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Bocconi University Institute of Comparative Law "Angelo Sraffa" (I.D.C.) Legal Studies Research Paper Series
Consolidated Convergence: An Italian Merger Saga
Maria Lillà Montagnani Research Paper No. 06-06
This paper may be downloaded without charge at : The Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=802684
CONSOLIDATED CONVERGENCE : AN ITALIAN MERGER SAGA Maria Lillà Montagnani Bocconi University – Institute of Comparative Law (IDC) Journal of Computer, Media and Telecommunications Law, Vol. 9, No. 2, pp. 37-80, 2004
Introduction The 1998 European telecommunications framework was designed to facilitate the transition from a national state-owned telecoms industry into a competitive telecoms market throughout Europe. Although this ideal has been slow to be realised and confronted by Member State specific legislative and regulatory barriers, it has been deemed to be sufficiently implemented. Thus, having achieved the goal of telecoms sector liberalisation, the 1998 framework has been regarded as impeding the internal market integration in this sector, thereby stifling EU international competitiveness. Consequently, the European Commission (hereafter Commission) adopted a measures set within the “new regulatory framework for electronic communications services” 1 to be put in place by the 24th of July 2003 in order to realign regulation to the current situation deriving from convergence occurring at technological, industry and services levels and the market structure changes 2. The new regulatory framework3 revamps the 1998 one by focusing upon strengthening electronic communications services sector competitiveness within the global market thereby promoting an open and competitive European market for such services4. The Commission also seeks to tackle other related objectives such as increasing universal service quality, and therefore benefiting European citizens, and “enabling the
A premise is here necessary. The wording “1998 regulatory framework”, deriving from Directive 96/19/EC of 13 March 1996 amending the Directive 90/388/EEC implementing full competition in telecoms markets (OJ L 74, 22.3.1996, p. 13) by 1st January 1998, is regarded as the date of this framework adoption and will be used to refer to the former regulation. On the other hand, although the new regulatory framework’s implementation – due by the 24th of July 2003 – is not completed in all Member States, this set of measures is now the current regulation. Both wordings “current framework” and “new regulatory framework” will be used to refer to it. 2 The Green Paper on the Convergence of the Telecommunications, Media and Information Technology sector, and the implication for regulation – Towards an Information Society Approach, COM(97) 623 (hereafter Green Paper), p. 1, http://europa.eu.int/ISPO/convergencegp/97623en.pdf, defined the convergence phenomenon as either “the ability of different network platforms to carry essentially similar kinds of services” or “the coming together of consumer devices such as telephone, television and personal computer”. It also highlighted that the convergence phenomenon is taking place at three different levels: technology, industry and services. As to the former, the factor underpinning convergence and enabling the whole process is digital technology development, making possible the use of different platforms for same services delivery. Technological convergence has then produced a trend towards industry convergence with alliances, mergers and joint ventures among communications market operators being created to exploit existing and new markets through the technical and commercial know -how common use (industry level convergence). Finally, as to the services level, far less certainty surrounds the product of the convergence. So far “convergent services” are not as developed as expected due to difficulties faced by technological convergence. In fact, voice, data and vision, once compressed and “translated” in bits, are currently transmitted over platforms which do not yet have the requisite speed (T. Ballard (Field Fisher Waterhouse), Convergence, LLM lecture within the Telecommunications Law Course, Centre for Commercial Law Studies, Queen Mary, University of London, 29 April 2003). 3 The new regulatory framework consists of a new directives package, competition law and non-binding measures (see I(1), infra). A precise date of adoption is then difficult to fix. It may be considered adopted on 7 March 2002, i.e. adoption date of the Framework and three specific directives (see n. 18-19, infra). 4 Terminology changes from 1998 to new regulatory framework. Under the former, the sector concerned is defined as “telecoms market”; under the latter it is named “electronic communications services market”. Then, “telecoms market” will be used every time the 1998 framework is considered, and “electronic communications services” or “communications sector” when dealing with the new regulatory framework. On differences between these two categories see n. 12, infra. 1
consolidation of the convergent environment throughout the internal market in order to ensure same treatment to similar operators whenever they operate in the EU”5. Among the several drivers leading to the new regulatory framework adoption, emphasis is upon the need for a rearrangement of telecoms regulation and the convergence phenomenon, with the former easily encompassing the other main drivers that instigated this process6. The latter is central issue to the whole work and a starting point of many considerations. This paper cannot pursue a detailed analysis of all new regulatory framework features, instead the main issue will be the new regulation’s effectiveness to promote and protect competition within the convergent environment with regard to the Italian telecoms sector situation. All the remarks on 1998 and new frameworks will be therefore utilitarian to this assessment. In this context, the multi-step mergers of Telecom Italia with Seat Pagine Gialle and of Seat Pagine Gialle with Cecchi Gori Communications are illustrative of how the 1998 framework was not able to deal with the convergence phenomenon in the Italian telecoms market. This is the starting point to show that not even the new framework appears to be appropriate in facing the effects of this process. While the former regulation was not thought to deal with convergence, the new one is driven by it. The 1998 framework’s failure is due to the Italian telecoms market partial liberalisation7, and, on the other hand, to the means it offered to face convergence: competition law. The new framework’s hypothetical failure is due to the fact that it does not appear “equipped” to deal with convergence effects. The same competition regime that addresses converged markets under the new regulation did not effectively do it in the analysed case. As competition law was not able to address convergence under the 1998 framework, it is unlikely that it will do under the new one. Analysis of these concrete and hypothetical failures serve thus as a marker to evaluate the effectiveness of 1998 framework in liberalising the Italian telecoms sector and new framework in facing convergence effects. In order to assess the new framework’s effectiveness in dealing with converged markets in the Italian electric communications services market, section I will provide a brief overview of the new regulatory framework and examine the mechanism to transit from ex-ante to ex-post regulation. In this context the Italian implementation’s state of art will be briefly summarised. Section II will then describe the infrastructure of the Italian telecoms market, both from ex-ante and ex-post perspectives under the 1998 and new frameworks; the environment in which the case developed; and provide a description of the analysed merger with regard to entities and proceedings. Finally, both regulations’ failure will be concluded as whether the assessment of 1998 and new frameworks’ convergence relies on the sole competition law. Although the former’s failure is due to the European Commission, The 1999 Communication Review - Towards a new framework for electronic communications infrastructure and associated services, COM(1999) 539 final (hereafter Communication), 10 November 1999, http://europa.eu.int/comm/information_society/policy/telecom/review99/pdf/review_en.pdf (unofficial version), p. iv. 6 It is not easy to list all drivers leading to the new regulatory framework. Rather, it appears a seamless process triggered by the telecoms market liberalisation. However, shall a non-exclusive list be provided, it could include information society’s eve, global competition challenges to European companies and internal market, Internet phenomenon, and the ever-increasing pace of technological and market changes. 5
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Italian telecoms market’s partial liberalisation and the complex allocation of competition competence between national authorities, even a fully realised implementation (so far not the Italian current situation) and a different competition competence allocation would have probably produced the same results that the new framework is likely to produce. New regulation’s effectiveness in dealing with convergence effects in the electronic communications services market is thus to be put in doubt.
I.
