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On 1 March 2004, the European Commission issued a press release entitled "Competition probe leads to decrease in tariffs for broadband access via line sharing in Germany".


The press release announces what amounts to a settlement, i.e. the closure of an investigation by DG Competition for a presumed abuse of dominant position by Deutsche Telekom, in exchange for a commitment by Deutsche Telekom to increase the margin between the (regulated) wholesale price for shared access to the local loop and the (unregulated) retail end-user price for ADSL-based broadband access.


The most salient point in the press release is that it highlights a commitment made by Deutsche Telekom towards the European Commission (to be approved by the national regulatory authority Reg-TP) to apply a monthly recurring charge for shared access of essentially ZERO from 1 April 2004 until 31 Dec 2004, and to apply, as of 1 Jan 2005, a new monthly fee for shared access which will be lower than the fee which was determined by Reg-TP in March 2002. Deutsche Telekom will also increase certain retail ADSL tariffs.


This announcement can only be described as constituting a very important precedent, containing a new form of compensation, and affecting not only the position of Deutsche Telekom, but also of Reg-TP.



The full text of the European Commission press release is copied below.


IP/04/281


Brussels, 1 March 2004


Competition probe leads to decrease in tariffs for broadband access via line sharing in Germany.


Deutsche Telekom has committed vis-à-vis the European Commission to terminate the presumed margin squeeze with effect from 1 April 2004. This commitment leads to a significant reduction in the line sharing fee that competitors have to pay to Deutsche Telekom for shared access to its local loops. "In spite of a 2001 EU obligation to provide competitors shared access to its local loops, only a few competitors found it profitable to make use of shared access. Deutsche Telekom meanwhile has become a quasi-monopolist for broadband access at retail level. None of the new entrants has been able to reach any significant market position. This is due to DT's anti-competitive tariff structure" Competition Commissioner Mario Monti stated. "We believe that competition between operators is the best means for bringing the overall prices down. That is why we have ensured that the margin squeeze shall be remedied to a large extent by lower wholesale tariffs that competitors have to pay for shared access. We trust that the German regulator accepts this consumer-friendly solution" Mario Monti continued.


In light of the proposed tariff reductions, the European Commission has accepted the commitments proposed by Deutsche Telekom and deems the latter suitable to settle the pending investigation regarding the presumed abuse of DT's dominant position for the provision of broadband access to its fixed telecommunications network. The Commission has previously investigated competitors' allegations that Deutsche Telekom's tariffs for line sharing were so high that there was little scope for competitors to make profits in offering the broadband service at retail level. The tight margin between the line sharing tariff of Deutsche Telekom and the end consumer price for broadband access via ADSL prevented new competitors from entering this market.


The Commission is of the opinion that this margin squeeze prevents the development of more competition in the area of broadband access services and precludes vigorous price competition to the detriment of consumers.


Deutsche Telekom is the dominant supplier of broadband access in Germany, both at wholesale and at retail level. At wholesale level, Deutsche Telekom is the only German network operator having a network with nation-wide coverage. In order to provide a variety of services to end users, new entrants need access to this infrastructure on a wholesale basis. Regarding retail access, even after more than three years of competition, Deutsche Telekom still has around 90% market share.


The Commission's investigation commenced in 2002 triggered by a complaint from the German new entrant QSC. The investigation brought indications that Deutsche Telekom abused its dominant position by way of a margin squeeze since March 2002, the date on which line sharing tariffs were first set by the German telecoms regulator (RegTP).


The margin squeeze


A margin squeeze occurs if there is an insufficient spread between Deutsche Telekom's wholesale access prices for line sharing and Deutsche Telekom's retail tariffs for ADSL-based services. As a consequence, new entrants had no scope to compete with DT for offering ADSL services to business and residential users.


Instead of opening formal proceedings against Deutsche Telekom, the Commission has accepted Deutsche Telekom's commitments to fully close the margin squeeze on a lasting basis as from 1 April 2004. From that date until the end of 2004 Deutsche Telekom will forego charging a monthly line sharing from its competitors. From 1 January 2005 onwards, DT will substantially reduce the current line sharing tariffs on a lasting basis. In addition, DT also decided to increase its retail certain ADSL tariffs.


The reduced line sharing tariffs are subject to approval by RegTP upon request which DT has committed to file in the course of April 2004, so that RegTP will have to take a decision before the end of June 2004. The Commission will close the file only after RegTP has adopted this decision and only if the decision is in line with DT's commitments.


Background: Broadband access to fixed networks


The «local loop» is the physical circuit between the customer's premises and the telecommunications operator's local switch. Traditionally it takes the form of pairs of copper wires. The frequency spectrum of the double copper wire can be split into a low frequency range for the provision of traditional voice telephony services and a high frequency range for the provision of broadband access. When both are rented out to new entrants, this amounts to full local loop unbundling, whereas the renting out of the mere high frequency range is regarded as shared use of local loops / line sharing. New entrants on the telecommunications markets need access on fair and non-discriminatory terms to the local loops to be able to offer retail services to end-customers, as it would be impossible to replicate such a network built over a century and under a state monopoly.


On 21 May 2003, the Commission already adopted a decision against Deutsche Telekom for abusing its dominant position pursuant to Article 82 of the EC-Treaty (see IP/03/717). In this decision the Commission had found a margin squeeze between the wholesale and the retail tariffs for full local loop unbundling and had imposed a fine of 12.6 million Euro. That decision was focussed on tariff-related barriers for access to fixed voice telephony services.


This settlement concerns line sharing which is one of the preconditions for the spread of broadband services, such as data transmission and high speed Internet access. Line sharing was imposed on the incumbent operators as from January 2001 by way of an EU regulation. However, effective competition for broadband services is not developing fast enough, especially in Germany. According to RegTP´s annual report 2003, DT had already 4.1 million broadband lines at the end of 2003. In contrast, all new entrants in Germany had only 0.5 million broadband lines, of which very few are based on line sharing.