program. If a village where telephone services are inaccessible assigned

to an enterprise gets access to telephone services in this period, the government can

consider that the enterprise has accomplished the telephone extension task of the program

for the village.

In terms of management systems, two-tier ministerial and provincial management is implemented

for the Program of “Extending Telephone Coverage to Every Village”, the support from local

governments is sought, and the enterprises are responsible for specific implementation. The

Telecommunications Administration of MIIT is responsible for formulating the policies for the

program, timely promulgating relevant policies and carrying out coordination. The

telecommunications bureaus of all provinces are responsible for coordination, supervision,

inspection, guidance and promotion of the local programs and assessing accomplishment of the

targets of local programs. During the target assessment process, the enterprises that refuse to

perform its universal service obligations will be handled in accordance with Article 70 of

Telecommunications Regulations, and those having accomplished their tasks satisfactorily will be

commended. The competent telecommunications departments and enterprises are actively seeking

the support in finance, policy, taxation and other aspects and collaboration of relevant state

departments and local governments, and competent telecommunications departments are actively

urging local governments and telecom enterprises to sign relevant cooperation agreement.

Based on the current actual conditions, broadband universal service in China is mainly funded by the

Program of “Extending Telephone Coverage to Every Village”, and some funds are appropriated from

the program to support the construction of broadband in rural areas. The funds for the program are

mainly raised by the telecom enterprises, with a small amount being subsidies from the central and

local governments. During 2006-2010, direct investments totalled 50 billion yuan, among which the

subsidies from the central government and local governments amounted to 1.55 billion yuan and

400 million yuan respectively and the funds raised by the telecom enterprises were about 48 billion

yuan. In 2011, the direct investments of the three basic telecom enterprises of China Telecom, China

Mobile and China Unicom amounted to 7.38 billion yuan, among which the financial investment in

broadband services was about 300 million per year.

In the case of only a very small amount of financial appropriate funds from the central and local

governments, the practice of “dividing up the work and assigning a part to each operator” fully takes

into consideration the characteristics of self development of the enterprises and promotes the

convergence and unification of the program with the development of the enterprises, giving a strong

impetus to the implementation of the program. Practices have proved that in case of malfunction of

the market adjustment mechanism and lack of a cost compensation mechanism, some results have

175

been achieved in the implementation of the Program of “Extending Telephone Coverage to Every

Village”.

2.3.2 New moves of the government to promote rural broadband penetration in recent two years

After the “Broadband China” strategy was introduced in 2013, the Ministry of Finance, the National

Development and Reform Commission (NDRC), MIIT and other relevant departments have attached

great importance to broadband development in China, especially in rural areas and the central and

western regions, and speed up the implementation of the strategy.

(1) Main moves led by MIIT

The Opinions on the Implementation of the 2014 Special Action for the “Broadband China”

promulgated by MIIT in March 2014 proposed to strengthen policy support to improve the

penetration levels in rural areas. We should continue to implement the Program of “Extending

Telephone Coverage to Every Village”, and in the process of extending the broadband coverage to

administrative villages, we should give priorities to extending the Internet coverage to the

administrative villages with access to electricity in contiguous destitute areas. MIIT will join hands

with the Ministry of Education to promote broadband access in rural schools and strengthen support

to agricultural and rural information services to support economic and social development in the

central and western regions and remote areas. We should promote improvement of the telecom

universal service compensation mechanism and strengthen public financial support for rural

broadband development.

In August 2014, MIIT implemented the 2014 broadband construction and development

demonstration projects, among which a key project is to support rural broadband applications and

network construction demonstration to improve broadband access capacity and penetration level

and explore a sustainable broadband development model combining rural development and

application. The objectives of the project: first, support the pilot rural areas to improve their

broadband access capacities and carry out broadband application demonstrations with

rural/agricultural characteristics based on the local social, economic and industrial development

characteristics; second, explore the coordinated development model for rural broadband

infrastructure construction and broadband applications through demonstrations and explore and

innovate in the mechanism for government's public financial funds to support sustainable

broadband development in rural areas and form replicated promotional experience. Through the

demonstration effects, rural areas throughout the country actively explored to jointly promote the

spread of broadband in rural areas with local financial and social capitals.

(2) Main moves led by NDRC

In July 2014, NDRC, the Ministry of Finance and MIIT jointly organized and implemented the “Rural

Broadband” Pilot Program (Phase I), and the first projects of the “Rural Broadband” Pilot Program

are concentrated in the western regions. Sichuan and Yunnan were finally selected from the 6

western provinces (Inner Mongolia, Sichuan, Guizhou, Yunnan, Shaanxi and Gansu) by application,

approval and selection to implement the “Rural Broadband” Pilot Program. 20 counties were

176

selected in each province as pilot areas, with the construction period of the program is three years,

and the major investments required were mainly raised by the enterprises themselves. The state

arranges 100 million yuan per year to each province as financial subsidies to promote the

implementation of the “Rural Broadband” Pilot Program.

3 Analysis and Findings The improvement of broadband availability and the search for new solutions to cut costs of rollout

and facilitate investment is clearly a joint priority for the EU and China, a joint challenge that lends

itself to joint solutions. Both sides have made it a top policy priority and consider the public sector to

play a crucial part in safeguarding or ensuring the infrastructure availability. Quality broadband

networks are seen to contribute positively not just to the individuals and corporations directly

accessing the services, but on a larger scale to social and economic development at large. Both the

EU and China have regions still devastatingly underserved with high-quality network access,

hindering the development not just of these regions, but having a negative impact on the whole of

the economies.

The Chinese 12th Five-Year Development Plan for the Communications Industry, the Development

Plan for the Information Industry and the Implementation Plan for “Broadband China” Strategy have

included the construction of information infrastructure and rural broadband into the development

priorities and clearly proposed to establish a long-term universal service mechanism in future to

speed up to extend fibre to towns and promote administrative villages to achieve the goal of

extending broadband coverage to each village. Presently, MIIT, the Ministry of Finance, NDRC and

other relevant departments have started the research on the implementation mechanism for

telecom universal service funds targeted at broadband services and proposed specific considerations

to strengthen public financial support to actively seek multi-channel financial support, explore the

formation of an efficient multi-party implementation mechanism as an essential path to tackle the

challenges of universal service in China. The Chinese government announced to increase broadband

support for the Midwest and rural areas, with the aim of increasing the availability of broadband

internet among the 2015 administrative villages to 95% by the end of 2015.

Both in China and the European Union, the promotion of rural broadband in particular has a high

priority, with the bridging the digital divide as a major challenge. China and the EU with their

respective regional conditions continue to advance through a variety of ways to extend broadband

to rural, low-income groups and public agencies. What they have in common despite the differing

administrative tools and regulatory framework is the realisation that the upgrading of networks can

not only rely on market forces, and can not only be covered by public funds. This is why concepts of

partnerships between public and private sector, between governments on various levels and

telecoms operators (whether private sector players in Europe, or state-owned enterprises in China)

will be crucial. Governments and companies both need to carefully study the available tools for

creating such partnerships. The legal framework for government involvement in network

177

construction and operation may be different, but many basic principles of investment models and

business models do apply whatever the legal circumstances.

The Telco companies will continue to be hesitant to invest in infrastructure with only a very long-

term profit horizon. Therefore, the government departments for creating incentive schemes will

need to build up the skills to very precisely calculate the level of subsidies or state aid that is

required in order to create an investment environment that at the same time incentivizes the

companies while not creating undue windfall profits out of public budgets. It is encouraged to create

capacity building and training schemes that improves the administration’s facility to be an equal and

competent partner in negotiations with telecommunications network operators.

This can be supported by creating more elaborate guidelines and check lists that the administration

can use for its decision-making process. Most administrations, especially on the local level, and in

the EU as well as in China, will not be staffed with competent analysts able to select the appropriate

and suitable PPP scheme from the abundance of available possibilities.

However, the companies face a similar challenge. Negotiating investment and operation conditions

with public sector administrations requires a different set of know how than the regular private

sector business. There can be support in establishing intermediaries that help the companies

understand the legal and budgetary requirements of the local government entities, and allow them

to tailor-make PPP settings that accommodates all stakeholders’ needs in creative ways.

Due to the differing definition of universal service in China and the EU, the universal service policies

are hard to compare. This should not mean that this is no area of potentially beneficial cooperation.

At the end of the, regardless the wording, both sides seek to ensure that every citizen and resident

has access to high-quality communications infrastructure. This may be covered by a “broadband

rollout” policy package or under the headline of “universal service”, but the main part of the tasks

consists in ensuring that there are well-defined policy goals, rollout targets, available means to

support the goals, and institutions equipped with the necessary authority and independence to

ensure that the policy is implemented. How this will be set up institutionally will differ from region

to region, the way it also often differs between EU member states. Fundamental design principle,

however, can be very similar.

The policy and legal framework should also be specified. While the Chinese policy papers mention

the establishment of a universal service obligation and corresponding universal service fund, the

specifics of this have not been formulated and legalised. How, for instance, an operator to serve a

certain region should be chosen, how the operator should be compensated for supposed deficits of

service provision, and how this deficit compensation should be calculated and raised-are all details

not yet specified. The current initiative of allowing private sector investment in the

telecommunications sector also plays a part here, as it widens the possible foundation of capital

investment in new infrastructure. Also here, the details are not yet clear, however.

On the EU side, such Universal Service provisions are in place and there is a range of options

available to member states’ regulators. However, the vast majority of member states does not make

use of the universal service instrument, and the EU level did specifically exclude broadband quality

internet access from the scope of legitimate universal service obligations. The EU’s approach rather

178

focuses on increasing incentives for the operators to widen network coverage and modernise

existing networks. Still, there is an existing and vast documentation of the previous decades of policy

discussions about universal service design, which can be of benefit to countries seeking to introduce

such measures.

179

IV. OTT and Telecoms Operators – Redefining Relationship and Dealing with Network Neutrality

1 Relationship between OTT and basic telecom enterprises in China In recent years, a great number of Internet enterprises in China are committed to providing OTT

services, and OTT services are showing a booming trend. Presently, OTT services can mainly be

divided into instant messaging, Internet TV, app stores and so on. Among them, communication

products represented by WeChat are fastest-growing OTT businesses posing most serious impact on

the basic telecom enterprises, which bring the telecom operators into the predicament that text

messaging and voice services are gradually replaced. In this regard, the relationship between

telecom operators and OTT services has experienced the change from passive response to active

adjustment. By looking at their competitive positions and advantages, China Telecom and China

Unicom have started to cooperate with Internet companies, and China Mobile has launched

integrated businesses through its own reform.

1.1 Current development of OTT services in China

(1) Instant messaging (IM)

China's mobile instant messaging services have been developing rapidly in recent years, with the

number of users currently exceeding 800 million, becoming one of the most important and most

popular applications in the mobile Internet sector in China. WeChat launched by Tencent has

developed into the OTT instant messaging platform with the largest number of users. WeChat was

born in January 2011, and its functions have been expanded from the initial free sending of text

messages, pictures and videos information to voice calls, group chat, circle of friends, games, smilie

shops, payment by WeChat and WeChat malls. WeChat has become a kind of application software

with fastest-growing users in the history of the Internet. According to the 2014Q3 financial report

published by Tencent, WeChat’s monthly active users have reached 468 million, and over 1 billion

text messages, 20 million images, 300 million voice messages and 400,000 video messages are sent

per day through WeChat.

180

Growth of WeChat’s monthly active users in 2013Q1-2014Q2

To take the first chance in the mobile Internet portals, WeChat has integrated a number of Tencent’s

products to build its business ecosystem. Presently, WeChat has four main business properties,

namely communication property (one to one, or many to many), social property (information

dissemination via circle of friends), media property (public account information push), and O2O

entrance (LBS entrance, Internet applications entrance, WeChat payment etc.). In addition, in

November 2014, Tencent has separately launched the new free call application “WeChat Phone

Book” (network calls via WiFi, 3G and 4G).

(2) OTT TV

Presently, the OTT TV industry chain has been gradually formed in China. The Operation

Requirements for Institutions Holding Internet TV Licenses71 issued by the State Administration of

Radio, Film and Television (SARFT) (No. 181 Document) provides that the radio, film and television

institutions that have obtained the license for Internet content services shall be responsible for

providing and regulating the content terminals; the radio, film and television institutions that have

obtained the license for integrated businesses shall be responsible for the broadcast platforms; and

the contents input terminals - smart TV and smart TV top boxes have gradually become mature and

must cooperate with the operators that have obtained the license for integrated businesses and can

only be implanted into an operator that has obtained the business license. At present, only 7 license-

holding Internet TV operators in China such as CNTV, BesTV, Wasu and LeTV are eligible for

integration of Internet TV contents, which is the only export for OTT TV video contents. In the whole

industrial chain, due to the regulatory policy, the license-holding operators are in the core position

and able to integrate upstream and downstream resources and have the natural platform

advantages. The relations in the industrial chain of OTT TV are shown below:

71

On October 28, 2011, SARFT issued Operation Requirements for Institutions Holding Internet TV Licenses (No.

181 Document) to detail the requirements for the management of Internet TV contents, operation, set-top box

terminals and other aspects.

181

Relations in the industrial chain of OTT TV

The No. 181 Document of SARFT specifies the licensing management system of the OTT industry in

China, so the Internet TV terminals (all-in-one machines and set-top boxes) need pre-installing the

broadcast control platform of the license-holding operators, and the leading license-holding

operators such as BesTV and Wasu Media thus obtain the terminal advantages. At present, the parc

of Internet TV terminals in China is about 40 million units, and Internet TV sets account for over 60%

of flat-panel TV sales. Internet TV terminals are rapidly spreading in China, and it is expected that by

2016, the Internet TV terminals will exceed 100 million units.

(3) APP Store

At present, China is the world's largest market for Android applications and the world's second

largest market for WP applications and will continue to lead the growth in the global mobile

application market. Through competition and market integration in recent years, the number of app

stores in China has reduced, but is still more than 100. There are over 10 large-scale app stores with

over 100,000 on-line apps and there are numerous app stores with on-line apps less than 50,000. In

the next few years, large-scale app stores represented by 360, Baidu and Tencent will gradually

compress the development space of small and medium app stores. Although China's app stores and

application market are growing very fast, they are still facing the challenges in the serious issues

such as security mechanism, personal information protection and technical monitoring measures.