The phenomenon of convergence under the new regulatory framework
The 1998 framework has been the means to enable the transition from monopoly to open competitive telecoms markets. Since a competitive telecoms market has been deemed achieved as a result of its implementation8, the Commission, considered necessary a more suitable regulation for the new competitive environment, 1. The new regulatory framework The new regulatory framework has introduced a mechanism to phase out those former framework’s9 exante provisions no longer necessary. Three noteworthy characteristics are here to be pointed out regarding its scope and structure. Firstly, the new framework, a part from having reorganised and simplified the 1998 regulation (for example, a smaller number of directives replacing the former twenty), adopts a horizontal approach, while the former adopted a vertical one. The 1998 framework’s approach consisted, thus, of different regulations for telecoms, broadcasting and information technology sector. This implied that same services supplied to final users were subject to different regulation according to networks (cable or satellite for example) and operators (cable service provider, or telecoms or broadcasting operator) carrying it. Such an approach has not been deemed suitable anymore due to the technological changes occurring within the telecoms sector. Digital technology application to content makes it “scaleable” and, then, suitable for different environment as well as deliverable on Evaluating sufficiently implemented the legislation that makes up the 1998 framework does not necessarily mean that the markets have been opened as de iure and de facto liberalisation can take place at different moments. Illustrative of this difference is the description of the Italian telecoms market’s de iure liberalisation (see II(1.2.1), infra), and competitive structure – i.e. de facto liberalisation – (see II(1.2), infra). 8 In both Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions – Seventh Report on the Implementation of the Telecommunications Regulatory Package, COM(2001) 706 (hereafter 7 th Report), http://www.europa.eu.int/information_society/topics/ecomm/doc/all_about/implementation_enforcement/annualreports/7threport/7 report2001.pdf; and Eighth Report from the Commission on Implementation of the Telecommunications Regulatory Package – European telecoms regulation and markets 2002, SE(2002)1329 (hereafter 8 th Report), http://europa.eu.int/information_society/topics/telecoms/implementation/annual_report/8threport/finalreport/com2002_0695en01.p df, the Commission deemed the 1998 regulation’s implementation to be not complete though sufficient to move to ex-post regulation (see both documents’ Summary and Principal Conclusions). 7
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different network infrastructures 10. The current framework’s approach is instead horizontal in order to offer same treatment to operators under similar circumstances 11. Here, it is not the network or the operator offering the service to be relevant, rather, the nature of the service carried. Then, regardless of other elements, so far a service is an electronic service falling under the definition of art. 2(c) Framework directive12, it will be covered by the same treatment. Moreover, the horizontal approach also aims to remove the obstacles to the provision of communications networks and services at the European level by encouraging the establishment and development of trans-European networks and the interoperability of pan-European services, and removing discrimination against companies across the EU. Secondly, the new framework expressly distinguishes networks and services from content, covering only the former. In practice, what the Commission considered subject matter of the new regulation are “telecommunications networks (fixed or mobile), satellite networks, cable TV networks, and terrestrial broadcast networks, as well as the facilities such as Application Program Interfaces, which control access to the services” 13. Thirdly, broadcasting content, financial services and certain information society services are not covered by the new framework even when conveyed over electronic communications networks using electronic communications services 14. The new European framework, thus, does not include information society services, For a complete overview of this former framework see Commission Staff Working Document, Europe’s Liberalised Telecommunications Market – A Guide to the rules of the Games, 2001, http://europa.eu.int. 10 Green Paper, n. 2, supra, p. 3, where also “the basic building block is the MPEG family of standards for the digital encoding of moving images. Once encoded in this format, images may be modified, manipulated, or transmitted in the same way as any other digital information. The systems and networks handing such information are of course indifferent to the nature of the source material, be it image, sound or text. Digital source encoding thus forms the basis of technological convergence”. 11 For a complete analyses of these two approaches see R. Frieden, Adjusting the Horizontal and Vertical in Telecommunications Regulation: A Comparison of the Traditional and a New Layered Approach, 55 Federal Communications Law Journal, 2003, p. 207. 12 Framework directive, n. 18, infra. The 1998 framework telecoms services transit from “services whose provision consists wholly or partly in the transmission and routing of signals on a public telecommunications network by means of telecommunications process, with the exemption of radio and television broadcasting to the public, and satellite services” (Directive 94/46/EC) to those “whose provision consists wholly or partly in the transmission and routing of signals on telecommunications networks, with the exemption of radio and television broadcasting” (Directives 97/33/EC and 97/51/EC), Commission Staff Working Document, Europe’s Liberalised Telecommunications Market, n. 9, supra, p. 60. The new framework thus does not operate a simple renaming of the services concerned in that electronic communications services now including those broadcasting and television services before excluded from the telecoms services definition. Under the new regulatory framework a telecoms services definition listing different services does not exist anymore in that the “horizontal regulatory approach” includes all services consisting of conveyance of signals irrespective of operators or networks used, unless they involve provision, or control over, content. 13 Communication, n. 5, supra, p. vi. 14 Information society services refer to “Any service normally provided for remuneration, at a distance, by electronic means and at the individual request of a recipient of services. For the purposes of this definition: “at a distance” means that the service is provided without the parties being simultaneously present, “by electronic means” means that the service is sent initially and received at its destination by means of electronic equipment for the processing (including digital compression) and storage of data, and entirely transmitted, conveyed and received by wire, by radio, by optical means or by other through the transmission of data on individual request”. See Directive 98/48/EC of the European Parliament and of the Council of 20 July 1998 amending Directive 98/34/EC Laying Down a Procedure for the Provision of Information in the Field of Technical Standards and Regulations, O J L 217, p. 21. Information society services, therefore, include electronic commerce services, distance teaching services, electronic publications and information services (i.e. a wide range of services such as news, weather reports, online databases and so forth), professional teleservices (telemedicine and legal advice), home banking, and online entertainment. See Regulatory Transparency in the Internal Market for Information Societies Services, Proposal for a European Parliament and Council Directive amending for the Third Time Directive 83/189/EEC Laying Down a Procedure for the Provision of Information in the Field of Technical Standards and Regulations, http://europa.eu.int/ISPO/infosoc/legreg/docs/regtrans.html (unofficial text). Again, in order to understand the differences between electronic communications and information societies services, the Framework directive recital 10 (see n. 18, infra) states that information society services are those “activities which take place on-line. Most of these activities are not covered by the scope of this Directive because they do not consist wholly or mainly in the conveyance of signals on electronic communications networks. Voice telephony and electronic mail conveyance services are covered by this Directive. The same undertaking, for example an Internet service provider, can 9
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TV programmes, radio and telecommunications terminal equipment15, or measures dealing with the audiovisual policy and content regulation, security interests, public policy and investigation, detection and prosecution of crime. With regard to its structure, the new framework consists of three different elements: binding sectorspecific legislation; complementary non-binding sector-specific measures; and competition law16. The former operates the current framework simplification and consolidation by reducing twenty directives to the six measures below mentioned. The latter consists of those flexible tools, such as guidelines and recommendations, adopted by the Commission or national authorities in order to achieve harmonised solution to common problems. Lastly, competition law has been reconsidered in the competitive environment established by the liberalisation process as the right tool to avoid the still-existent incumbent operators extending their influence throughout the convergent environment17. 1.1 Binding sector-specific legislation The new framework legislation introduces five new directives: one general directive combined with four specific directives. The former is the below summarised Framework directive18, offering a common regulatory framework for electronic communications networks and services; the latter measures deal with the specific issues of access, licensing, universal service, and privacy protection19. The Framework directive establishes the bases of the whole binding legislation to be implemented by national regulators. It specifies policy objectives for Member States to achieve and regulatory principles to act in accordance with, as well as rights, responsibilities, decision-making powers and procedures of national
offer both an electronic communications service, such as access to the Internet, and services not covered under this Directive, such as the provision of web-based content”. 15 TV programmes and radio and telecommunications terminal equipment are still regulated under the directives 89/552/EEC and 1999/5/EC respectively. The new regulatory framework does cover consumer equipment used for digital television (see Framework directive, n. 18, infra, recital 8). 16 Communication, n. 5, supra, p. 14. 17 The wording “new regulatory framework” is here used mainly to refer to the binding sector-regulation. Nevertheless, when necessary, guidelines, recommendations and the other measures adopted will be considered. 18 Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic network and services, OJ L 108, 24.4.2002, p. 33. 19 Namely, Directive 2002/18/EC of the European Parliament and the Council on access to, and interconnection of, electronic communications network and associated facilities, OJ L 108, 24.4.2002, p. 7; Directive 2002/22/EC of the European Parliament and the Council on universal service and users’ rights relating to electronic communications networks and services, OJ L 108, 24.4.2002, p. 51; Directive 2002/20/EC of the European Parliament and the Council on the authorisation of electronic communications networks and services, OJ L 108, 24.4.2002, p. 21; and Directive 2002/58/EC of the European Parliament and the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector, OJ L 201, 31.7.2002, p. 37.
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authorities20. It also states specific consumer rights and an appropriate level of interoperability for electronic communications services and equipment 21. 1.2 Non-binding regulation The transition to post-regulation mechanisms is harmonised in all Member States by the Commission’s non-binding regulation, namely: Recommendation on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC (hereafter Recommendation); its Explanatory Memorandum22 (hereafter Memorand um); and Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services (hereafter Guidelines) 23. Even though there are no effective sanctions in case of non-compliance with this regulation, it appeared the most suitable means to either respond to the electronic communications services market changing needs or align binding sector-regulation to the on-going developments. Non-binding regulation can timely provide the direction that binding provisions have to take according to the market structure changes and technology developments, and also represents an effective mean to ensure a harmonised implementation of the new framework. It can thus supply national legislators with the European legislator’s viewpoint and interpretation of the legislation for implementation.
2. The transition from ex ante to ex-post regulation The new regulatory framework’s goal is increasing competitiveness of the liberalised telecoms sector, in light of technology and market changes, by gradually enabling the transition from ex-ante to ex-post regulation without jeopardising either competition derived from the liberalisation or public interest objectives.
Several principles, in accordance with the NRAs are to act, emerge from the Framework directive (n. 18, supra) such as, for example, separation of regulatory and operational functions (recital 11); right to appeal at national level against NRAs’ decisions (recital 12); right of ask information whether proportionate and not unduly pervasive. The European legislator establishes a set of obligations related to, for example, cooperation with the national competition authorities (art. 3(4) and recital 35), and consultation and transparency mechanism to adopt during their activity (art.6). 21 For example, undertakings providing electronic communications networks entitled to install facilities on, over or under public or private property shall be encouraged to share such facilities or property (art. 12 Framework directive, n. 18, supra). 22 Commission Recommendation of 11/02/2003 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 network and services, C(2003) 497; and 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 network and services, Explanatory Memorandum, http://europa.eu.int/information_society/topics/telecoms/regulatory/maindocs/documents/explanmemoen.pdf. 23 Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, 2002/C 165/03. 20
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The move from sector-specific regulation to competition law results from both Framework directive and non-binding regulation24. The mechanism leading to the phasing out of the sector-specific regulation in favour of the competition law is articulated in two distinct phases: Commission’s definition of relevant markets and national regulatory authorities’ analysis. 2.1 Phase I: Commission’s definition of relevant markets Under the 1998 framework, the market areas subject to ex-ante regulation were not defined in accordance with the principles of competition law but chosen by the Commission. Within these areas, the national regulatory authorities (hereafter NRAs) had the power to designate operators presenting Significant Market Power (hereafter SMP) when they had more than 25% market share. However, this threshold could be deviated considering several factors, such as operators ability to influence the market, their turnover in comparison with the market size; their power to control access to users and access to financial resources; and their experience in providing product and services to the market. This implied that in all Member States the incumbent operator was judged possessing SMP and subject to ex ante obligations 25. Since telecoms markets has been currently deemed open, the new regulatory framework has required electronic communications services markets to be defined in accordance with European competition law principles. The Commission, thus, under art. 15(1) Framework directive, adopted the Recommendation to provide such a definition. In other words, the Commission supplied “translation” of pre-defined areas - subject to ex-ante regulation - to that of relevant markets of product and services under the competition law on which NRAs are to carry out their analysis. However, NRAs can also add to Commission’s list of relevant markets other markets to be analysed due to peculiar features of a national electric communications services sector26. 2.1.1 Criteria to define relevant markets
See I(1.1) and (1.2), and n. 18-19, supra. In the 7th Report, n. 8, supra, p. 3-4, the Commission, having carried out a market and regulatory overview of the telecoms market, noted that: “Incumbent operators’ market shares by retail revenues have fallen since liberalisation on average by 10% for local calls and by around 20% for long distance and 30% for international calls. The incumbent’s share of retail revenues for international calls is below 50% in one Member State, around 60% in four Member State and between 70% and 75% in three more. However, while incumbents’ market shares for local calls are around 70% in two Member States, they remain at between 90% and 100% of the market in at least ten”. 26 Art. 7 Framework directive (n. 18, supra), however, requires notification to the Commission whereas a NRA defines a relevant market not already included in Recommendation’s Annex I as well as decides whether or not to designate an undertaking as having SMP or adopts proportionate and provisional measures in exceptional circumstances. As to the notification procedure see Commission Recommendation of 23 July 2003 on notifications, time limits and consultations provided for in Article 7 of the Directive 2002/21/EC of the European Parliament and the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services, C(2003)2647 final, http://www.europa.eu.int/information_society/topics/ecomm/doc/highlights/current_spotlights/recommendation_art7/rec_en.pdf. As to March 2004 several notifications have been submitted http://forum.europa.eu.int/Public/irc/infso/ecctf/library?l=/&vm=detailed&sb=Title_d. 24 25
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The Framework directive requires the Commission to apply the principle of European competition law in identifying those product and services markets within the electronic communications sector, the characteristics of which may be such as to justify the imposition of regulatory obligations27. Thus, appropriate criteria are: (a) presence of high and non-transitory entry barriers; (b) intrinsic market trend towards effective competition; and (c) relative efficiency of competition law and complementary ex-ante regulation28. For the first, a balance between the presence of such barriers and the dynamic character of the electronic communications market should be taken into account as, despite of high and non-transitory-barriers, the market might tend towards a competitive outcome29. The relevant barriers are structural and legal or regulatory barriers. The former are those causing asymmetric conditions between incumbents and new entrants due to level of technology and its costs - resulting in the impedance of entry. The legal or regulatory barriers, instead, result from all the measures having a direct effect on the conditions of entry and the position of operators on the relevant market. As to the second criteria, the question whether a market has characteristics which will enable effective competition has to be answered. In the Commission’s opinion this “involves examining the state of competition behind the barrier to entry, taking account of the fact that even when a market is characterised by high barriers to entry, other structural factors or market characteristics may mean that the market tends towards effective competition” 30. The last criteria implies that ex-ante regulation is to be considered an appropriate complement to competition law only where applying competition law would not adequately address market failures31. Whether electronic communications services markets continue to be identified, by subsequent versions of the Recommendation, justifying possible ex-ante regulation depends on the persistence of high barriers, the dynamic state of competitiveness and the sufficiency of competition law by itself (absent ex ante regulation) to address persistent market failures. The following does not seek to review all electronic communications markets set out in Recommendation’s Annex I, rather, it will address only those related to broadcasting transmission as deemed
Starting point for the markets’ identification are those markets listed in Framework directive’s Annex I (n. 18, supra) reporting all market areas subject to ex-ante regulation under the 1998 framework. Final point is, instead, the Recommendation’s Annex I (n. 22, supra,) setting out the corresponding relevant markets which are to be analysed by NRAs. 28 Memorandum, n. 22, supra, p. 10-13. 29 Id., p. 10. 30 Id., p. 11. 31 Id., p. 12. 27