1.2 Impact of Internet OTT services on traditional telecom industry

(1) OTT services are accelerating to replace the traditional telecom services

OTT services are replacing traditional telecom services, especially for short message services. In the

meanwhile, some OTT service providers have launched free international roaming call services,

which may also cause some impacts on international roaming services of traditional telecom

operators.

According to the data released by MIIT, the number of mobile SMS and MMS messages continues to

decline. Impacted by OTT services, the number of mobile SMS messages in the whole country was

CP/content provider

SP/business

provider

Terminal provider

License co-operator

Cooperative

operator

Technical support provider

User

ISP service provider

182

572.56 billion pieces in the first three quarters of 2014, down 17.9% compared to the previous year.

Among them, the number of P2P SMS messages positively initiated by mobile users declined by 19%,

a decrease of 0.2% over January-August, its proportion in mobile SMS messages fell to 47.9%, down

0.5% over the end of the previous year, indicating a further weakening role of short messages as a

communication tool among users. The number of MMS messages was 47.97 billion pieces, down

29.8% year on year and 0.3% over January-August, and WeChat and other new instant messaging

applications continue to replace MMS. The average monthly numbers of P2P SMS and MMS

messages per user were only 38.2 pieces and 2 pieces respectively, among which the monthly

average P2P SMS messages per user declined by 9.3 pieces, and the mobile messaging revenues fell

by 14.1%. WeChat and WeChat monthly active users sent 9 billion pieces of messages per day, much

higher than the number of China Mobile’s P2P text messages sent per day.

Number of monthly mobile SMS messages and revenue growth during 2013-2014

In voice services, OTT service providers’ real-time voice calls and free cross-border international

roaming calls have also caused impact on traditional voice services of the operators. According to

the data released by MIIT, as the growth of mobile phone users is slowing down and the Internet is

gradually replacing voice and short message services, the duration of outgoing mobile calls in the

whole country during January-September was 2198.94 billion minutes, up 1.8% over the previous

year, down 0.3% over January-August and down 3.4% over the same period last year. The monthly

average contribution of mobile voice services per user continued to decline, the MOU value of

mobile local outgoing calls was 149.5 min/month · user, and the MOU value of mobile outgoing long-

distance calls 45.6 min/ month · user, down 6.1% and 4.8% respectively over the same period last

year.

183

Growth of monthly mobile voice services and mobile subscribers during 2013-2014:

(2) Occupying network resources may affect the quality of normal communications in some hot-

spot areas

OTT message services have the business features of low rate, strong abruptness, less data and long

online time. When the intelligent terminals in a network take a large proportion, the signaling load

of wireless network will be significantly increased and thus increase the pressure on the network

operators and construction costs and even lead to paralysis of the operator's network in a severe

case. According to China Mobile’s monitoring, WeChat contributes 10% of the traffic to China Mobile,

but it takes up 60% of the signaling. In some hotspot areas, this may affect the quality of user's

normal communications.

(3) OTT services also help the transformation of telecom enterprises

While the rise of OTT services brings impact on SMS, MMS, voice calls and other traditional services

of the telecom operators, it has raised mobile users’ demand for data traffic. The total volume and

revenue of telecom businesses generally keep a steady growth, but the focal points of business

growth have shifted from voice to data traffic.

Mobile Internet access traffic maintains rapid growth. According to the data released by MIIT, during

January-September, mobile Internet access traffic reached 1.399 billion G, an increase of 57.2% year

on year and 1% over January-August, and an increase of over 55% for four consecutive months. The

average monthly mobile Internet access traffic per user reached 186.5M, an increase of 48.8%. As

the main driving factors, mobile Internet traffic reached 1.196 billion G, an increase of 93.1% year on

year, and the average monthly Internet traffic exceeded 130 million G.

184

Comparison of monthly mobile Internet access traffic and average traffic per user during 2013-2014

1.3 Competition between the telecom operators and OTT enterprises

“Cooperation + competition” has become the main trend of the relationship between telecom

operators and OTT enterprises. With the increasingly serious impact of OTT services on the

traditional telecom industry, after experiencing fierce debate between the operators and Tencent on

whether WeChat should be charged, the basic telecom enterprises and OTT enterprises are currently

shifting from controversy to cooperation and competition and from relying on voice messaging to

traffic management. The basic telecom enterprises are positively taking appropriate measures to

deal with OTT services.

(1) China Unicom: fostering strengths and circumventing weakness to achieve win-win

cooperation with OTT service providers

In July 2013, WeChat and Guangdong Unicom joined hands to launch the Unicom WoCard, which

allows users to enjoy 300M WeChat directional traffic in a 10 yuan package. WeChat WoCard

services performed strongly and attracted nearly a million users in a month after it was put into use,

while China Unicom added 3.85 million 3G users totally in July throughout the country. Later,

Guangxi Unicom and WeChat jointly launched the WeChat WoCard. In June this year, Hunan Unicom

launched the WeChat WoCard targeted at post-90 persons and it was widely received by college

students due to preferential charges and wide applications. WeChat WoCard services are gradually

promoted throughout the country.

OTT has become the trend of industrial development, so the operators should adapt to market

changes and jointly develop new business models through fine traffic management to make up for

the decline of SMS and voice revenues. China Unicom made use of its 3G network and good service

basis to cooperate with WeChat to achieve a win-win situation that not only helps WeChat but also

expands its business through WeChat’s huge number of users.

(2) China Telecom: positive response and deep participation in operation of OTT services

185

China Telecom and NetEase joined hands to launch EaseCredit. In the meanwhile, it has made use its

own advantages as an operator and launched the free traffic plan for the three networks. Recently,

EaseCredit 3.0 Preview Version launched a free call function – “dedicated line” to respond to the

WeChat phone book launched by WeChat. The “dedicated line” is a kind of intelligent network

services, in which a third party is dialing the calling and called numbers and finally completes the call

connection. As the cost for answering a phone call is far less than that for making a phone call, this

kind of services is widely used in international long distance service roaming, government and

enterprise services and other services needing to reduce call costs. Unlike WeChat phone book’s

network calls that consume traffic, EaseCredit realizes true free charge for calls.

Through providing stimulus to different levels of activities for users, EaseCredit can not only enhance

user viscosity, but also stimulate users to use more functions of EaseCredit. This is an important step

the operator has made in transition to the Internet. Under the dual pressure of OTT’s involvement

and non-availability of 4G license, the operator has taken the first step in attempting free voice

services via EaseCredit under the background of free voice services of the global mainstream

operators.

(3) China Mobile: conducting self-reform and preparing to launch “converged communications” to

respond to OTT

China Mobile has ever launched FlyChat, jego, Fetion and other services similar to WeChat, but

ultimately failed to achieve the desired effects due to their inability to be timely upgraded, poor user

experience and lack of differentiation and special characteristics. Earlier this year, China Mobile

joined hands with Samsung, Sony, Huawei and many other terminal partners and intends to launch

“converged communications” services. Converged communications is to upgrade original phone calls,

messages and contacts to new calls, new messages and new contact. Users can directly send text

messages, pictures, location and other communication functions without the need to install other

apps. For example, the integrated new message function can directly send text messages, pictures

and other contents via the message interface of mobile phone, which means free text messaging.

China Mobile is “upgrading” its text message to “WeChat” and shifts to traffic operation from

reliance on voice messaging services. The service is expected to achieve commercial trial in the

fourth quarter of this year and achieve full commercial operation in 2015.

Presently, China Mobile's converged communications business has entered the final phase of charge

system design and will support the two user payments modes of pre-payment and post-payment.

Users just need to select specific packages, but there will be no previous restrictions on the number

of text messages and charges after exceeding. At the early stage after China Mobile’s converged

communications business is put into operation, it will temperately not support the

intercommunication with users of China Telecom and China Unicom.

186

2 Analysis China: Relationship between OTT and the basic telecom operators

Unlike the neutral attitude and sensitivity of the developed countries in America and Europe

towards the networks, China is showing some concern and tracking network neutrality, but this has

not yet become a hot spot of public opinions. The most important thing is how to make broadband

more widely available and need lower access fees, and the three operators are committed to this. In

the past two years, WeChat has a huge impact on the basic telecom operators and there were fierce

debates among the operators and Internet companies on whether WeChat services should be

charged. How to strike a balance in the relationship between the basic network operators and the

Internet service providers will become a long-term challenge in future development in China. Facing

the convergence and competition in businesses, we should fully identify the upstream and

downstream competition, mutual businesses and market impact of the basic telecom enterprises

and Internet enterprises and explore to formulate new market competition regulation rules,

regulate market behaviors and promote rational division of labor and win-win cooperation in the

industry chain.

2.1 Relationship between OTT enterprises and basic telecom enterprises

In early 2013, due to the huge impact of WeChat and other OTT services on the operators’ most

profitable voice and test message services, the operators and the Internet company Tencent carried

out a fierce debate on “whether WeChat should be charged”. The operators believe that as WeChat

and other similar OTT services occupy a large amount of signaling resources in the process of their

use, resulting in a heavier burden on the operators’ network, and the operators are unable to

balance the network costs with traffic charges from end-users, so they need to charge extra fees

from OTT services like WeChat to compensate for the decline in their incomes. Based on the

principle of network neutrality in the world, the providers of OTT services like WeChat hold that the

Internet should be open and equitable, so they should not pay additional fees to the operators. The

framework of the existing telecommunications market competition rules was established in the

voice era and mainly target for the basic telecom operators, so there is no relevant legislation for the

principle of “network neutrality”. Later, MIIT as the business regulatory department took its stand

on this issue: First, MIIT encourages and supports innovative development of the Internet and

mobile Internet, including WeChat, and WeChat is one of most innovative products of the Internet

companies in China. Second, whether new Internet and mobile Internet services should be charged

should be determined by the market. Since WeChat was launched in 2011, whether the business

should be charged or how it should be charged has been decided by its operator based on market

conditions, the government did not intervene and MIIT will adhere to this principle in future. The

controversy between the operators and OTT enterprises has shifted to cooperation and competition,

and the operators are actively taking measures to deal with the impact of OTT services on their

businesses.

On November 11, WeChat released its free Internet calls- WeChat Phonebook (VoIP), which allow

WeChat users to make calls via Wi-Fi, 3G and 4G networks with high call quality in the fixed network

environment, but if the caller's position changes, the mobile network environment will switch from

Wi-Fi to 3G, 2G and other mobile networks, or the call will be interrupted for 5-10 seconds or even

187

directly hang up when experiencing network congestion. Before the release of WeChat Phonebook,

WeChat and QQ mobile apps have already possessed voice phone functions. WeChat Phonebook is a

standalone app, which is more convenient to operate and associated with the address book and

WeChat friends, with 500 million WeChat users. Due to the previous “WeChat charging” event,

Tencent took a cautious, low-key attitude to its promotion. Coupled with the previously mentioned

WeChat Phonebook as a VoIP app, it will not have much impact on the operators in the short term.

Therefore, the operators were relatively indifferent, but later China Telecom and NetEase jointly

released the EaseCredit 3.0 preview version with free call function – “dedicated line” to cope with

the release of WeChat Phonebook. But once WeChat Phonebook becomes popular, the network

neutrality debate on “WeChat will reappear.

2.2 Discussion on supervision of the Government over OTT services

The impact brought by rapid innovation and development of OTT services has also posed new

challenges to the regulator of the telecommunications industry. First, it is more difficult to

coordinate the balanced development between the old and new market players. VOIP, mobile

instant messaging, Internet video and other OTT services continue to squeeze the development

space of traditional telecom operators and radio and TV broadcasters, and the rapid development of

OTT services has aggravated the telecom operators’ problem of “no addition income for additional

businesses”. This has doubled the network expansion investment pressure, so the telecom operators

are calling for the regulators to allow them to differentiate the charges of traffic of OTT services or

charge extra fees. Second, the regulatory boundaries are increasingly blurred. The development of

OTT and other Internet services has blurred the regulatory boundaries. For example, WeChat has

converged game center, WeChat payment and other new functions on the basis of social apps and

has gradually developed into a comprehensive information service platform integrating instant

messaging, social recreation, public services, e-commerce and financial payment. This requires that

the original sub-sector regulatory model must make positive adjustments, expand the existing

regulatory functions and delineate the regulatory boundaries to adapt to the regulatory needs for

converged services. Third, network and information security risks increase. Some OTT services

provide the functions such as uploading mobile phone contacts and collecting and mining user

information, which may lead to disclosure of users’ privacy information. In addition, mobile instant

messaging services provide multimedia transmission modes such as voice and images and are able to

achieve cross-border service provision, but due to the lack of mature regulatory mechanisms like

those for traditional telecom services, this is likely to cause the spread of harmful information such

as pornography, gambling and drug abuse and even information threatening the national security.

With regard to administration of Internet information services in China, MIIT is currently carrying out

the whole-process management of Internet information services, including advance admittance,

supervision in the act and punishment after the act, based on the Telecommunications Regulations,

Measures for the Administration of Internet Information Services, Measures for the Administration of

Recordation of Non-operational Internet Websites and other laws and regulations. But there is

currently no appropriate regulatory law or policy for OTT and other similar new services. To solve

the problem of lack of regulation over the telecommunications industry, we should pilot new

management modes to strengthen the management of telecommunications operators to provide

188

the basis for management of rapid-growing new services such as WeChat, micro blogging and mobile

QQ. In May 2013, MIIT promulgated Measures for the Administration of Piloted New

Telecommunications Businesses (Draft for Comments) and sought public comments on it. According

to the Measures, MIIT will strengthen the administration of new telecom services, including WeChat

and micro blogging. Meanwhile, as the security, privacy and other problems with WeChat and other

OTT services are increasingly serious, MIIT is actively exploring how to strengthen supervision over

these services. In July 2013, MIIT promulgated Provisions on Protecting Personal Information of

Telecommunications and Internet Users to further improve the system for protecting personal

information of telecommunications and Internet users.72

In August 2014, the State Internet Information Office73 (hereinafter referred to as “the Info Office”)

promulgated the Provisions on Administration of the Development of Public Information Services of

Instant Communication Tools74, which requires that instant communication tool service providers

should register accounts after certifying true identity information in accordance with the principle of

“background real name, foreground voluntary”. The regulatory goal of the Provisions is public

accounts, especially customized mobile APP that can widely disseminate information, and it intends

to purify the Internet environment, curb rumors and regulate instant messaging. In the future, the

public accounts for registering WeChat and other instant communication tools shall be subject to the

true identity authentication, and the public accounts for publishing and forwarding political news are

required to obtain relevant qualifications.