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relevant to this paper as those where regulators are more forced to take into account the convergence process occurring between “traditional” telecoms and broadcasting services. 2.1.2 Relevant markets related to broadcasting transmission The Commission considered all market areas subject to ex-ante regulation under the 1998 regulatory framework, as listed in Framework directive’s Annex I. This includes markets related to broadcasting transmission as technological convergence currently enables broadcasting operators to convey their services over all networks through digital technology32. In fact, under the new legislation, transmission services in networks used for broadcasting are included in the electronic communications services excluding, however, those services providing or exercising control over content transmitted using electronic communications network and services. In other words, whilst broadcasting services provision lies outside the scope of the new framework, networks and services used for broadcasting services delivery are within its scope33. The Commission considered retail and wholesale broadcasting markets separately. As a result, the retail market related to broadcasting transmission lies outside the new regulatory framework scope. This markets consists of those services providing or exercising control over content, even if transmitted through electronic communications networks and by electronic services providers, whilst content, as previously noted, remains uncovered under the new legislation. A brief overview of the Commission’s description is here necessary to derive the wholesale markets or assess whether any retail market should have been included for the Recommendation’s purpose. In its Memorandum the Commission identified the retail level as consisting of radio and broadcasting transmission to end-users and including “free-to-air broadcasting as well as subscription and pay broadcasting and also the delivery or transmission of interactive services” 34. To deliver those services some means of both accessing end users and controlling end-users’ access for delivery are required. This implies that reception of services delivered by broadcasting operators to authorised end-users is enabled by the use of conditional access
Even here scarce consideration convergence effects’ emerges as the Commission, when defining the relevant markets related to broadcasting transmission, does not mention that also broadcasting networks can convey electronic communications services. 33 Electronic communications services include telecoms and transmission services in network used for broadcasting. Conversely, the latter are not part of the telecoms sector under the 1998 framework. It has to be pointed out that there is not a perfect correspondence between market listed in Recommendation’s Annex I (n. 22, supra), including the broadcasting transmission services market among those markets NRAs have to analyse, and the market areas listed in Framework directive’s Annex I (n. 18, supra), not including the latter. Thus, the question arises as to broadcasting transmission services’ presence in Recommendation’s Annex I. A reason can be offered by the same Commission where it asserts that “Article 15(1) of the Framework directive requires the Commission to define markets in accordance with the principles of competition law. The market areas set out in Annex I of the Framework directive cannot all be regarded as such on the basis of the examination undertaken in section 4 [of the recommendation’s explanatory memorandum]. The Commission has therefore defined markets (corresponding to the market areas listed in Annex I of the Framework directive) in accordance with competition law principle”, Memorandum, n. 22, supra, p. 39. Commission is likely to have considered the broadcasting transmission services market because, even though not included in the market areas listed in Framework directive’s Annex I, they needed to be evaluated. 34 Id., p. 36. 32
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systems (hereafter CASs) and other associated facilities, such as decoders or, in case of interactive services 35, software and related applications, incorporated in set-top boxes. From the above definition of retail level emerge two different markets at the wholesale level: the market of broadcasting transmission services and distribution networks, and that of ancillary technological broadcasting services (including CASs). The former is included in the Commission’s Recommendation. Although “the supply and demand substitution conditions between the different delivery platforms may be such that the feasibility of switching between platforms is limited” - therefore, “In that situation a hypothetical monopolist on one platform may not necessarily be constrained by the activities of operators of other platforms”36 -, the market of broadcasting transmission services and distribution networks, providing the means to deliver broadcast content to end-users, has to be analysed by the NRAs, especially where limitation on switching between platforms are absent. As to the latter, CASs, application program interfaces, and electronic programme guides on one or more transmission networks are necessary means for broadcasting operators to deliver subscription or pay broadcasting as well as interactive services to end-users. No wholesale market for these ancillary technicalbroadcasting services, however, has been identified by the Commission for the purpose of the Recommendation by virtue of articles 5 and 6 of Access directive 37. These provisions, in fact, permit Member States to require all CAS operators to offer access on fair, reasonable and non-discriminatory terms or to apply such access terms only in respect of those CAS operators found to have SMP on the relevant market. In this second case, such obligations can be imposed only after NRAs, having carried out their market analysis, conclude for the presence of a monopolist across to all delivery platforms or on a specific one38. In both cases, the retail market regulation is up to the Member States’ discretion. 2.2 Phase II: NRAs’ analysis As soon as possible after the Recommendation’s adoption, NRAs are to carry out, under art. 15(3) Framework directive, an analysis of the relevant product and services markets in accordance with either Commission’s definition or Guidelines principles. The analysis consists of (a) defining geographic scope of markets identified in the Recommendation; (b) evaluating their competitiveness; and, according to the assessment results, (c) making a decision about the current specific-regulation. If the market is deemed to be competitive, ex-ante regulation can be withdrawn. On the contrary, if it lacks competitiveness, the analysis has to
Interactive services require a return path which may be part of the broadcast network or separate as, for example, using telephone lines (a telephone line is just part of a different network). 36 Memorandum, n. 22, supra, p. 37. 37 See n. 19, supra. 38 Memorandum, n. 22, supra, p. 37. 35
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be carried on in order to (d) address the existence of operators possessing SMP, and (e) impose the necessary obligations or amend the current regulation39. So far few Member States have complied with this analysis’ obligation while the others are still working on it40. 2.2.1 Relevant markets definition Starting point for every NRA’s analysis is the Recommendation’s Annex I listing those product and services markets whose characteristics may justify ex-ante obligations. In defining the geographic scope of those markets listed by the Commission and carrying on the further analysis phases, NRAs are required to use the same competition law methodology adopted in the Recommendation41. This implies that NRAs’ definition is based on the grounds of substitutability concept within both the product and geographical markets. As far as the relevant product or service market is concerned, substitutability criterion identifies all those products or services sufficiently interchangeable and, therefore, included in the same market. Interchangeable products or services are to be determined in the light of either demand or supply substitution. Demand substitutability focuses upon the interchangeable character of products or services from the buyer’s point of view. Thus, in determining demand substitutability, NRAs have to make use of any previous evidence of consumers’ behaviour as well as, when available, historical price fluctuations in potentially competing products, records of price movements, and relevant tariff information. It should also take into consideration that, in the electronic communications services market, the possibility for consumers to substitute a product or a service for another may be hindered by considerable switching costs 42. In this case, products whose substitution presents switching costs cannot be included in the same market. Supply substitutability hinges on whether suppliers other than those offering the products or services in question would switch their line of production immediately or in the short term or offer the relevant products or services without incurring significant additional costs. Several factors are thus to be taken in account, such as the likelihood that undertakings not currently active on the relevant product market may decide to enter that market, any existing legal, statutory or other regulatory requirements which could defeat a time-efficient entry 43.
The analysis does not have to be limited to those markets listed in the Recommendation (n. 22, supra) but can also be expanded to other electronic communications markets according to the national features. 40 In order to have a survey of the new regulatory framework’s implementation see the 9 th Report, n. 8, supra. As to the Italian implementation see I(3), infra. 41 Recommendation, n. 22, supra, p. 7. 42 For example, consumers who invest in technology in order to receive a service or use a product may incur in additional costs in switching to another service or product. Again, consumers of existing providers can be “locked in” by long term contracts. Such situations, as well as others more, may be not uncommon in the electronic communications services market. See Guidelines, n. 23, p. 17. 43 Id., p. 18. 39
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It would be prudent to remember that occasionally different kinds of products or services may be used for the same end. This is especially true in the electronic communications services sector where, as noted by the Commission, “consumers may use dissimilar services such as cable and satellite connections for the same purpose, namely to access the Internet. In such a case, both services (cable and satellite access services) may be included in the same product market. Conversely, paging services and mobile telephony services, which may appear to be capable of offering the same service, that is, dispatching two-way short messages, may be found to belong to distinct product markets in view of their different perceptions by consumers as regards their functionality and end-use” 44. Once the relevant product markets are identified, next step is delineating their geographical dimension which is supposed to be the area (a) in which the operators concerned are involved in products or services supply and demand; (b) in which competition conditions are similar or sufficiently homogeneous; and (c) which can be distinguished from neighbouring areas due to appreciable differences in competition condition. In defining electronic communications services markets’ dimension, several factors have to be taken in account, such as linguistic differences, areas covered by networks and legal or other regulatory instruments existence 45. 2.2.2 SMP assessment Having defined the relevant national markets 46, NRAs may properly assess the conditions of effective competition striving for concordance under competition law principles and allocation of competence adopted in each Member State. This means that there are Member States in which this analysis will be carried out by NRAs, and others in which the national competition authorities will participate or be the main actor of the procedure. The Commission does not seem to be concerned about this analysis phase as the Guidelines do not enlist particular criteria. Conversely, its concerns regard NRAs’ response in case of markets being deemed not competitive. In fact, the SMP assessment which must follow the lack of competition within a relevant market is widely dealt with, in regard of the criteria to be used in defining the concept of dominant position. Art. 14 Framework directive defined “having significant market power” as a position equivalent to dominance, that is a position of economic strength affording it the power to behave to an appreciable extent, independently of competitors and customers. As a result the new framework can be deemed to align the SMP concept with the definition of dominant position as meant at art. 82 of the Treaty establishing the European Union. However, criteria for the SMP position cannot be exactly the same as those of the dominant position as the former is an ex-ante assessment, whilst the latter is an ex-post evaluation. As emphasised by the Commission: “in an ex-ante environment, market power is essentially measured by reference of the power of the undertaking concerned to 44 45
Id., p. 16. Id., p. 19
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raise prices by restricting output without incurring a significant loss of sales and revenues”. For this reason, in a forward-looking market analysis, either potential competitors or the complex character of economic, factual and legal situations have to be taken in account where there is a lack of evidence or record of past behaviour or conduct on which the analysis can be based. Market share, therefore, remains one of the main criteria to base the analysis upon. Although a high market share alone is not sufficient to establish the possession of significant market power, it is unlikely that an operator without market share power would be in a dominant position. Starting point is thus the percentage of market possessed by the undertaking concerned: whilst a market share of 25% and under is not likely to enjoy a dominant position (at least not single 47), very large market shares (more that 50%), themselves, are evidence of a dominant position as a dominant position usually arises with market shares over 40%48. The criteria used to measure the market share may vary from market to market in accordance with the characteristics of the relevant market, and it will be up to NRAs to decide those most appropriate. In the Commission’s opinion, other criteria to combine with the market share are (a) the overall size of the undertaking; (b) control of infrastructure not easily duplicated; (c) technological advantages or superiority; (d) absence of low countervailing buying power; (e) easy or privileged access to capital markets/financial resources; (f) product/services diversification; (g) economies of scope; (h) vertical integration; (i) a highly developed distribution and sales network; (l) absence of potential competition; and (m) barriers to expansion49. A dominant position can thus derive from a combination of the above criteria, which, when taken separately, may not necessarily be determinative. Having reviewed the new framework with an overview of the scheme as to broadcast markets, it will now be helpful, in order to understand its likely impact within a national market such as Italy, to examine the status and significant developments there under this current framework. The following will explore this.
3. Italian implementation of the new regulatory framework In the 9th Report on the new regulatory framework’s implementation the Commission lists those countries that, as to 1st November 2003, had taken action to incorporate the new regulation’s directives, whose
Precision requires noting that the term “national” is not used in a technical sense. It only refers to those relevant markets resulting from the NRAs’ analysis in contrast with markets identified by the Commission in the Recommendation. It should in fact be recalled that the former can be national, regional, local, according to their geographical dimensions. 47 In the telecoms markets particular account has to be reserved to the collective dominant position insofar as the number of operators is now increasing but the transition from monopoly to full-competition necessary passes for an oligopolistic market where tacit coordination can be easily put in place. 48 Guidelines, n. 23, supra, p. 26. 49 Id., p. 28. 46
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deadline was 24 th July 200350. It also highlights that in certain cases, as the Italian one, secondary legislation is still required to ensure full transposition. As far as Italy is concerned, then, a first phase has been complied with (European directives’ translation into national law), while the latter is still on-going (NRA’s definition of relevant markets and, in case, ex-ante regulation on operators possessing SMP). As to the first phase, the Italian Government adopted, according to art. 41 of law 166/200251, a decree aiming to implement the whole regulation package and consolidating the entire Italian regulation into a single code. Then, after public consultation involving operators and the Italian NRA, decree no. 259/2003 has introduced the Electronic Communications Code (hereafter Code). The main points of this regulation are a) powers’ allocation between the Ministry of Communications and the national NRA; b) simplification of the licensing regime; c) process of notification under art. 7 Framework directive; and d) introduction of spectrum trading. Beside, art. 18 of this Code requires the Italian NRA to adopt the relevant markets definition according to the Guidelines and competition law principles by the 15th of December 2003. Art. 19 of the Code, then, details the procedure this authority has to follow. The second phase is on-going as the Italian NRA is currently carrying out the relevant markets’ analysis. In order to simplify this process it has grouped the 18 markets listed by the Commission in the Recommendation’s Annex I in five clusters 52. For each of them the Italian NRA has prepared a questionnaire aiming at collecting information on network’s topology and coverage of each operator. In the meantime the existing obligations remain in force according to Recommendation’s recital 17. It is to point out that, as to the relevant markets related to broadcasting transmission, the Italian NRA has the choice, under art. 5 and 6 of the Access directive, between applying access obligations to all CAS operators or only to those possessing SMP in the ancillary services market (as a result of the required analysis). In this context, art. 43 of the Code - and the related annex I - adopts the first option and introduces obligations to offer access on fear, reasonable and nondiscriminatory terms on all operators as long as an adequate market analysis will possibly release those not possessing SMP.