Internet enterprises are also strengthening their self management in protection of network and

information security and user rights. In terms of protecting user privacy, when a user is using

location-related services, WeChat will prompt the user and can only proceed after gaining the

consent of the user; users can clear their location information to protect their personal privacy; for a

72

The Provisions, based on MIIT’s management responsibilities for the telecom and Internet industry, specifies

MIIT’s scope of management of users’ personal information, which means a user's name, date of birth, identity

card number, address, telephone number, account number, passwords and other information with which the

identity of the user can be distinguished independently or in combination with other information, as well as the

time and place of the user using the service and other information as collected by telecommunications service

operators and Internet information service providers in the process of providing services. 73

The State Internet Information Office established in 2014 is committed to network information management. Its

main responsibilities include: planning and construction of key news websites and organizing and coordinating

online publicity work; investigating and punishing illegal websites according to laws; guiding the relevant

departments to urge telecom operators, access services companies, domain name registration and domain name

registration of service agencies, assigning Internet addresses (IP addresses), website registration and recording,

access and other basic Internet management work. It guides the relevant departments in China for Internet

management to carry out work within its scope of responsibilities.

74Article 7 of the Provisions provides that: the public accounts established by instant communication tool service

users for being engaged in public service activities shall be reviewed by instant communication tool service

providers and reported by instant communication tool service providers to the competent departments for Internet

Information contents recording. Party and government organs at all levels, enterprises, public institutions and

people's organizations are encouraged to establish public accounts to serve economic and social development

and meet the demands of the public.

189

user with potentially malicious behavior, the system will automatically intercept it when it greets

and remove it from the list of “persons nearby”; it allows users to report malicious users and inputs

enormous efforts to distinguish and delete the information like rumors. Meanwhile, in the chatting

process with WeChat, a number of security prompts are set up for users, including encrypted

transmission of chat information among friends; the intelligent analysis module is equipped for

sensitive chat contents and provides warns against finance-related information to the party

receiving the information.

2.3 Suggestions on development and regulation of OTT services

OTT services have become a strong force in the development of the telecommunications industry,

and its impact on the development of the telecommunications industry and the resulting regulatory

challenges are the issues requiring a high degree of attention and intensified research of the world's

national telecommunications regulatory agencies. It is suggested that we should strengthen research

on development and regulation of OTT services from the following aspects.

First, create an ecological environment promoting innovation and positive interaction. On the one

hand, we should encourage Internet companies to continuously make innovations and introduce

more new business functions to meet different needs of users. On the other hand, we should create

a positively interacted development environment to balance the harmonious development between

telecommunications operators and OTT service providers. The explosive growth of traffic of OTT

services does not match with the revenue growth of the telecom operators brought by them, and

OTT and other mobile instant messaging services have become alternatives to traditional basic

telecom services, causing impact on the network expansion and sustainable healthy development of

the telecom operators, so the telecommunications regulators should design related mechanisms and

take effective measures to balance the development relationship between them and form a benign

interaction and development pattern.

Second, improve the right protection mechanisms for OTT service users. OTT services have certain

network and information security risks and may lead to disclosure of users’ privacy information, so

the telecommunications regulators nationwide should continue to improve relevant laws and

regulations to protect users’ personal information. In addition, the regulators should prevent the

spread of harmful information such as pornography, gambling and drug abuse and even information

threatening the national security.

190

3 European Union Market Players and Competitive Relationship

3.1 OTT-Providers as new Players in the Telecom and IT Markets

The emerging information society that allowed the access of increasing amounts of customers to

high-speed internet in the past few years has led to an explosion of new services in the World Wide

Web. These services can be offered on the market without ownership of the telecommunications

network. Those so-called Over-The-Top (OTT)-Providers 75 are a novelty in the history of

telecommunications markets. The services and offers of these OTT-Providers are popular, causing

high traffic in communication networks. Globally, only a few OTT-Providers are economically

successful. Among them are American internet giants like Google with You Tube or Facebook with

WhatsApp. It’s important to note right from the beginning of this paper that the European markets

are dominated by these foreign providers. European entrepreneurs did not manage to build up a

European search engine or social network with a relevant market share. This seems to be a unique

situation worldwide. Even in Russia or Korea national search engines or social networks developed.

Asian internet companies play a minor role in Europe.

In Chapter I we will give a broad overview on the important Telecom and OTT players in the

European markets. Moreover, their competitive relationship and the counter-measures taken by the

telcos will be described. Chapter II and III focus on the policy debate on the OTT phenomenon. We

will stress in detail on the net neutrality debate. This debate got wide attention in the general public

of Europe and it outcome is still open.

It is worth mentioning that finding reliable data on the market situation of OTT providers is very

difficult - if not impossible. So far, there is no systematic census of neutral data concerning OTT by a

national regulatory authority or the European Commission. Most of the information comes from the

TC providers or from their consultants. However, most of the studies are costly. We did not have

access to them. So we must rely on internet sources or information provided by telcos.

There are legal reasons for this unsatisfactory situation. In Europe, access to data will only be given

based on a specific legal basis. However, the existing legal rules for collecting data from the

companies do not apply to OTT-providers. Therefore, the Body of European Regulators for Electronic

Communications (BEREC) requests the European Commission to extend the current regulatory

framework so that the data collection authorization can be extended to OTT-markets.76

75 The OECD defines the OTTs as „video, voice or other services provided over the internet

rather than solely over the provider’s own managed network” in OECD Communications Outlook 2013, p. 20.

76 BEREC, Commission Recommendation on relevant Product and Service Markets susceptible to ex ante Regulation, June 2014, BoR (14) 71, p. 9.

191

3.2 Most important Telcos and OTT-Providers in Europe

3.2.1 Telcos

77

In the following, the three biggest telecommunications providers – which also belong to the top 10

worldwide – will be introduced.

• Telefónica S. A.

The Spanish stock company Telefónica S. A., founded in 1924 and based in Madrid, mainly

operates in Europe and Latin America.78In 2013 the company served 323.1 million customers,

2% more than the year before.79In contrast, revenues declined by 8.5% from EUR 62.356

billion to EUR 57.061 billion.80

• Deutsche Telekom AG

Deutsche Telekom s revenue amounted to EUR 60.1 billion in 2013, which is an increase of

3.4% compared to the year before.81Nevertheless, the amount of customers served by the

Deutsche Telekom is comparatively low at approx. 191 million. 14.5% of the company is

77 ETNO, Annual Economic Report 2013, p. 27, available at:

https://www.etno.eu/datas/publications/economicreports/ETNO_Financial_Report_2013_Def-Lands.pdf; furthermore the annual reports of different companies.

78 Cp.http://www.telefonica.com/en/about_telefonica/html/geographic_spread/clientes.shtml 79 Telefónica, Annual Report 2013, available at:

http://annualreport2013.telefonica.com/sites/default/files/documentos/TELEF_Informe%20Integrado%20ENG%20%2803_07%29.pdf

80 Ibid. 81 Deutsche Telekom, Geschäftsbericht 2013, available at:

http://www.geschaeftsbericht.telekom.com/site0413/de/lagebericht/das-geschaeftsjahr-2013-im-ueberblick/index.php

0 10 20 30 40 50 60 70

Telefónica (Spain)

Deutsche Telekom (Germany)

Vodafone (UK)

Orange (France)

Telecom Italia (Italy)

BT (UK)

Telenor (Norway)

KPN (Netherlands)

Telia Sonera (Sweden)

SFR (France)

The Top 10 European Telcos measured by their revenue in 2013 (EUR bn)

revenue in 2011 (EUR bn)

revenue in 2013 (EUR bn)

192

owned by the Federal Republic of Germany, The Kreditanstalt für Wiederaufbau (KfW) owns

a further 17.4% of the stock.82

• Vodafone Group PLC

The Vodafone Group is the telecommunications provider with the highest number of

customers (approx. 404 million). It is a Public Limited Company from the United Kingdom,

operating worldwide. It focuses on the markets in Europe, the Middle-East, Africa and the

Asia-Pacific region.83Like Telefónica S.A., the Vodafone Group suffers from a decline in sales

– in 2014 revenues decreased by 1.9% to approx. EUR 55.52 billion (£ 43.6 billion) compared

to annual accounts in 2013.84

3.2.2 OTT-Providers

The top ten OTT-players in Europe are listed in the following chart. It is important to note, that only

American companies play a role in the European market.

85

Currently, instant messaging services as well as video telephony and video-on-demand

services are subject to public debate. These services are provided by different players.

However, the American “hyper giants” are active in all of these three markets.

82 Telekom, http://www.telekom.com/aktionaersstruktur 83 Vodafone, http://www.vodafone.com/content/index/about/about-us/where.html 84 Vodafone, Annual Report 2014 p. 3, available at:

http://www.vodafone.com/content/annualreport/annual_report14/downloads/full_annual_report_2014.pdf

85 Data based on http://de.statista.com

0 100 200 300 400 500 600

Twitter

LinkedIn

Netflix

ebay

Amazon

Facebook

Microsoft

Google

Apple

The Top 10 OTT-Player in Europe measured by market value 2014 (in bn USD)

The Top 10 OTT-Player in Europe measured by market value (in bn USD)

193

Short Messaging Services

OTT-short messaging services compete with the short messaging services on mobile phones.

• WhatsApp

WhatsApp is the largest short messaging service in Europe. The company was founded by

two former Yahoo employees in November 2009 in California. The service was originally

developed for the Apple iPhone. Support for other platforms was subsequently

implemented. In 2014, Facebook Inc. took over the service for about 19 bn. USD.86 In

October 2014, the European Commission expressed that there would be no competition

concerns regarding the takeover.87

WhatsApp offers the possibility of sending texts, pictures and video or audio messages via

Internet. After the first year there is an annual charge of 0,89 €.

WhatsApp currently has more than 600 million active users,88making it the leading short

messaging service provider worldwide.89In comparison, WeChat, the leading Chinese short

messaging service in Asia, had about 438 million active users in 2014.90 WhatsApp gained 45

million users in Europe alone in 2013.91The service has remarkably high market penetration

rates in Spain (74%), Germany (61%) and Italy (56%).92

86 http://newsroom.fb.com/news/2014/02/facebook-to-acquire-whatsapp/ 87 http://europa.eu/rapid/press-release_IP-14-1088_en.htm 88 http://de.statista.com/statistik/daten/studie/285230/umfrage/aktive-nutzer-von-whatsapp-

weltweit/ 89 http://www.forbes.com/sites/parmyolson/2014/08/25/whatsapp-hits-600-million-active-

users-founder-says/ 90 http://www.forbes.com/sites/parmyolson/2014/08/25/whatsapp-hits-600-million-active-

users-founder-says/ 91 http://de.statista.com/statistik/daten/studie/299727/umfrage/nutzerwachstum-von-

whatsapp-nach-regionen-weltweit/ 92 http://de.statista.com/statistik/daten/studie/299740/umfrage/anteil-der-whatsapp-nutzer-

an-allen-mobilen-internetnutzern-weltweit/

194

The company does not disclose its exact sales figures. Holly Magister (Forbes) considers a

turnover of around $ 400 million to be possible.93 Currently the service is and shall remain

free of advertising.

• Twitter

Another short messaging service provider is the platform Twitter. The service allows its users

to publish short messages (140 characters) to a group of “followers” or to a single person.

Twitter was founded in April 2007. Its IPO in 2013 was very successful. The issue price was

$ 26. A closing price of $ 44,90 was achieved.94

The company’s turnover increased from $ 106,313 million in 2011 to $ 664,890 million in

2013,95 without yet reaching the break even point.96 The service generates around 89% of its

income with advertisement on the platform itself.97

Not only does the turnover increase but also the monthly amount of active users. By end of

2011 Twitter had around 117 million active monthly users whereas in the third quarter of

2014 the service already had around 284 million monthly users. 98 Nonetheless, the

discrepancy between registered and active users is exceptionally high.99

• Apple iMessage

The in-house short message service of Apple Inc. iMessage is available since October 2011.

In 2012 the company declared to have 140 million users.100It features an end-to-end

encryption.101

• Facebook Messenger

Facebook Messenger is part of the social network of the US-American Facebook Inc. The

service is available as a mobile phone app since August 2011. The service enables its users to

93 http://www.forbes.com/sites/hollymagister/2014/02/21/whatsapp-19-billion-secret-

formula/ 94 http://www.handelsblatt.com/finanzen/aktien/neuemissionen/twitter-boersengang-die-

neue-aktie-startet-furios/9045588.html 95 Twitter, Annual Report 2013 p. 41, available at:

https://investor.twitterinc.com/common/download/download.cfm?companyid=AMDA-2F526X&fileid=742484&filekey=A418947A-E065-4822-8BD4-00FA8EB4E795&filename=Twitter_2013_Annual_Report_-_FINAL.pdf

96 Ibid. p. 19; cp. http://www.handelsblatt.com/finanzen/aktien/neuemissionen/twitter-boersengang-nutzerwachstum-bedeutet-nicht-automatisch-gewinne/9045588-2.html

97 Twitter, Annual Report 2013 p. 14; cp. http://www.bbc.com/news/business-24397472 98 http://de.statista.com/statistik/daten/studie/232401/umfrage/monatlich-aktive-nutzer-von-

twitter-weltweit-zeitreihe/ 99 http://www.cbsnews.com/news/many-twitter-users-dont-tweet-finds-report/ 100 http://techcrunch.com/2012/06/11/imessage-has-more-than-140m-users-and-has-150b-

messages-over-1b-a-day/ 101 http://www.apple.com/apples-commitment-to-customer-privacy/

195

send messages to other app users or other Facebook users.102 The chat feature previously

integrated into the facebook app has been disabled. This is why short messages are now

exclusively sent via Facebook Messenger.103 The service already had more than 200 million

monthly active users in 2013.104 In comparison to the amount of users in 2011 (56,7 million

monthly active users) their number increased more than five times.

Internet Telephony

Presently, OTT-Voice-over-IP-Players replace more and more classical voice phone calls. This

is a severe attack on a traditional business model of telecommunication companies.