II.
The Italian telecoms market53: a case study in the convergent environment
As to the other countries, they are Denmark, Spain, Ireland, Italy, Austria, Finland, Sweden and the United Kingdom (9 th Report, n. 8, supra, p. 3). 51 Law 166/2002 gave power to the Government to implement the new regulation through the adoption of a decree which does not require any further approval by Parliament. 52 The identified clusters are the following: fixed retail telephony (corresponding to markets from 1 to 6 of Recommendation’s Annex I); fixed wholesale telephony (corresponding to markets from 8 to 11, and 22 of Recommendation’s Annex I); mobile; leased lines; and broadcasting. An unofficial English version of questionnaires is available at http://www.agcom.it/operatori/operatori_AMC.htm#eng. 53 The case concerned took place in 2000-2001 under the former regulatory framework. Then, the term “telecoms market” will be used. On the differences between telecoms and electronic communications services markets see n. 12, supra. 50
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1.
The Italian telecoms market under the 1998 and new regulatory frameworks
1.1
A brief history of the Italian telecoms market liberalisation
Italian telecoms market liberalisation was lead by the 1987 “Green Paper on the Development of the Common Market for Telecommunications Services” 54, and given substantive force by adoption (albeit partial) of European liberalisation and harmonisation directives. These directives’ impact has yet to be fully realised due to Italy’s retentive mechanism for implementing EU legislation. However, this sector has been moving from a monopoly to an open market since mid-90’s. Three steps can be individuated, taking also into account that, in parallel, the Italian government tackled the telecoms sector transition from state to private proprietary structure. 1.1.1 Pre-liberalisation proprietary structure Pre-1992, telecommunications services were provided directly by ASST (Telephone Services State Agency) and Posts and Telegraphs Administration (PT) or indirectly through several concessionaires such as SIP, ITALCABLE, TELESPAZIO, SIRM. This monopoly was segmented into services functions: ASST and ITALCABLE supplying international voice telephony service; SIP national voice telephony service; TELESPAZIO satellite services; and SIRM marine radiomobile services 55. In 1992, the Italian government, under law 58/92, devolved all telecoms services management to concessionaires. It thus introduced a completely indirect telecoms services supply, retaining solely the posts and telegraphs services through ASST. However, as this telecoms services’ division was recognised to weaken the overall development of the Italian telecoms industry, in 1994 the Italian government merged all concessionaires into a single company, Telecom Italia (hereafter TI), which came to include, in 1995, the newly created Telecom Italia Mobile (hereafter TIM)56. Therefore, by 1995, no telecoms services were directly provided by government, but entirely through a state concessionaire. 1.1.2 Liberalisation phases Italian telecoms market liberalisation can be broadly divided in three phases as dictated by the successive EU directives.
“Green Paper on the Development of the Common Market for Telecommunications services and equipment”, COM(87)290, http://europa.eu.int/ISPO/infosoc/legreg/telecom.html#Green%20Papers. 55 See G. Ballarino, La sfida dell’armonizzazione. Relazioni industriali e contratto di settore alla Telecom Italia, Rapporto di ricerca, Milan, January 2002, http://www.ireslombardia.it/rapporto_telecom_2002.pdf. 56 Id., § 7. 54
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In 1995, telecommunication services (except fixed, voice telephony, mobile, satellite services and network installation) were liberalised following decree no. 103/95 on competition in the Italian telecoms market, mirroring Directive 90/388/CEE57. In 1997, network and satellite services were then liberalised under Decree no. 55/97 in compliance with the Satellite Directive 94/46/EC requiring Member States to remove exclusive and privileged rights concerning satellite equipment and services 58. In parallel, the government, under law 249/97, created the Communications National Regulatory Agency which became responsible for monitoring and regulating the telecoms and broadcasting sector59. Finally, in 1997 decree no. 318/97, in compliance with Directive 96/19/EC60, completed telecoms market full liberalisation granting rights to operators to provide any heretofore reserved service, including voice telephony 61. 1.1.3 Italian telecoms market privatisation TI, even after the final phase of the EU driven liberalisation of telecoms market, could be still classified as a state-controlled entity 62. It took until May 1999 for the incumbent to be appreciably privatised when Olivetti 63 obtained operational control through acquisition of a 52.12% stake in TI rising to 54.99% the following June as a consequence of the activities of its subsidiary Tecnost S.p.a. Even then, the government retained a controlling equitable interest (3.46%) in the company64. In July 2001, TI’s control was gained by Pirelli, Italian tire and cable company65, along with Benetton group, through a complex deal with the primary shareholder leading Pirelli to own 27% of Olivetti and, thus, with the power to make management and strategic decisions 66. 1.2
Competitive structure of the Italian telecoms and broadcasting markets
Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, O J L 192, 24/07/1990, p.10. 58 Commission Directive 94/46/EC of 13 October 1994 amending Directive 88/301/EEC and Directive 90/388/EEC in particular with regard to satellite communications, O J L 268, 19/10/1994, p. 15. 59 See II(1.3.1), infra. 60 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, O J L 074, 22/03/1996, p. 13. 61 OECD, Review Regulatory reform in Italy (hereafter Review), 2001, § 7, http://www.agcom.it/oecd/bk_intro_eng.htm. 62 Even though liberalisation and privatisation are not correlated processes, the Italian government preferred to follow the reported sequence, and - after having liberalised the sector - privatised it. 63 Olivetti is one of Europe’s largest industrial holdings, active in the information and communications technology business even before TI’s acquisition. On its activity, history, share capital and shareholders see http://www.olivetti.com/cgi-bin/index.asp. 64 Review, n. 61, supra, § 7. 65 Pirelly is active in the production of tyres and electric cables - from very high to low voltage - for underground, submarine and aerial applications. Following TI’s acquisition, it expanded its activity to the optical telecommunications market. See www.pirelli.com. 66 “The Italian government holds a “golden share” of 3.46% which allows it to block any actions that might pose a “vital threat” to the company. The remaining shares are publicly traded in Italy and abroad”. See IDC EMEA, European Telecommunications Services. Monitoring European Telecoms Operators: Final Reports, 2002, p. 250, http://europa.eu.int/information_society/topics/telecoms/implementation/studies/monitoringeutelcomop/finalwordversion.doc. 57
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As a result of the 1998 regulatory framework implementation, the Italian telecoms market transited from monopoly to a more competitive structure increasing numbers of telecoms operators and services, at least in some markets. A brief overview of this sector’s competitive structure at that time will be helpful to the case study’s understanding. 1.2.1
Telecoms market
In 2000-2001 competitive structure differed in fixed telephone and mobile markets. As to the former, TI possessed a dominant position deriving from its previous monopoly as shown by the extremely high market share in the fixed-line market67. Although there were over 90 operators licensed for this service, entry into this market required leasing of capacity from TI which owned all fixed-access lines. As to the mobile sector, even here TI’s dominance was still strong due to its 49% market share through its subsidiary TIM. However, other operators were offering other competitive services, namely OPI, WIND, BLU68. 1.2.2
Broadcasting market