• Skype

Skype took up business in 2003. The company Skype Technologies S.A. was incorporated by

eBay Inc. for EUR 3.1 billion. In 2011 the US-American software giant Microsoft Inc. bought it

for $ 8.5 billion.105

By the time of the incorporation by Microsoft Skype had revenues of around $ 800 million, in

2012, as a part of Microsoft Inc. already approx. $ 2 billion (numbers include Lync).106

Customer base also increased in the past few years – 170 million users in 2011 face 300

million users in 2013.107 Skype-usage is said to amount to a third of the worldwide telephone

traffic.108 According to poll ratings, Telcos had to pay $ 100 million per day for Skype in

2013.109

• Viber

Viber was first released in 2010. It unites instant messaging and voice-over-IP for mobile

phones. With only 250 kilobytes of data per call per minute it is less traffic intensive than

other VoIP services.110

The service is currently developed by the company Viber Media, which was bought by the

Japanese online trader Rakuten for $ 900 million in January 2014.111 Viber shows a rapid

102 https://www.facebook.com/notes/facebook/a-faster-way-to-message-on-

mobile/10150249543542131 103 http://techcrunch.com/2014/04/09/facebook-messenger-or-the-highway/ 104 http://www.huffingtonpost.com/sam-fiorella/the-insidiousness-of-face_b_4365645.html 105 http://www.microsoft.com/de-de/news/pressemitteilung.aspx?id=533433 106 http://www.bloomberg.com/news/2013-02-19/microsoft-s-skype-unit-approaching-2-

billion-in-annual-revenue.html 107 http://www.techradar.com/news/internet/voip/skype-turns-10-did-microsoft-s-bet-pay-off-

-1176537 108 http://www.techradar.com/news/internet/voip/skype-turns-10-did-microsoft-s-bet-pay-off-

-1176537 109 Mobile squared, OTT Services Blow Up the Mobile Universe. Operators Must Act NOW!,

2013 p. 5, available at: https://www.tyntec.com/fileadmin/tyntec.com/whitepapers/Whitepaper_Operator-survey-OTT-blows-up-mobile-universe.pdf

110 http://voip.about.com/od/mobilevoip/a/Skype-Vs-Viber.htm

196

growth in customer amount. The number of users more than tripled between 2011 (90

million) and 2014 (300 million).112 The monthly amount of active user accounts rose to

around 100 million.113 Until 2013, Viber Media did not make any revenues. This changed by

the end of 2013 due to charged additional services.114 The main services shall remain free.115

Viber Media recently caught attention because of its data pooling practice.116

• Apple FaceTime

The OTT-service Apple Facetime is an in-house video-phone-call service of Apple Inc., which

can only be used by the Apple system software. It was launched for the first time for iOS in

2010 and for Mac OS in 2011. By now, the application is preinstalled on all Apple products.

Statistical data for FaceTime is not available.

• Google Voice/Google Hangouts

The OTT-service Google Voice is the voice- and video-phone-call-service of Google Inc.

Outside of the US it can be accessed by Gmail-Accounts. Google Voice allows relatively

advantageously priced phone-calls to telephone numbers worldwide. Inside the US the

service is free. The main idea of the offer is to be reachable via a single “telephone” number

(provided by Google Inc.) on various terminal devices by voice-over-IP.117 Google Voice

offers all the features that are available on a classic mobile phone making mobile services

aside from internet access redundant. In 2007 Google bought the service for $ 95 million

from Grand Central, the initial amount of 570.000 daily users in 2009118 increased up to 3.5

million in 2013.119

Apple Inc. rejected a Google Voice application for its app store in 2009.120 After a proceeding

was initiated by the FCC, Apple Inc. released a customized version in 2010.121

Since September 2014 Google Voice features are integrated into Google Hangouts.122 Google

Hangouts is an instant messaging and video chat platform launched in 2013, which is

intended to centralize all communication services of Google Inc. At the same time, Google

111 http://global.rakuten.com/corp/news/press/2014/0214_04.html 112 http://www.businesswire.com/news/home/20140213006561/en/Rakuten-Acquires-Viber-

900-million#.VCq6LxCviCq 113 http://global.rakuten.com/corp/news/press/2014/0214_04.html 114 So that revenues of $ 1.5 million could be made. Cp.

http://global.rakuten.com/corp/news/press/2014/0214_04.html 115 http://www.forbes.com/sites/parmyolson/2013/05/07/free-calling-app-viber-jumps-to-

desktop-hits-200-million-users/ 116 http://www.zeit.de/2012/09/Telefonsoftware-Viber 117 http://www.nytimes.com/2009/03/12/technology/personaltech/12pogue.html?_r=0 118 http://www.zdnet.com/blog/btl/business-week-14-million-google-voice-users-global-push-

in-the-works/26813 119 http://www.wired.com/gadgetlab/2013/04/google-voice-future-uncertain/ 120 http://www.apple.com/hotnews/apple-answers-fcc-questions/ 121 http://www.ifans.com/blog/8480/ 122 https://plus.google.com/+CheeChew/posts/eaZ9wzPxtmm

197

Hangouts is part of the Google Inc. social network Google+. Reliable numbers of users are

not available.

OTT-Videos

• Importance

Video-on-demand-services have a special position among OTT-services. They provide

content that is generally protected by intellectual property rights. These rights have to be

acquired and respected for each European country individually. For a global acting company,

this can be an important obstacle to conquering a specific market.

In 2013, all Video-on-Demand-Services shared 2% of the total audiovisual market revenue.123

Consumption of internet videos is increasing worldwide. According to Cisco, by 2018 79% of

the entire bandwidth will be used by video traffic.124 In March 2014 streaming already had a

share of 39,4% of the European internet traffic (in North America the share even lies at

59,1%, in Asia Pacific at 47,1 %).125 In Europe, consumers mainly watch short videos,

whereas Asia has the highest demand for long videos.

• Netflix Inc.

Netflix is a US-American stock corporation located in Los Gatos (USA). Having started as a

DVD rental service by post, Netflix is currently one of the leading video-on-demand-

providers worldwide. The corporation shows continuous growth and has been able to

increase its sales from approx. $ 3.2 billion to approx. $ 4.4 billion during the last two

years.126 According to his own proclamation, Managing director (and co-founder) Reed

Hastings aims at a global market share of 33% by 2020. At the End of 2014, Netflix had about

50 million users, which is more than twice the amount of two years ago.127

Netflix predominantly provides TV series after their original broadcast and older movies.

Additionally, Netflix most recently became very successful with its own productions. For

instance, the series House of Cards enjoys great popularity worldwide. Netflix provides

individualized video recommendations based on analyzed user behavior, which has been

very well received. Only 9 % of Netflix consumers come from Europe.128 In its current annual

report, Netflix states risks for the company’s development – amongst others a lack of

regulatory protection for network neutrality and the strictness of privacy policies. 123 http://www.statista.com/statistics/292153/distribution-global-audiovisual-market-revenue-

by-source-and-region/ 124 Cisco, Visual Networking Index: Forecast and Methodology 2013 -2018, 2014, p. 2. 125 http://de.statista.com/infografik/2258/anteil-des-webbrowsings-am-festnetz-internet-

traffic-in-verschiedenen-regionen/ 126 Netflix, Annual Report 2013 p. 19, available at:

http://files.shareholder.com/downloads/NFLX/3479331597x0x748407/76a245dc-3314-401c-baba-ed229ca9145a/NFLX_AR.PDF

127 http://de.statista.com/statistik/daten/studie/196642/umfrage/abonnenten-von-netflix-quartalszahlen/

128 Statista 2014, Ranking der Top 10 Länder weltweit mit dem größten Anteil an allen Nutzern von Netflix.com im April 2014.

198

• Amazon Instant Video (Lovefilm)

Amazon Instant Video is an online video store and video-on-demand service by Amazon. It

features a physical rental service by post anda video-on-demand-service, which can be

classified as OTT. The platform emerged from the conversion of Amazon Prime and the

video rental service and video-on-demand-provider Lovefilm from London (which had

already been part of Amazon since 2011) in February 2014. At the moment, there are no

reliable numbers regarding the amount of consumers in Europe, since the data is only

published combined with the US-American parent company’s numbers. According to

Lovefilm, it has exceeded the two million user threshold at the beginning of 2012, the total

amount of Amazon Prime users (that have free access to the service) is estimated to lie at 20

million.129

• MyVideo Broadband S. R. L.

The video platform MyVideo is one of the biggest genuinely European video-on-demand-

services. The MyVideo Broadband S.R.L., seated in Bucharest, was founded in 2006 and has

been a subsidiary of the ProSiebenSat.1-group since 2007. The provider operates in

Germany, Austria, Switzerland, Belgium, the Netherlands and Romania. Because the

business-model is based in a gratuitous, ad-financed offer, the amount of customers is not

known – according to a statement of the Arbeitsgemeinschaft Online Forschung (AGOF) the

web-based portal had around 10 million unique users monthly in 2014.130 As MyVideo is part

of the ProSiebenSat.1-group, numbers are merged in the company’s annual report.

• Youtube

Youtube is the leading video-on-demand-provider on the European market in terms of

customer base. For instance, in 2011 74% of the Netherlanders and 55% of the French used

this OTT-service, in the United Kingdom Youtube users amount to 52% of web users and in

Germany the percentage is 48%.131Youtube is a gratuitous, ad-financed video portal, which

allows the upload of user-generated content. Therefore, it remarkably differs from the other

designated OTT-providers. The platformwas established in 2005 and incorporated by the US-

American Google Inc. in 2006. By its own account, it has more than 1 billion unique users

monthly. Reliable financial data for Youtube as part of the Google enterprise is not available.

Advertising revenues are estimated at $ 5.6 billion for 2013.132 This would mean more than a

129 Vgl. http://www.forbes.com/sites/greatspeculations/2014/01/09/re-evaluating-amazon-

primes-strength/ 130 AGOF, Internet Facts 2014-7 p. 25, available at:

http://www.agof.de/download/Downloads_Internet_Facts/Downloads_Internet_Facts_2014/Downloads_Internet_Facts_2014-07/07-2014_AGOF%20internet%20facts%202014-07.pdf?1f74f1

131 Statista, Statista Dossier 2014 – Youtube, p. 10. 132 eMarketer, http://www.emarketer.com/Article/Advertisers-Spend-560-Billion-on-YouTube-

2013-Worldwide/1010446

199

doubling of the revenues in the last two years and a worldwide market share in the

advertisement branch of 1.7%.133

3.3 Competitive Relationship between TC- and OTT-Providers

• Short Message Services

On smart phones, the trend is going from text message utilisation towards OTT-utilisation. The

amount of messages sent via OTT-services increases significantly as the charts below shows:

134

133 eMarketer, http://www.emarketer.com/Article/Advertisers-Spend-560-Billion-on-YouTube-

2013-Worldwide/1010446 134 IDATE, OTT Communication Services, 2014, p. 15.

200

The trend towards OTT-services can also be observed in the individual EU member states. As the

chart below shows, the Bundesnetzagentur registers a decline of text-traffic around almost one third

in its annual report of 2013 (37,9m messages) compared to 2012 (59,8m messages).135

135 Bundesnetzagentur, Jahresbericht 2013, p. 77.

201

136

Similarly, the UK has seen a decline in short messages in 2013 (152 million to 145 million), for the

first time since the service was introduced.137 Estimates put the use of OTT short messaging services

at 8 billion during the same period.138 The greatest decrease in text messaging revenue for Western

Europe is expected in Italy, with an estimated drop from $ 3.3 million yearly revenue in 2013 to 2.2

million USD in 2018.139

136 Ibid. 137 Cp. http://www.theguardian.com/technology/2014/jan/13/number-text-messages-sent-

britain-falls-first-time 138 Cp. http://www.theguardian.com/technology/2014/jan/13/number-text-messages-sent-

britain-falls-first-time 139 Cp. http://www.telecoms.com/197721/ott-app-use-undermining-sms-revenue/

0

10

20

30

40

50

60

70

2009 2010 2011 2012 2013

SMS sent in bn (Germany)

SMS sent in bn (Germany)

202

The chart above details the development of the share of mobile internet (light blue) and SMS (dark

blue) of all mobile phone revenues in Germany. The relevance of mobile internet has significantly

grown in last years, while SMS revenues lost much of its importance.

The gross turnover of OTT messengers for 2018 is predicted to rise to at least $ 60 billion.140 As a

result, telcos will continue to lose revenue. A study showed a loss of $ 25 billion for 2012 and a loss

of $ 34 billion for 2013 of a gross turnover of $ 120 billion.141 Prospects for 2020 even put this loss at

$ 86 billion.142 The OTT services will however not gain turnover at the same rate, due to their above-

mentioned low prices.143 Their high share in date traffic only reflects in comparatively low

turnover.144

140 http://www.trutower.com/2014/05/08/text-app-message-revenues-2018-juniper-research/ 141 http://www.theguardian.com/technology/2013/apr/29/app-messaging-damages-mobile-

text-revenues 142 http://www.theguardian.com/technology/2013/apr/29/app-messaging-damages-mobile-

text-revenues 143 Cp. http://www.theguardian.com/technology/2013/apr/29/app-messaging-damages-

mobile-text-revenues 144 http://de.statista.com/statistik/daten/studie/298645/umfrage/umsatzanteile-von-mobile-

messaging-und-instant-messaging-apps/

203

• Internet Telephony

Current data suggests a similar trend in the use of OTT internet telephony. The traffic of Voice over

IP services not operated by Telcos is rising, too:

145

29% of German households use Wifi connections for telephone calls by now while the average share

for the European Union is at 36%.146 This suggests a high probability of losses in revenue for

telecommunications providers.

According to their answers in a study, the majority of providers do not expect increasing revenue

from internet access services to cover the losses in telephony services.147 Gross revenue of OTT VoIP

service providers is estimated to reach between $ 14 and 100 billion in 2016, depending on market

development.148

Different OTT video telephony and VoIP services are increasingly merging into communication

platforms for multiple devices, thereby possibly obliterating other communication services. This

145 IDATE, OTT Communication Services, 2014, p. 14. 146 http://de.statista.com/statistik/daten/studie/194914/umfrage/nutzung-von-voip-in-eu-

staaten/ 147 ATKearny, The Future of Telecom Operators in Europe 2014, p. 3. 148 Arthur D. Little, Disruptiv Threat or Innovativ Opportunity? Scenarios for Mobile Voice OTT

2011, p. 3.

204

could especially render conventional mobile services unnecessary.149 It appears entirely possible,

that future generations of smart phones will communicate exclusively over OTT services, with telcos

only providing internet access for the devices.

• Videos

During the last years European telcos improved their IP-TV/pay-tv-offers. Their main competitors

used to be the cable and satellite operators offering pay-tv-packages. For both, competitive pressure

presently increased by OTT-videos-providers.150

Netflix is potentially seen as the most important competitor. Since late 2014 Netflix is expanding

throughout Europe. The corporation is no longer just active in the UK, the Netherlands, Denmark,

Norway and Sweden, but also in Germany, France, Austria, Switzerland, Belgium and Luxembourg.

The majority of Netflix consumers in Europe comes from the UK (2,850 million users), followed by

Sweden (800.000) and the Netherlands (700.000).151The most significant growth can be observed In

the Netherlands. The number of users has increased sevenfold within a year.152 It is hard to predict

how the market situation will develop in the next years.

3.4 Effects on Revenue

The revenues at the European market of telecommunication providers fell slightly by 1.8 % over the

last years according to an annual report of the European Telecommunications Network Operators

(ETNO).153 Looking at the IT-services only, the revenues increased slightly by 1.2%.154

149 Cp. Mobile Squared. OTT Services Blow Up the Mobile Universe. Operators Must Act NOW!

2013. 150 For the cable industry see Solon Survey of European Cable Communication 2014, 2014, pp. 8,

15, available at: http://www.solonstrategy.com/uploads/tx_soloncm003/Solon_Survey_of_European_Cable_Communication_2014.pdf

151 Digital TV Research, Newsletter December 2014 p. 16, available at: http://www.digitaltvresearch.com/ugc/press/106.pdf

152 Ibid. 153 ETNO, Anual Economic Report 2013, p. 13, available at: https://www.etno.eu/datas//publications/economic-

reports/ETNO_Financial_Report_2013_Def-Lands.pdf 154 Ibid.

205

155Simultaneously the OTT-provider were capable to increase their revenue growth to a remarkable

extent.

156

155 ETNO, Anual Economic Report 2013, p. 12. 156 Ibid., p. 15.

206

However, it is predicted that the OTT revenue share will hold a modest 6%. OTT will take over some

part of traditional telco services, but it will not be possible to take the same profit out of it.157

Furthermore, the user base of OTT-services exploded. This applies in particular to OTT-services with

focus on mobile phones and smart phones, which are especially short message service providers,

video chat and voice-over-IP. It is expected that 2.1 billion out of 3.1 billion estimated smartphone

users will use OTT-communication services in 2017.158

3.5 Countermeasures by the Telcos

• Short Message Services

The losses in the text messaging market appear to be the major point of concern for European

telecommunications providers. Therefore this issue is at the very heart of the conflict between both

industries. In 2013 the European Commission estimated, that about 100 Million Europeans have

suffered restrictions (blockage, etc.) in usage of free chat apps, such as WhatsApp (countermeasure

1).159

As a counterbalance Telcos started to provide their own OTT services (countermeasure 2). Telefonica

introduced their TU Me app and Orange their Libon app. They provide for integrated communication

services including text, voice calls, message and photo transfer.160In 2012 a union of different TC-

providers like Vodafone, Deutsche Telekom, EPlus and Telefonica161, joined together as the GMS

Association (GMSA) to create a common industry standard for communication services (Joyn or RCS-

e). They created a chat platform comparable with OTT-services in design:

157 Ecory,Future electronic communications markets subject to ex-ante regulation, 2013, p. 71. 158 Mobile squared, OTT Services Blow Up the Mobile Universe. Operators Must Act NOW! 2013,

p. 9. 159 http://www.ft.com/intl/cms/s/0/f07c61d4-ea24-11e2-913c-

00144feabdc0.html#axzz3OuQvaGlK 160 Ecory, Future electronic communications markets subject to ex-ante regulation, 2013, p. 73. 161 http://www.gsma.com/membership/who-are-our-gsma-members/full-membership/

207

162

The platform manages communication between the telcos’ different OTT-short messaging-

systems.163 The respective telcos establish their own infrastructure which is connected to companies

engaged in Joyn. The application is preinstalled on the terminals by the telcos already. The providers

differ in price structure.164 In this regard, the strategy deviates from the typical OTT model. Up to

now this platform, offered by Deutsche Telekom and Vodafone, has not received much response in

Germany.165Internet Telephony

For lack of an infrastructure of their own, OTT providers need to use telecommunications provider‘s

networks to perform their services. This gives the network’s owners the option of blocking or

impeding OTT services in order to decrease competition.166 Another option is the charging of special

fees for the use of OTT services. Specially the mobile telecommunications sector has seen countless

examples of this in the past. One of the most spectacular cases involved the Dutch provider KPN who

announced plans to grant access to competing VoIP and video telephony services only under the

condition of special fees. This was meant to balance the company’s loss in revenues from these

branches. The Netherlands then passed a law on network neutrality, prohibiting the discriminatory

treatment of data packages by network operators. Other cases include the ad-blocking by French

provider free and the announcement of volume-based pricing models by the German operator

Deutsche Telekom.167 We will discuss this issue in the section on net neutrality.

162 https://www.t-mobile.de/apps-und-musik/joyn/0,26270,27661-_,00.html 163 Cp. http://www.joynus.com/ 164 http://www.chip.de/artikel/Joyn-Das-Ende-von-SMS-WhatsApp-Skype-2_56651424.html 165 http://www.dw.de/sms-nachfolger-joyn-ein-erfolgloses-system/a-17469143 166 Jayakar/Park, Emerging frameworks for regulation of Over-The-Top services on mobile networks: An international comparison 2014, pp. 4. 167 BEREC (2014a), ‘BEREC Annual Reports − 2013’, BoR (14), p. 60.

208

In internet telephony, telcos partner with OTT players (countermeasure 3). A well-known case is

Skype which collaborated with H3G Uk.168 However, it seems to be that this countermeasure has not

been used often in Europe.

• Videos

In the last few years Telcos began offering their own video-on-demand-/OTT-services. Partly, this

business strategy can be seen as a reaction to OTT-competition. An example is video load (Deutsche

Telekom) with a revenue of EUR 18 million in 2010 in Germany.169 In 2014, video load had a market

share of 10% in Germany and came in just behind Amazon Prime with 13%.170 Another example is

Vodafone TV, which offers IP-TV additionally to an online video store, which is only receivable in a

package with an internet connection by Vodafone.

OTT-video-providers also challenge the business models of pay TV. The pay TV providers react in

various ways. Their strongest weapon consists of influencing the access to market through

monopolizing content rights (countermeasure 4). Thus, companies recently started to enable their

subscribers to use the contents on tablets and smart phones without imposing any additional fees.171

46% of participants of Solon’s Survey of European Cable Communication labeled a multi-device-

strategy and VoD, OTT TV-Everywhere as their most important video strategies.172

Blocking and throttling is also used as a countermeasure against OTT video services. In this market it

is politically easier for the telcos to argue that there is a capacity shortage for the transport

restriction (countermeasure 5). It is however argued in some cases (see the level 3 Deutsche

Telekom dispute) that the telcos do not extent their nets with intention in order to block OTT

services from abroad.

• Future Developments

It is predicted that Web Real Time Communication will enter the market. This interface for voice and

video communication can be implemented on websites. The revenues then will no longer go to OTT

players but to the owners of the websites. Furthermore, more difficult to change the market

situation by forming a partnership with OTT players.173

One of the key questions will be how telcos will deal with the capacity shortage issue. The

possibilities of choosing this strategy will depend heavily on the outcome of the net neutrality

debate.

168 Ecorys, Future electronic communications markets subject to ex-ante regulation, 2013, p. 73. 169 http://de.statista.com/statistik/daten/studie/255449/umfrage/umsaetze-der-grossen-video-

on-demand-anbieter/ 170 http://de.statista.com/statistik/daten/studie/284837/umfrage/marktanteile-der-online-

videotheken-in-deutschland/ 171 Solon Survey of European Cable Communication, 2014, pp. 15. 172 Ibid. 173 Ecorys, Future electronic communications markets subject to ex-ante regulation, 2013, p. 74.

209

3.6 Net Neutrality: Debate on Regulatory Framework

The most important countermeasures against the competition of OTT players are blocking or

throttling their services. These strategies would be limited or even impossible if the principle of strict

net neutrality would prevail. Furthermore, many new business models of the Telcos like the

introduction of quality services for telemedicine etc. depend on the rules concerning net neutrality.

For this reason our report will focus on this important debate in detail. The overall strategy of Telcos

concerning OTT competition will be summarized in chapter III.

3.6.1 Technological Basics

• Principle of Best-Effort

The Internet is a global network of numerous single networks. The end-users are able to exchange

data via this network of sub-networks supported by IP addresses. A router enables the connection

between the networks. Traditionally the principle of best effort forms the basis of the data transfer

via routers. On this basis and within the scope of available resources transmission requests are

served as fast as possible. If there are more data packets sent to a router than can be processed, a

data jam is the result. An intermediate storage dissolves this jam. The data is forwarded using the

First-In / First-Out-Principle (FIFO-Principle). This technique is based on a perfectly equal treatment

of the data packets. Therefore it is understood as the purest form of net neutrality.

The principle of best-effort implies that a guaranteed transmission quality of data cannot be

warranted. All incoming packets are forwarded as long as there are no jams. Regularly, no problems

occur when it comes to non-time-critical services such as e-mailing. However, delays in the data

stream cause a distinct reduction of the transmission quality if not a total breakdown of the

streaming connection. This affects time-critical services such as video-streaming services or VoIP

services. In a best-effort-network with increasing network utilization, services with high transport

requirements are the first to suffer a perceivable loss in quality. Unambitious services, such as

emailing or web-browsing, are less affected by network congestions. The users only might

experience email delivery delays or slowly loading websites.

This is why a telephone call via IP-technology can be considerably affected within the scope of a

mere best-effort approach. On the other hand, users of data intensive services such as peer-to-peer

networks or video-streaming services are able to occupy resources. Given the current capacity limits,

this can cause a severe reduction in quality of other users’ applied services and has an impact on

customer satisfaction and thus harms the service provider.

• New Network Management Procedures

The technological evolution undermines the best-effort principle little by little. By now, modern

network management already employs certain techniques which are necessary for a smooth

210

operation of the networks. Network management procedures are also used to throttle, block or

prioritize certain services.

Network operators can single out services and transmit them with certain quality characteristics.

These services are called “managed or special services”. A good example of this are IP-TV offers. The

distinction between “managed services” and services from the open internet plays a key role in the

debate about a legal framework for net neutrality.

174

• Peering and Paid Peering

Certain services such as video services are only used if they are judder free and of high quality. This

can be achieved by different approaches. Engaging Content Delivery Networks (CDN) is one

procedure.175

A content delivery network is a system of cache servers that are interconnected. It uses geographical

proximity as a criterion for delivering content. The content in a CDN exists as multiple copies on

strategically distributed servers. By placing the servers closer to the users across the globe it is

possible to minimize the distance the content has to travel. Akamai for example is one of the few

active CDNs in Europe.

Another approach is to bring the traffic to the end-user as fast as possible. Therefore Internet

Service Providers (ISPs) of different sizes and with various product portfolios (providing internet

connection, hosting, content-providing etc.) enter into an agreement, which contains routing-

policies for data traffic. These contracts take shape in two forms: Transit means the service to

transmit data through a network. The contractual partners are mostly providers of different

174 BAKOM, Report on Net Neutrality 2012, p. 12. 175 BEREC, An assessment of IP interconnection in the context of Net Neutrality, BoR (12)130, pp.

47.

211

company size. The larger provider usually provides an uplink in exchange for money. Billing is based

on uploaded data volume. Peering – in contrast to transit – is usually understood as an agreement

between providers of equal rank concerning data exchange among them. The following diagram

shows the exchange:

176

Due to the increase of video traffic during the last years for peering, much less data volume was

available for the exchange. When one data volume surpassed the other one many times over, the

affected ISPs demanded a special payment for the Peering. These are cases of Paid Peering.177 There

is a danger of powerful ISPs demanding excessive Peering payments and enforcing those on the

market. (Paid) Peering isn’t regulated yet. The regulatory authorities don’t have valid information on

the cost structures. Furthermore they don’t have appropriate authorization.

In the net community, charging payments for peering is considered as infringement against the

principle of net neutrality, because data traffic/transport is not treated equally everywhere. This

group of cases played a big role on the occasion of public peering disputes between Comcast and

Netflix.178

176 BAKOM, Report on Net Neutrality 2012, p. 6. See also Arthur D. Little, The Future of the

Internet, 2014, pp. 19. 177 Norton, Internet Peering Playbook, 2014, Chapter 2. 178 http://de.scribd.com/doc/249063073/Comcast-Netflix

212

3.6.2 Violations of Net Neutrality

The debate on net neutrality involves four groups of cases which shall be shortly presented.

• Blocking and Throttling

The practice of excluding specific services out of the transport or transmitting them only slowly in

the own net is called blocking or throttling. This strategy is used to resist competitive services. An

example is blocking OTT telephony like Skype or OTT short messaging services like Whatsapp on

smart phones by some mobile communication providers. One approach is to allow the OTT service

only on condition of extra payment. Blockades and decelerations are criticized by the net community

for deviating from the principle of Best-Effort. This group of cases is focused within the debate on

the legal framework for the net neutrality.

The following examples instancing this group of cases took place in Europe:

o In 2004 freenet from Germany blocked the client‘s access to websites criticizing

freenet’s business practices.

o British ISPs (BT, Tiscali, Carphone Warehouse) demanded excessive transfer fees

from the BBC for their internet television offer iPlayer. They threatened to “pull the

plug”.

o In 2008 the Swiss ISP Cablecom and the German ISP Kabel Deutschland slowed down

the P2P connections and especially Bittorrent services in overload situations.

o In the net of Deutsche Telekom the video platform Youtube could be used only in

poor quality for some time in 2011.

o In the Netherlands in the summer of 2009, upc has slowed down P2P data traffic for

clients of the product Fiber Power Internet: Between midday and midnight the

clients could only use one third out of the contractually agreed capacity.