At the end of 2000, the Italian unencoded television broadcasting market was still conveyed through terrestrial analogue communications networks and had a capacity for 11 free national television channels broadcasting programmes supplied by 700 local television broadcasters. This system has been introduced by the allocation frequencies plan the sector regulator issued in 1998 according to art. 3(2) law 249/97. Three broadcasting companies, RAI Radiotelevisione Italiana, Mediaset and Cecchi Gori Communications were then concessionaires of the public services with market shares equals to 56.2%, 30.2% and 2.6% respectively. Subscription broadcasting service providers (including satellite broadcasters) supplemented the state-owned service with 60 further channels. Cable broadcasting service was only available through two providers: Stream, a TI’s subsidiary possessing more than a dominant position (100%), and Telepiù (which was to start in that period)69. 1.3
Regulatory institutions 1.3.1
Italian communications market regulator
Almost 100% in the local calls market; 93% in the long distance calls market; 68% in the international calls market; and 100% of leased lines (Review, n. 61, supra, §8). On current situation see II(3.1.1), infra. 68 As to these operators’ market shares: Opi posses 38,7%, Wind 11,1%, and Blu 1,51%. Moreover, TIM had – and still has – the only analogue licence (Review, n. 61, supra, § 8). On current situation see II(3.1.1), infra. 69 Id., § 15. On current situation see II(3.1.2), infra. 67
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The sector regulator (hereafter NRA70) is an independent body established under law 249/97 and commences its activities in June 1998. It has a regulatory competence over the whole communications sector: broadcasting, telecommunications, and press, within which it also protects pluralistic information and ensures the protection of users’ rights 71. Its primary task is to promote competition within telecoms markets, removing regulatory and cultural obstacles in the market and divesting monopolistic transactions 72. NRA achieves this by issuing numbering plan, rationalises the available resources and cultivates new services. Moreover, it also oversees carrier selection, carrier pre-selection, local loop unbundling and mobile number portability73. NRA adopts ex-ante regulation but has no powers in ex-post competition protection within telecoms and broadcasting markets. Its competition competence ends, thus, where the Italian competition authority’s (hereafter NCA74) competence starts. This implies a separation between the activity of promoting competition through ex-ante regulation and protecting competition through ex-post control: the former assigned to NRA; the latter to NCA. 1.3.2
National Competition Authority
NCA is an independent authority established by Italian competition law 287/1990, assigning it the task of protecting competition in all relevant Italian markets, including the telecoms sector 75. NCA has thus power to enforce competition rules in the telecoms market against anti-competitive behaviours and mergers. As respect to the latter, law 287/90 requires advance notification of all mergers and acquisitions when the acquired company’s gross aggregate turnover on Italian territory exceeds 40 million euro or all companies’ gross turnover in the Italian market exceeds 398 million euro (set 30 April 2003) 76. The Act also provides, in
The Italian telecoms market regulator is named Authority for Guarantees in the Communications (Autorità per le garanzie nelle comunicazioni) and is usually referred as “Agcom”, it will be here mentioned as NRA, however. Formal wording “Agcom” will be maintained only in citations. 71 This interest is regarded as particular of the broadcasting area where the NRA is the guarantor of pluralistic information. In cooperation with external experts and data survey companies, it has set up an important plan for around-theclock monitoring of national TV programmes in order to assess the extent to which networks comply with national legislation or regulatory provisions regarding: advertising, political and social pluralism, protection of minors, obligations for programming. 72 It has to precise that inside NRA’s general function of competition promotion, consisting in ensuring the transition from monopoly to a competitive market by adopting all the ex -ante necessary provisions, a specific function to promote competition by preventing distortions of the market can be identified. The adoption of specific antitrust provisions may be considered the means to perform this task. 73 Law 249/97, art. 1, 4, 5. On current situation see II(3.2), infra. 74 As for NRA, although the usual abbreviation for the Italian competition authority is “Agcm” (Autorità garante della concorrenza e del mercato), here the term “NCA” is preferable. Formal wording “Agcm” will be maintained in citations. 75 The only exemption to NCA’s competition competence is the insurance market where the sector regulatory authority (Istituto per la Vigilanza sulle Assicurazioni Private e d'Interesse Collettivo - ISVAP) is in charge to both regulate the sector and protect competition by applying the competition law 287/90 (in substance it has ex-ante and ex -post competence in promoting and protecting competition). Every decision ISVAP issues, however, should be preceded by NCA’s non-binding opinion to ensure that the competition law is homogeneously applied in all Italian relevant markets. 76 These thresholds are updated each year to take account of inflation. See Agcm, Soglie di fatturato ex. art. 16, comma 1, della legge n. 287/90, Resolution no. 11945 of 30 April 2003, in Bollettino 16-17/2003, www.agcm.it. 70
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addition to prohibiting mergers and acquisitions restricting competition, a further alternative: authorisation to apply conditions able to remove market distortive aspects, as will be seen in the instant case. 1.3.3
Relationship between NRA and NCA
The mechanism to coordinate NCA and NRA’s activities is provided under art. 20, law 287/90 and art. 1, paragraph 6, letter c), point 11, law 249/97. In all cases of agreements or dominant position abuses restricting competition in the telecoms market, and mergers involving telecoms or broadcasting operators, NCA is required to ask NRA for a prior non-binding advice. However, should NRA not supply this, NCA can carry on its proceeding after having waited a period of time required by law. Although NRA’s advice is not binding, NCA has to give reasons for not having taken it into account. This mechanism is intended to provide NCA with the information necessary to integrate its knowledge and rule on such cases. 2. Telecom Italia/Seat Pagine Gialle/Cecchi Gori Communications case This case is a “multiple transaction” 77 involving two different acquisitions among three different entities: TI, Seat Pagine Gialle (hereafter SPG), and Cecchi Gori Communications (hereafter CGC). Merger I consisted of SPG’s acquisition by TI. Subsequently, under Merger II, SPG, TI’s subsidiary, acquired CGC. 2.1 Undertakings involved78 2.1.1 Telecom Italia The OECD valued telecommunications markets in Italy at the end of 2001 at around US$33 billion; largely derived from the mobile telephony sector (US$ 12 billion) 79. TI was ranked the world’s seventh largest fixed telecommunications operator, controlling 26.5 million lines (inclusive of ISDNs). As the OECD also reported, in 2001, TI’s subsidiary TIM providing 18.5 million customers with mobile telephony services
Any consideration related to the concept of multiple transaction lies out of this paper’s scope. However, it is worth noting that NCA considered this hypothesis and rejected it on the grounds that the two transactions were independent. Firstly, they occurred in different periods and, thus, were separately notified to NCA (i.e. there was not a chronological link). Secondly, they were deemed two independent transactions for the different “nature” of either undertakings or relevant markets involved (see n. 108, infra, §133). Conversely, the Commission asserted that “the concept of economic unity should be assessed against the goal pursued by the parties. The relevant factors to establish that a situation is equivalent to a single concentration necessarily include a time connection as well as an identity link, both in terms of the participants in the transactions and in the scope of the transactions”, see Green Paper on the Review of Council Regulation (EEC) No 4064/89, COM(2001) 745 final, p. 31. Since NCA in both its resolutions highlighted that both transactions’ scope was the creation of a company operating at all level of the Internet market and this scope was not achievable through a single transactions, the term “multiple transaction” is here regarded as appropriate. 78 The undertakings’ market shares at Merger I and II’s time are below reported in more detail (see II(2.2.1(i) and 2.2.2(ii)) with regard to all the relevant markets involved. 79 Review, n. 61, supra, § 11, 12, where the OECD also explained that “The rapid growth of mobile services is largely due to the introduction of prepaid card services.” In fact, “After the introduction of prepaid card service in 1996, Italy’s mobile penetration rate ranking jumped from 12th to 8th among OECD member countries between 1996 and 1997. Approximately 82% of TIM customers, as of 31 December 1999 used prepaid cards. The only other OECD country, which has a comparable pre-paid card subscription percentage with Italy, is Portugal”. 77