Immediately after publication of those tests, the practice was abandoned.

o In 2007 the French Internet access provider Neuf reduced the nationally popular

website dailymotion.fr by 90 % for their clients (that means about one third of all

French broadband customers), so that watching videos was impossible.

• Prioritizing and Implementation of Quality of Service Classes

Furthermore it is possible to prioritize several data packets differently. Specific services can be

transmitted preferentially. Time critical applications like video streaming or online gaming can be

offered to the clients in better quality without interfering with less time critical applications like

Email or web browsing. For example, a special payment can be charged for the transport of videos in

a special quality class (for the legal term service quality see under II 7.4).

213

• Product Differentiation

This group of cases involves the so called “Drosselkom-Fall” of Deutsche Telekom. In 2013, German

Telecom announced plans to throttle internet connections down to 384 KBit/s after reaching 75

GByte data volume/month. After that customers could pay extra for more usage at normal speed.

The German Telecom proposal is controversial not only because it would impose the nation’s first

comprehensive download limits on landline broadband service. German Telecom also planned to

exempt the traffic generated by its own Internet television service, called Entertain, from the limits.

At the same time traffic of rival services, like YouTube, from Google; iTunes, from Apple; or

Facebook are not exempted from the limits. This way competitors’ streaming services will not work

properly after reaching the data volume limit.

Regulators have not come to a conclusion on the legality of throttling. However, based on the

current legal framework, there is no violation of German net neutrality regulations: The non-

discrimination regulation pursuant to § 41a TKG is not in force yet, neither is a minimum quality rule.

Hence throttling down to 384 Kbits/s means no infringement. Likewise there are no indices

concerning violations of transparency requirements. On top of that German broadcasting law allows

privileging the IPTV-entertainment package of German Telecom. Therefore, in the final analysis it is

up to the market to decide whether German Telecom succeeds with its new business model or not.

In the particular case the Telecom had to drop its project due to a judgment of Landgericht Cologne

on 30th October 2013.179The subject of the judgment was not a possible infringement of the net

neutrality but rather deception of the customers. The Landgericht Cologne has not prohibited

throttling itself but the sale of a throttled line labeled “flat rate”.

• Paid Peering

Paid Peering is considered a net neutrality issue in the USA (e.g. FCC ./. Comcast/Netflix) whereas in

Europe adjudications as well as legislative proposals regarding Paid Peering are not available so far.

3.6.3 Stakeholders’ Positions

• Users/ Content Providers

The cyber community, but also internet firms and content providers like the press advocate a new

legal framework for net neutrality in Europe. The cyber community proposes to stick to the best

effort principle because only this would guarantee uncontrolled communication and innovation in

179 https://www.justiz.nrw.de/nrwe/lgs/koeln/lg_koeln/j2013/26_O_211_13_Teil

_Anerkenntnis_und_Schlussurteil_20131030.html

214

the internet. In any case, the user should be told if it comes to a deliberate slowing-down of the data

transport.

They argue that the Internet is an infrastructure of crucial national importance. It is a central

fundament of the social, economic, cultural and political development of our society. In accordance

with the freedom of opinion and the prohibition of censorship content should not be blocked or

manipulated. Internet companies charge protection against technical and economical discrimination

by network providers because they are not willing to pay more for using the network providers’

facilities. The content companies fear the network providers to place their own or purchased

services on the market instead of the companies’ content. The network providers do not only have

an obvious economic interest here but also the possibility to advantage their own offers by a better

transport quality or by excluding requested data volume for own offers out of the monthly data limit.

Content providers claim that the possibility of quality differentiation could set wrong incentives for

the ISP. Especially the prospect of additional revenues for the ISP by means of preferred data

transmission is referred to as a motivation to keep transmission capacities down. This could be used

to press content providers into payment for a better transport. Demand could only be generated by

capacity shortages.

• Net Provider

The opposite opinion is mainly represented by the net providers. They point out that they cannot

finance the development of broadband networks without marketing quality of service offers. In their

opinion the ones who gain profit from the rising amount of transferred data, like Google or YouTube,

should pay more towards the costs in comparison to the amount of money they had to pay in the

past. The net providers claim to be over-regulated in Europe. Therefore further regulations were to

be rejected.

Only through reasonable traffic management it should be possible to offer telephony, television and

internet services without any interference and to offer IP-services within a common frequency band.

Traffic management helped to maintain the quality of telephony, television and other time critical

services.

For economical reasons they reject to provide a network that is dimensioned for the maximum peak

load. Such a network would induce massive costs but would not be needed most of the time besides

the peak loads. So they suggest to use the capacities at the best and based only on demand.

• Scientific Literature

In scientific literature, a legal commitment to net neutrality is often not considered to be necessary.

Instead, positive effects on competition were to be expected because of the differentiation of

quality and according to that, differentiation of pricing. This practice was also common in other

markets and guaranteed innovation. Any habits that damage competition could be solved by the

telecommunication and cartel law if market domination is given. The consumer had to be informed

about the slowing-down of data transfer. This would enable him to switch over to a different

215

provider. In judicial literature it is underlined that internet access free of discrimination is part of the

communicative basic service for the people. Everybody needs access to the internet these days.

Economics state that net neutrality is crucial for innovation. High transportation costs could hinder

the success of internet start ups.

3.6.4 Dimensions of Blocking and Throttling

In 2012 BEREC carried out a survey of telecommunication providers concerning the practice of

blocking and slowing down.180

The following diagram shows that a significant average of European

network providers intervenes controlling in the daily data traffic of their clients:

BEREC differentiates between four service groups specially affected by the ISPs intervention. The

first group is P2P networks like Bittorrent or eMule. These typical file sharing programs move

immense amounts of data. The second group is VoIP services like for example Skype. Services, that

are also affected are for example FTP-Server, that store big data volumes. Finally OTT services are

under special observation of the ISP.

180 BEREC, A view of traffic management and other practices resulting in restrictions to the open

Internet in Europe, BoR (12) 30.

216

181

The diagram shows, that especially the data intense P2P networks are subject to interventions. 18.4

per cent of the European fixed network providers for instance intervene in the P2P data stream of

their clients. In the area of mobile communications it is 23.5 per cent of the providers hampering

and blocking their clients’ VoIP traffic. Interferences in the VoIP traffic take place nearly exclusive in

the area of mobile communication. Here it is 27.2 per cent of the providers not passing VoIP services

unrestricted. Telecommunication providers interfere less with VoIP traffic on fixed network. Also

other services are subject of interventions by fixed network providers. But in total comparatively few

providers (10 out of 256) initiate blockades and/or throttling besides the data intense P2P networks.

It is similar in the area of mobile communication.

The next diagram shows the comparatively high percentage of customers affected by blockades and

throttling, although the far predominant percentage of telecommunication providers does not make

restrictions yet. From this it follows that especially the powerful companies with high numbers of

customers take network managing measures. From the customer’s perspective that means

numerical, that 38.7 million users don’t have unhindered fixed network access to P2P networks. In

181 BEREC, A view of traffic management and other practices resulting in restrictions to the open

Internet in Europe, BoR (12) 30, p. 15.

217

the area of mobile communications even more than 100 million users, that means about 50 per cent

of all mobile communication users, only have restricted or even no access to P2P networks.

182

3.6.5 Legal Framework of Net Neutrality

3.6.5.1 Statutory Net Neutrality

• Netherlands

The Netherlands have established statutory net neutrality as the first country in Europe and the

second country worldwide after Chile.183 The net neutrality provision is part of the amendment of

the Netherlands telecommunication law to fulfill the new requirements of information technology

and telecommunication as postulated in the telecommunication reform in 2009. It was ratified by

182 BEREC, A view of traffic management and other practices resulting in restrictions to the open

Internet in Europe, BoR (12) 30, p. 18. 183 For a comparative analysis Jayakar, Emerging frameworks for regulation of Over-The-Top

services on mobile networks: An international comparision, TPRC 2014.

218

the Netherlands senate on 8th May 2012. The law prohibits to block internet based services and

telecommunication traffic in any way, to throttle the line or to hinder in other way except as part of

network management, to maintain the network and for security reasons. Therefore it is prohibited

for internet providers to block internet based communication services like for example Skype or

messaging or to charge additional fees besides the contract fee on customers or to prefer own

services. Furthermore the use of so called deep packet inspection is forbidden as well as filtering or

manipulating data traffic in the internet.

Even though, the application of deep packet inspection stays permissible if the user formally

consents. Telecommunication groups are also allowed to offer a structure of rates and charges

containing different download speeds and different service catalogues.

The provision did not change the fact that some mobile communication firms in the Netherlands do

not credit the traffic of certain services against volume contingents. For customers of the KPN-

owned provider Hi data traffic is still free of charge, for example. The controlling institution ACM

does not find any infringement of net neutrality in this rating praxis. In May 2014 the Dutch Ministry

of Economics proposed a concretion of this statute classifying these bunch of services as an

infringement of net neutrality. The Dutch rules are listed in the following:

Article 7.4a, Telecommunications Act

1. Providers of public electronic communication networks which deliver

internet access services and providers of internet access services do not

hinder or slow down applications and services on the internet, unless and to

the extent that the measure in question with which applications or services

are being hindered or slowed down is necessary:

a) to minimize the effects of congestion, whereby equal types of traffic

should be treated equally; b) to preserve the integrity and security of the

network and service of the provider in question or the terminal of the end-

user; c) to restrict the transmission to an end-user of unsolicited

communication as referred to in Article 11.7, first paragraph, provided that

the end-user has given its prior consent; d) to give effect to a legislative

provision or court order.

2. If an infraction on the integrity or security of the network or the service or

the terminal of an end-user, referred to in the first paragraph sub b, is being

caused by traffic coming from the terminal of an end-user, the provider, prior

to the taking of the measure which hinders or slows down the traffic, notifies

the end-user in question, in order to allow the end-user to terminate the

infraction. Where this, as a result of the required urgency, is not possible

prior to the taking of the measure, the provider provides a notification of the

measure as soon as possible. Where this concerns an end-user of a different

provider, the first sentence does not apply.

219

3. Providers of internet access services do not make the price of the rates for

internet access services dependent on the services and applications which are

offered or used via these services.

4. Further regulations with regard to the provisions in the first to the third

paragraph may be provided by way of an administrative order. A draft order

provided under this paragraph will not be adopted before it is submitted to

both chambers of the Parliament.

5. In order to prevent the degradation of service and the hindering or slowing

down of traffic over public electronic communication networks, minimum

requirements regarding the quality of service of public electronic

communication services may be imposed on undertakings providing public

communications networks.

The following aspects of the article can be considered crucial:

o No distinction is being made between wireless and wired networks.

o it is clarified in paragraph 1.athat congestion management is allowed but should be

applied in a non-discriminatory way. It is not allowed to prioritize one service over

another.

o Charging based on services and applications is forbidden, without any exceptions.

o From the explanatory memorandum it is clear that the provisions only regulate the

‘open Internet’ rather than managed Internet services.

It is argued that the net neutrality provision had a direct impact on the strategy of market parties.

This is especially true with respect to mobile communication. Originally, the providers intended to

charge for specific services. However, they had to abandon the idea due to the new net neutrality

rules.184

• Slovenia

In December 2012, Slovenia passed a law protecting net neutrality based on the Dutch archetype.

The statute prohibits for internet service provider to limit, slow down or totally block data traffic.

Providers are prohibited from linking their products with internet services. This can be seen as a

direct answer to the managed services debate. In contrast to the Dutch statute, a limitation of net

neutrality is possible only by court order. Legal exceptions do not exist.

Article 203rd, Electronic Communications Act

184 Van Eijk, The proof of the pudding is in the eating: Net neutrality in practice, the Dutch

example, TPRC 2014.

220

(1) The Agency encourages the preservation of the open and neutral

character of the internet and the access to and dissemination of information

or the use of applications and services of their choice of end users.

(2) The Agency goals in the previous paragraph must be carefully considered

in the exercise of its jurisdiction under Articles 3 and 4 the second paragraph

of the 132nd of this Act, and the third and fourth paragraphs of the 133rd of

this Act and their responsibilities in relation to the implementation of the

second of the first paragraph of Article 129 Article by the network operator

and provider of Internet access services.

(3) Network operators and Internet access providers shall make every effort

to preserve the open and neutral character of the internet, thus it may not

restrict, delay or slowing Internet traffic at the level of individual services or

applications, or implement measures for their evaluation, except in case: 1.

necessary technical measures to ensure the smooth operation of networks

and services (e.g., to avoid traffic congestion); 2. necessary steps to preserve

the integrity and security of networks and services (e.g., elimination of unfair

seizure of over a transmission medium - channel); 3. emergency measures for

limiting unsolicited communications in accordance with the 158th of this Act;

4. decision of the court.

(4) The measures provided for in Articles 1, 2 and 3 of the preceding

paragraph shall be proportionate, non-discriminatory, limited in time and to

the extent that this is necessary.

(5) Network operators’ and Internet service providers’ services shall not be

based on services or applications, which are provided or used by internet

access services.

(6) The Agency may implement the provisions of the third, fourth and fifth

paragraphs of this Article can issue a general act.

Hence, the main ideas can be summarized as in the following:

o ISPs prevented from restricting, or slowing internet traffic except to solve congestion,

security or addressing spam.

o Commercial differentiation of Quality of service will be prohibited.

o ISP prohibited from different connectivity prices.

221

3.6.5.2 Informal Agreements

An alternative to the legal determination can be seen in informal agreements.185

Some of Great

Britain s biggest internet provider voluntarily joined in a self-obligation. However, it only contains

transparency requirements concerning network management. Ofcom appreciated the self-obligation

but also demanded for a more detailed regulation.

Since 2009, Norway has an industrial agreement in order to guarantee net neutrality. It was worked

out by the Norwegian regulation agency Norwegian Post and Telecommunications Authority (NPT) in

cooperation with several industrial representatives, e.g. internet and service provider and industry-

and consumer protection organizations. Since that, a meeting takes place once a year with

discussions about the present status of net neutrality in Norway. The arranged guidelines are neither

legally binding nor can the NPT sanction market players for a prospective violation.

3.6.6 Legal Framework in EU

An explicit rule concerning net neutrality does not exist in the European legal frame. Yet, the

European Union realized the set of problems and therefore addressed net neutrality at several

different places with several different approaches.

• Net Neutrality as a Regulatory Aim

First and foremost, net neutrality was made an objective and regulatory principle (Art. 8 para. 1

upara. 2, Art. 8 para. 4 lit. g Framework Directive). Hereby, end-users shall be able to fetch and to

dispread information and to use several appliances and services. With regards to contents this is less

meaningful. It is remarkable that the term of network neutrality has not been defined precisely.

• Transparency as the Major Essence

The major essence of the directive is that network neutrality can be effectively protected by

transparency. The consumer shall be informed before he signs the contract, if his network operator

works accordingly to the principles of network neutrality or not. Hereby, he is able to choose the

provider which he likes. So Art. 20 para. 1 Universal Service Directive (URL) orders that the provider

of telecommunication-networks and other public accessible telecommunication services have to

make it possible that consumers and other end-users can comprehend to the kind of service they get

and the most important data of their contract. Corresponding to Art. 20 para. 1 lit. b URL these are

also all attributes of limitation of the access to and using of applications and services (lit. b 2nd

indent), the minimum standard of service quality (lit. b 3rd indent), information of all kinds of data

controlling and rating to avoid an overcharge of the network-connection (measures of network-

185 EU COM, Working Document on Implementation of the EU regulatory framework for

electronic communications, SWD (2014), 249 final, p. 19.

222

management), and information of all kinds of possible consequences caused to service-quality by

these techniques (lit. b 4th indent), plus all from the provider inflicted limitations for the use of his

terminal equipment (lit. b 6th indent). Further details which specifications are necessary can be

constituted by the national regulatory authorities (Art. 22 para. 3 URL).

Furthermore, the provider can be bound to tell the consumer about every change which is

concerned with the use of services or applications (Art. 21 para. 3 lit. c URL). Additionally, the

providers can be obligated to publicize actual end-user-information about the quality of their

services (Art. 22 para. 1 and 2 URL). Based on this, the consumers can change their provider if they

want.

• Change of Provider

Pursuant to Art. 30 (6) Universal Service Directive conditions and procedures for contract

termination shall not act as a disincentive against changing service provider. This rule is based on the

understanding that a reliably functioning process of change is essential for competition.

• Minimum standard in Service Quality

With Art. 22 para. 3 URL the national regulatory authorities have the possibility to constitute

minimum standards to the service quality. The aim is to prevent a worsening of services and an

obstruction or a slowdown of the data traffic inside the network. At the moment, it is not clear what

this wording is supposed to mean. There is no legal definition of the term „service quality“.

The technical understanding of the term „service quality“ is narrow and means parameters of the

data traffic such as bandwidth, delay, fluctuation (jitter) and packet loss. In the European legislative

procedure there was a fear that the differentiation of quality of services would lead to an

unacceptable depression of the Best-Effort-standards for the end-user. The more quality of services

there are, the less capacity is available for Best-Effort-services. To avoid a lowering, the regulation

agency should introduce a minimum standard for the service quality. However, every time a national

regulator wants to introduce such a standard, it has to inform the commission and the BEREK about

the reasons that lead to his decision (Art. 22 para. 3 URL). These organizations then have to take the

necessary measures to secure the internal market and to harmonize the interpretation of the

European rules.

3.6.7 Criticism

In the opinion of the critics, the transparency rules on their own are not enough to solve the

problem of network neutrality. The willingness for a contract change in the telecommunication

sector is expectedly low and the effort (transaction costs) too high. Additionally, there is no

extraordinary cancellation right which would allow the consumer to immediately react to a

limitation of his data traffic. The alleviation of provider-changing is a good aim, but if this actually

leads to an increased willingness of the users to change their provider is doubtful. In practice, the

223

biggest problem to account for a change is the customer’s duty to prove a reduction of his download

rates.

A recent study of the Bundesnetzagentur on this topic has come to sobering results. According to the

report 69, 2 % of costumers (the vertical of the following figure) reach above 50% of the connection

speed (the horizontal of the following figure) that had been marketed to them. Only a slim 19,5 % of

costumers have access to the full connection speed. Predictably, no official statement has been

published. This complicates the justification of investments in high-speed-lines for end-costumers.

The providers can be engaged to inform the national regulatory authorities about their network

management measures (Art. 21 para. 3 lit. d URL). However, it is not certain that this brings

clearness to understanding the new system of data-controlling. Transparency defaults are no

adequate measures either if there are no other offerings at the market.

224

3.6.8 Future plans on Net Neutrality in EU

3.6.8.1 European Commission’s Proposal for a Single Market Regulation

In September 2013 the EU-Commission presented a proposal for a regulation concerning the

“European single market for electronic communications”.186 The draft legislation aims to establish a

new European regulatory framework for Net Neutrality. In its Articles 2, 19, 20, 23 and 24, the draft

legislation contains regulations directly referring to net neutrality. It advocates an open internet

which allows the end customer access to information and content and gives him the opportunity to

transfer it. It also advocates enabling the end customer to use applications and services of his choice.

Furthermore, internet providers are explicitly granted to offer different classes of quality for data

routing. Similarly, actions of network management as well as the offer of “specialized services” are

generally allowed.

The proposal of the commission defines the term „specialized service” in Art. 2 II No. 15 as

„an electronic communications service or any other service that provides the

capability to access specific content, applications or services, or a

combination thereof, and whose technical characteristics are controlled from

end-to-end or provides the capability to send or receive data to or from a

determined number of parties or endpoints; and that is not marketed or

widely used as a substitute for internet access service.”

The draft regulation thereby follows a “two-lane model” as it differentiates between internet access

services and specialized services. Internet access services are characterized by connectivity to

virtually all internet endpoints. Internet access services thus concern that part of the Internet which

is often referred to as the “Open Internet” (e.g. WWW).

The proposal of the commission defines the term “internet access services” in Art. 2 II No. 14 as

“a publicly available electronic communications service that provides

connectivity to the internet, and thereby connectivity between virtually all

end points connected to the internet, irrespective of the network technology

used”

186 Regulation laying down measures concerning the European single market for electronic

communications and to achieve a Connected Continent, COM(2013) 627, available at: https://ec.europa.eu/digital-agenda/en/news/regulation-european-parliament-and-council-

laying-down-measures-concerning-european-single

225

187

According to Art. 23 V of the proposal, blocking, deceleration and discrimination of certain

applications or contents by ISP is not allowed. Exemptions are made when it is necessary to apply

reasonable traffic management measures. These measures purpose, for instance, to prevent serious

crimes, to preserve the integrity and security of the network or to reduce temporary network

congestion.

In Art. 19 the proposal provides for the introduction of assured service quality connectivity products

to ensure Europe-wide consistent standards for quality classes. The implementation should

guarantee the development of those services depending on the transmission quality.

Article 19 – Assured service quality (ASQ) connectivity product

1. Any operator shall have the right to provide a European ASQ connectivity

product as specified in paragraph 4.

2. Any operator shall meet any reasonable request to provide a European

ASQ connectivity product as specified in paragraph 4 submitted in writing by

an authorised provider of electronic communications services. Any refusal to

provide a European ASQ product shall be based on objective criteria. The

operator shall state the reasons for any refusal within one month from the

written request. It shall be deemed to be an objective ground of refusal that

the party requesting the supply of

a European ASQ connectivity product is unable or unwilling to make

available, whether within the Union or in third countries, a European ASQ

187 Nooren/Leurdijk/van Eijk, Net neutrality and the value chain for video, 2012, info, Vol. 14 Iss:

6, pp. 45 (49).

226

connectivity product to the requested party on reasonable terms, if the latter

so requests.

3. Where the request is refused or agreement on specific terms and

conditions, including price, has not been reached within two months from

the written request, either party is entitled to refer the issue to the relevant

national regulatory authority pursuant to Article 20 of Directive 2002/21/EC.

In such a case, Article 3(6) of this Regulation may apply.

4. The provision of a connectivity product shall be considered as the provision

of a European ASQ connectivity product if it is supplied in accordance with

the minimum parameters listed in Annex II and cumulatively meets the

following substantive requirements:

(a) ability to be offered as a high quality product anywhere in the Union;

(b) enabling service providers to meet the needs of their end-users;

(c) cost-effectiveness, taking into account existing solutions that may be

provided on the same networks;

(d) operational effectiveness, in particular in respect of limiting to the extent

possible implementation obstacles and deployment costs for customers; and

(e) ensuring that the rules on protection of privacy, personal data, security

and integrity of networks and transparency in accordance with Union law are

respected.

5. The Commission shall be empowered to adopt delegated acts in

accordance with Article 32 in order to adapt Annex II in light of market and

technological developments, so as to continue to meet the substantive

requirements listed in paragraph 4.

The proposal of the commission defines assured service quality connectivity product in Art. 2 II No.

12 as

“a product that is made available at the internet protocol (IP) exchange,

which enables customers to set up an IP communication link between a point

of interconnection and one or several fixed network termination points, and

enables defined levels of end to end network performance for the provision

of specific services to end users on the basis of the delivery of a specified

guaranteed quality of service, based on specified parameters;”

227

Besides the new “two-lane” approach the draft legislation also continues the existing approach of

ensuring net neutrality via transparency obligations from Art. 25.

In Conclusion the EU draft legislation has the potential to preserve the openness of the Internet in

the future. It offers sufficient possibilities to introduce innovative and economically useful services

with special quality requirements. The draft therefore might lead to a balanced reconciliation of

interests between the conflicting standpoints in the Net Neutrality debate.

Art. 23:

1. End-users shall be free to access and distribute information and content,

run applications and use services of their choice via their internet access

service.

End-users shall be free to enter into agreements on data volumes and speeds

with providers of internet access services and, in accordance with any such

agreements relative to data volumes, to avail of any offers by providers of

internet content, applications and services.

2. End-users shall also be free to agree with either providers of electronic

communications to the public or with providers of content, applications and

services on the provision of specialized services with an enhanced quality of

service.

In order to enable the provision of specialized services to end-users,

providers of content, applications and services and providers of electronic

communications to the public shall be free to enter into agreements with

each other to transmit the related data volumes or traffic as specialized

services with a defined quality of service or dedicated capacity. The provision

of specialized services shall not impair in a recurring or continuous manner

the general quality of internet access services.

3. This Article is without prejudice to Union or national legislation related to

the lawfulness of the information, content, application or services

transmitted.

4. The exercise of the freedoms provided for in paragraphs 1 and 2 shall be

facilitated by the provision of complete information in accordance with

Article 25(1), Article 26 (2), and Article 27 (1) and (2).

5. Within the limits of any contractually agreed data volumes or speeds for

internet access services, providers of internet access services shall not restrict

the freedoms provided for in paragraph 1 by blocking, slowing down,

degrading or discriminating against specific content, applications or services,

or specific classes thereof, except in cases where it is necessary to apply

228

reasonable traffic management measures. Reasonable traffic management

measures shall be transparent, non-discriminatory, proportionate and

necessary to:

a) implement a legislative provision or a court order, or prevent or impede

serious crimes;

b) preserve the integrity and security of the network, services provided via

this network, and the end-users' terminals;

c) prevent the transmission of unsolicited communications to end-users who

have given their prior consent to such restrictive measures;

d) minimize the effects of temporary or exceptional network congestion

provided that equivalent types of traffic are treated equally.

Reasonable traffic management shall only entail processing of data that is

necessary and proportionate to achieve the purposes set out in this

paragraph.

3.6.8.2 European Parliament’s Proposal for Single Market Regulation

As part of the European legislation in April 2014, the European parliament decided

on important amendments concerning the proposal of the commission.188 The

network neutrality provisions were retained in general but altered and strengthened:

Article 23

Freedom to provide and avail of open internet access and traffic

management

1. End-users shall have the right to access and distribute information

and content, run and provide applications and services and use terminals of

their choice, irrespective of the end-user’s or provider’s location or the

location, origin or destination of the service, information or content, via their

internet access service.

2. Providers of internet access, of electronic communications to the

public and providers of content, applications and services shall be free to

offer specialized services to end-users. Such services shall only be offered if

the network capacity is sufficient to provide them in addition to internet 188 Parliaments proposal available at: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2014-

0281+0+DOC+XML+V0//EN

229

access services and they are not to the detriment of the availability or quality

of internet access services. Providers of internet access to end-users shall not

discriminate between functionally equivalent services and applications.

4. End-users shall be provided with complete information in accordance

with Article 20(2), Article 21(3) and Article 21a of Directive 2002/22/EC,

including information on any traffic management measures applied that

might affect access to and distribution of information, content, applications

and services as specified in paragraphs 1 and 2 of this Article.

5. Providers of internet access services and end-users may agree to set

limits on data volumes or speeds for internet access services,. Providers of

internet access services shall not restrict the freedoms provided for in

paragraph 1 by blocking, slowing down, altering, degrading or discriminating

against specific content, applications or services, or specific classes thereof,

except in cases where it is necessary to apply traffic management measures.

Traffic management measures shall be transparent, non-discriminatory,

proportionate and necessary to:

(a) implement a court order;

(b) preserve the integrity and security of the network, services provided

via this network, and the end-users' terminals;

(c) prevent or mitigate the effects of temporary and exceptional network

congestion provided that equivalent types of traffic are treated equally.

Traffic management measures shall not be maintained longer than necessary.

Without prejudice to Directive 95/46/EC, traffic management measures shall

only entail such processing of personal data that is necessary and

proportionate to achieve the purposes set out in this paragraph, and shall

also be subject to Directive 2002/58/EC, in particular with respect to

confidentiality of communications.

Providers of internet access services shall put in place appropriate, clear,

open and efficient procedures aimed at addressing complaints alleging

breaches of this Article. Such procedures shall be without prejudice to the

end-users right to refer the matter to the national regulatory authority.

Most notably the adopted text introduces measures in favor of the open internet by providing a

clear and binding definition of network neutrality. It is the first piece of EU-legislation disposing of a

legal definition of net neutrality. The definition in Art. 2, para. 12a refers to the “best-effort”-

principle which has largely contributed to the success of today s Internet landscape:

230

"’net neutrality’ means the principle according to which all internet traffic is treated equally,

without discrimination, restriction or interference, independently of its sender, recipient,

type, content, device, service or application.”

Beyond that, the proposal of the parliament tightens the definition of „specialized service“and

„internet access service“. Amendment 235 gives a strong definition of specialized services, making it

clear that ISPs can’t simply decide Netflix, for example, is no longer a standard internet service:

“’Specialized service’ means an electronic communications service optimized for specific

content, applications or services, or a combination thereof, provided over logically distinct

capacity, relying on strict admission control, offering functionality requiring enhanced

quality from end to end, and that is not marketed or usable as a substitute for internet

access service.”

“‘internet access service’ means a publicly available electronic communications service that

provides connectivity to the internet in accordance with the principle of net neutrality, and

thereby connectivity between virtually all end points of the internet, irrespective of the

network technology or terminal equipment used”

Specialized services now show a closed character by definition. They have specific technical

standards offering a higher “Quality of service”. They are offered in closed networks with strict

access control. Examples for such specialized services might be offers of IPTV or applications of

“Telemedicine”.

Amendment 236 in Art. 23 para 2 supports this restricted applicability of specialized services and

stipulates that such services shall only be offered if the network capacity is sufficient to provide

them in addition to internet access services. They are not to the detriment of the availability or

quality of internet access services.

The parliament’s proposal thereby ensures non-discrimination of the open internet. Specialized

services however do not have to fulfill strict net neutrality requirements. This is consequent because

every single service has to meet different technical criteria concerning the specific quality of service.

Providers of specialized services must therefore be free to define the parameters of these services

according to the requirements of the concrete use case. The principle that ISPs are free to offer

specialized services is laid down in article 23 para. 2. The only but essential requirement to be

fulfilled is that specialized services are not established in detriment of the open Internet access

service. As a consequence specialized services may only be offered if and as far as network capacities

are sufficient to properly run both Internet lanes in parallel. This provision is crucial to uphold the

open internet and to guarantee its future development. Otherwise there would be a danger that the

open Internet is displaced by the more lucrative specialized lane. The provision may thus work as an

incentive for ISPs to extend the existing Internet infrastructure.

231

3.6.9 Outlook

The legislation process of the single market regulation and its regulations concerning network

neutrality is currently in progress. After the amendments of the European parliament, it is now the

Council of the European Union’s turn. In November 2014, the Italian EU Council Presidency

requested the prompt mandating of „exploratory“tripartite negotiations with the European

Parliament and the European Commission. However, a soon start of the tripartite negotiations could

not be realized since further ascertainments of the position of the Council were necessary. Tripartite

negotiations ideally are expected in this year under the EU Council Presidency of Latvia.

However, a consensus about the basic principles of net neutrality regulation is foreseeable. The

relevant criteria are:

• Transparency rules concerning blocking and throttling of data traffic are important.

• Specialized services and the open internet services will be handled in a different way.

• Only in the open internet, the principle of non-discriminatory data traffic will be unheld.

• The distribution of specialized services is free and does not require a specific license.

Different qualities of services (for telemedicine etc.) are in principle possible.

• The open internet is a “basic service” for a modern information society. Specialized services

should not be distributed in detriment of the functionality of the open internet.

• It is still open to which extent telcos can use the strategy to block or throttle OTT services

using the argument of overcoming a traffic congestion. Concerning this issue the language

used in the proposal of the European Commission is rather vague.

4 Conclusion In recent years, OTT industry has been developing by leaps and bounds around the world. Whether

in China or in Europe, various OTT business applications emerge one after another, constantly

expanding the competitions with basic telecom operators in businesses. In China, instant

communication products such as Wechat, Momo and Credulity are the OTT businesses that grow up

fastest and have the most apparent shock on traditional enterprises. In Europe, OTT businesses are

represented by WhatsApp, Twitter, Facebook, Skype, and Apple iMessage. The emergence of OTT

business has inflicted shocks to varying degrees on the basic businesses such as short message

services, voice and IP video. OTT business is increasingly taking place of traditional telecom

businesses. With China as an example, according to the data released by the Ministry of Industry and

Information Technology, affected by the online OTT businesses, mobile short message and

multimedia message businesses have kept slumping. In the first three quarters in 2014, the short

message business volume dropped by 18% year on year; in terms of voice service, while the increase

in the number of mobile phone users is obviously slowing down, the internet application voice and

message services are taking place of the traditional mobile services. Under this situation, the

average monthly contribution per client to the voice business is continuously dropping. Meanwhile,

in the European telecom market, according to the statistics reported by ETNO, the European market

232

revenue of telecom operators in 2013 dropped by a small margin of 1.8% and OTT businesses

brought about a certain shocks on the short message, voice and video services offered by telecom

operators. However, on the other hand, with the prosperity of OTT businesses, the flow operation of

operators has witnessed substantial growth.

In China, the Internet neutrality has not become a hot issue. Different from the attitude and

sensitivity of the EU towards the Internet neutrality, China has given some attention to the Internet

neutrality, but it has not become the focus of public opinion. The most important task is still how to

universalize broadband and reduce the cost of Internet access. In the past two years, Wechat have

inflicted huge shocks on basic operators. Basic operators and Internet companies once had heated

argument on whether Wechat services should be charged. How to balance the relationship between

the basic operators and Internet service providers will become the long-term challenge for both

China and the EU.

The supervision measures and problems of China on OTT businesses:

1) First, whether operators should additionally charge OTT businesses such as Wechat services.

Ministry of Industry and Information Technology has expressed that this belongs to market

behaviour and the government encourages the innovative development of Internet businesses such

as Wechat services, but whether to charge the service or how to charge it should be autonomously

determined by its operators according to the market condition and the government will never

intervene.

2) China’ supervision measures on new OTT businesses. There is a lack of corresponding supervision

laws and regulations and policies on such new businesses as OTT services for the purpose of

tightening the management of new telecom businesses. In May 2013, Ministry of Industry and

Information Technology issued Administrative Measures (for opinion solicitation) on Running New

Types of Telecom Businesses. At the same time, targeting the increasingly prominent safety and

privacy problems of OTT businesses such as Wechat services, Ministry of Industry and Information

Technology is now actively exploring to step up supervision on them. In August 2014, National

Internet Information Office released Tentative Administrative Measures on Public Information

Service Development for Instant Communication Tools which requires instant messaging tool

providers to adhere to the principle of “Background real name foreground voluntary” and registering

the account after real identity authentication. This aims at purifying Internet environment,

containing the spread of rumours and supervising the instant messaging. In addition, Internet

companies are also constantly stepping up self-management in terms of Internet and information

safety and user right protection.

3) Supervision challenges for the new businesses such as OTT services. The innovative rapid

development of OTT businesses has posed new challenges to the supervision of telecom industry

supervision. The first challenge is to balance the development of basic Internet operators and OTT

service providers. The second challenge is that with the development of OTT businesses, the

boundary of supervision has been broadened. For example, the social interaction application of

Wechat has gradually turned it into an integrated information service platform that integrates

instant messaging, social interaction entertainment, public service, E-commerce and financial

payment. The third challenge is the increase of network and information safety risks. Some OTT

233

businesses have the functions of uploading mobile phone address book and collecting and digging

user information, which may divulge users’ privacy.

The supervision measures and problems of the EU on OTT businesses:

1) In the EU there is also a debate on whether OTT providers should make extra payments for their

services. This topic is seen as part of the Net Neutrality discussion since extra payments favour big

players like Google over small businesses or start-ups that cannot afford such extra payments. There

is no legal framework on a European level yet. Only a few countries, like the Netherlands for

example, have national Net Neutrality rules, which say, that taking extra charges for OTT providers is

illegal. It seems that the Dutch approach is the model for the FCC Net Neutrality decision on

February 26th.

2) However, the telecom industry tries hard to avoid strict Net Neutrality rules. ETNO, the

organization of European Telecommunications Network Operators, recently presented a “Proposal

to address New Internet Ecosystem”. In this document a so-called quality of service model has been

requested. Telcos should be allowed to offer several transport categories for different qualities of

services. As a consequence, it would be possible to set up price categories for data transport on the

internet. A video or telemedicine service could be for example transferred in higher quality and

without any delay. ETNO justifies this demand by the “huge disproportion amongst revenues and a

clear shift of value towards players (Over the Top players ‐ OTT) who are not contributing to network

investment”.

Furthermore, it is argued that the traditional model of peering, which backbone network providers

are using since the beginning of the internet, is outdated. The provider’s peering agreements are

based on the assumption that the volume of traffic passing in each direction is roughly equal. The

charges paid by the operators offset each other. Therefore the operators exchange traffic on a

settlement-free basis. However, the high traffic of just a few OTT-services leads to an imbalance in

this system. More and more ISPs therefore asked for fair compensation for their transport of data.

“Paid peering” is increasingly common. The telcos argue that paid peering cannot be viewed as an

infringement of the principle of Net Neutrality.

3) So far, OTT service providers have not been specifically regulated. This is even true in areas where

OTT and telco compete directly (short message services, voice or IP video) They are not subject to

telecom regulation because they do not have significant market power (SMP) in the telcom sector.

Telcos argue that this situation is unfair. OTT-providers should obey to the legal rules valid in the EU

member states. Otherwise OTT-providers could just operate without any regulation, which makes

global networking effects even more significant. To create a level playing field, telecommunications

providers have first demanded their asymmetrical regulatory burden to be decreased. One example

would be a reduction of the access and tariff regulation. Second, OTT providers should be subject to

symmetrical regulation, especially concerning collection of market data, interoperability and

interconnection. Ten major European telecommunications providers have recently addressed a

letter to the president of the EU Commission, demanding platforms such as WhatsApp or facebook

234

to be open and accessible for other providers of similar services.189 This would mimic the situation in

the telecommunications market, where every provider is obligated to interconnect their network to

others and cannot deny access to their clients.190 There is a good chance that ETNO might implement

these ideas in the upcoming review of the European telecommunication framework.

4) Besides the issue of controlling significant market power in the telecommunication sector, over

the past 15 years European regulation and the laws of the member states have been amended to fit

the needs of the internet. For instance measures have been taken to protect copyrights, privacy or

to prevent online defamation. Still, there is no Anti-Mobbing-Law or law against the spread of

rumors. Europe primarily focuses on data protection, like telecommunication data retention or a

General Data Protection Regulation.

5) As a general tendency the competences of supervision authorities overlap more and more. This

similar to what can be observed in China (see the debate on WeChat). Video providers like Netflix

touch upon issues that are relevant for both telecommunication and media authorities alike.

Sectorial competences therefore blur. Europe increasingly encounters problems with cyber security

and data security. Issues related to industrial espionage and state sponsored surveillance have

become a major issue.

6) Contrasting the situation in China, in Europe there are just a handful important telcos. The big

four of American OTT-providers are facing at least 381 telecommunications network operators (266

landline / 115 mobile communications).191 ETNO therefore calls for the consolidation of the

European telecom market.192 Furthermore, the establishment of combined platforms in the internet

is proposed. However, this strategy only can be implemented if the anti-trust-regulation will be

adjusted to the interests of the telecommunications sector.193Whether this strategy pans out over

the long term might be questionable. It does not provide a reliable explanation for the weak

performance of European enterprises in comparison to American companies regarding innovation

over the last years: There is no world class European internet company. Even manufacturing of end

devices underperformed. Former industry leader Nokia lost its status to smart phones

manufacturers.

7) The European problem is to enforce European legislation in a global net. The European market is

dominated by foreign OTT- players, mostly from the USA. This is an important difference to the

Chinese internet ecosystem. However, just recently the European Court of Justice (ECJ) recognized a

“Right to be Forgotten”. It forces search engines to de-list links to content which hurts the rights of

data subjects. It applies in situations where the data subject’s interests outweigh the public interest

in accessing the information. This decision is considered to be a turnaround because of the

189 Cp. http://www.rp-online.de/wirtschaft/unternehmen/brief-an-jean-claude-juncker-

europaeische-telekomindustrie-will-hilfe-gegen-google-und-facebook-aid-1.4651334 190 Ibid. 191 BEREC, A view of traffic management and other practices resulting in restrictions to the open

Internet in Europe, BoR (12) 30. 192 ETNO, Reforming Europe’s Telecommunication Regulation, 2013, pp. 36, available at:

https://www.etno.eu/datas/publications/studies/BCG_ETNO_REPORT_2013.pdf 193 Ibid. pp. 6.

235

application of European law to foreign OTT players. Hiding behind foreign company headquarters

outside the EU is no longer an option.

8) Bottom line for the European situation: there is no coherent policy or regulation on OTT in Europe.

The debate on these issues just started. In Brussel, the principle of platform neutrality is discussed

extensively. The basic idea is keep service platforms that fulfills an intermediation function neutral

and open. Such service platforms (intermediaries) are e.g. virtual markets like tuneIn, uber or airbnb,

search engines, social media, app stores, etc. The importance of the service platforms derives from

their indispensable role by business and private interactions, and their capability to influence the

data stream according to their own interests. Neutrality means also in these cases the transparent

and non-discriminatory access to the platforms, and it ensures the possibility of innovation on the

basis of an open digital environment. Moreover only little data is available regarding OTT. Some

consultancies published reports, but there are no official studies. The reason for this is that

European authorities do not have any legal right to oblige OTT players to submit market data. Critics

argue that the regulators should have the right to ask, for example, for the details of paid peering

deals. Without control powerful ISPs who are in a gatekeeper position could just ask for an “unfair

high price” for data transport.

OTT businesses have become a strong force in the development of telecom industry. Their impact on

the development of telecom industry and the supervision challenges brought by them should be

highly prioritized and urgently studied by telecom administrations of all countries around the world.

Research on the following areas should be strengthened in terms of OTT business development and

supervision.

1) Build an eco-environment to boost innovation and benign interaction. On the one hand, we

should encourage the constant innovation of Internet companies and promote more new business

functions to meet the diversified needs of users. On the other hand, we should build a development

environment with benign interaction and fair competition and balance the coordinated

development between telecom operators and OTT business providers. The explosive growth of OTT

industry flow has failed to match with the flow revenue it has brought to telecom operators. In

addition, OTT instant message businesses can replace the traditional basic telecom businesses, thus

influencing the Internet expansion and sustainable and healthy development of telecom operators.

Telecom supervision institutions should design relevant mechanisms and adopt effective measures

to balance the development between the two to form a development pattern with benign

interactions.

2) Improve the right protection mechanism for OTT business users. OTT industry has some Internet

and information security risks and may divulge the privacy of users. So telecom supervision

institutions of all countries should constantly improve relevant laws and regulations on the

protection of personal information. The supervision institutions should also step up prevention on

the spread of pornography, gambling and drug taking and even harmful information that threatens

the national security.