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represented the largest mobile telephony service provider in Europe and the third largest in the world80. This fortuitous position could be attributed to the evolution of the company, i.e., ownership of the Italian telecommunication infrastructure. At the time of the investigations required by the case, TI, having already begun to offer DSL services through its subsidiary Internet Service Provider TIN.it, was offering a complete array of voice and data services for consumers and businesses. TI was also dominant in both digital television market, through Stream with a market share of 100%, and mobile market, through TIM with a market share of 49%81. 2.1.2
Seat Pagine Gialle
SPG is a company operating in hard copy and on-line yellow pages service, and offering advertising spaces in hard copy and on-line publishing sector. At the mergers’ time, it was also the only entity entitled to offer advertising spaces on yellow and white pages. Since TI was the sole owner of fixed -telephone service subscriber directory, due to its monopolistic position, SPG could exploit its database for advertising space offer on the grounds of an exclusive contract that would have lasted until 201282. It was also operating on-line through the Internet Service Provider McLinck, offering Internet access services, and the portal Virgilio. 2.1.3 Cecchi Gori Communications CGC is a broadcasting company working at all levels of its sector: production, distribution and telecast of its own content. It also owns two television licenses for TMC and TMC2 Italian television channels: the former intended for a wide public and offering information and entertainment programs; the latter dedicated to the young, with sport, music and fashion programs. The unencoded television market has a high degree of concentration. Besides CGC, which possesses a marginal market share (2,6% 83), there are only two other broadcasting operators, RAI Radiotelevisione Italiana Spa and Mediaset, owning three channels each 84. 2.2 The procedural history There are two factors that should be noted here - before further procedural analysis -, namely: (i) different agencies were called to rule on the transactions, and (I) neither of the mergers fell under the competence of the European Commission.
Id., § 13. See also II(2.1.1), infra. IDC EMEA, European Telecommunications Services, n. 66, supra, p. 260. 82 See n. 88, infra, § 12. 83 See II(2.2.2.1 b)), infra. 84 See, n. 108, infra, § 15. 80 81
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As to the former, Merger I was notified to NCA but not to NRA. Merger II, on the other hand, was notified to both agencies. The reason is grounded on the distribution of competence between the two authorities. In facts, parallel to NCA’s competence in all Italian relevant markets 85, transactions involving a broad casting company are also to be authorised by NRA under art.1 (6), c), n. 13 law 249/97. Then, in compliance with these provisions, Merger I required only NCA’s authorisation and NRA was only required to provide a non-binding opinion on this transactions involving two telecoms operators86. Conversely, Merger II, involving a broadcasting company, required both NCA and NRA’s authorisations and was then subject to two different proceedings. As to acquisitions and mergers falling within the scope of the European Council Regulation 4064/89, as amended by European Council Regulation 1310/97, the criteria related to companies’ turnover were not satisfied. Namely, an aggregate world-wide turnover of all the undertakings above 5,000 million euro, and an aggregate community-wide turnover of each - or at least two of the undertakings concerned - above two-thirds of its aggregate community-wide turnover within one and the same Member State. If these conditions are not met, as in the instant case, and the turnover thresholds provided by Italian legislation are attained 87, the merger operation falls under the NCA’s competence. In order to provide an adequate overview of this complicated procedural history, Merger I and Merger II will be separately analysed, and, within each merger, the proceeding of each authority separately briefed. 2.2.1 Merger I: Telecom Italia/Seat Pagine Gialle Merger I, consisting of the acquisition of SPG by the telecoms incumbent, was deemed compatible with competition in the telecoms market. Both NCA’s decision and NRA’s advisory opinion need to be analysed to know their rationales for this transaction. 2.2.1.1 NCA’s proceeding NCA authorised Merger I subject to conditions, largely proposed by the undertaking themselves. This decision (hereafter NCA(I)88), after a brief description of the transaction, considered the parties’ activities in the relevant markets to evaluate the transaction’s anti-competitive effects in the light of the proposed measures. i) Relevant markets
See II(1.3.2), supra. See II(1.3.3), supra. 87 See II(1.3.2), supra. 88 Agcm, Telecom Italia/Seat Pagine Gialle, Resolution no. 8545 of 27 July 2000 in Bollettino 30/2000. 85 86
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NCA identified five relevant markets affected by this transaction: a) supply of Internet access services; b) sale of advertising space in the telephone directory and yellow pages; c) sale of on-line advertising space; d) distribution of telecommunications products and services; e) supply of electronic commerce services. The criteria utilised were the traditional substitutability principle from the product and geographical market point of view 89. While the product market individuation changed in relation to every market considered, all the relevant markets concerned were geographically defined as national in scale, considering that: the necessary administrative authorisations are valid only for Italy; the necessity of having network infrastructure situated in Italy for the supply of such services, and; within that context, the homogeneous nature of the conditions of supply to public90. As the first three markets are more relevant to the case in hand, due to the close links presenting with Merger II, a brief overview of them is helpful. a) Internet access service Internet access service can only be offered by those operators91 having access to the platforms, namely copper network (including x-DSN technology), fibre cables and third- generation mobile technology. Thus, telecoms operators, whether fixed and mobile, and Internet Service Providers (hereafter ISPs) are able to offer this service to private or business users, according with the network used and its technological features 92. Within this market, NCA ascertained that TI held a dominant position after considering its significant market share (more than 50%, contrasted against a otherwise substantially fragmented market)93; the widespread diffusion of its own networks in Italy; the existence of a dominant position in the upstream markets of dial-up connections and supply of direct circuits; its simultaneous presence in all the segments of Internet services; and its possession of a widely-known brand name and massive technological and financial resources 94. Even though SPG’s market share was not more than 1-3%95, the aggregate share was regarded strengthening the incumbent’s dominant position96. b) Sale of advertising space in the telephone directory and yellow pages As NCA noted, the telephone directory includes all fixed-line subscribers and the incumbent traditionally offering the related service owns it. The directory’s commercial exploitation through the yellow
For a brief overview of the traditional competition methodology see I(2.1.1), supra. NCA(I), n. 88, supra, § 25, 30. 91 The term “operator” is the one used by NCA in its decision even though operators are those possessing a network that is not the case of those offering the Internet access services. 92 NCA(I), n. 88, supra, § 24. 93 Id., § 28. 94 Id., § 27, 28. 95 The real percentages are not always offered in NCA(I) and (II) due to privacy reasons. NCA preferred to give a simple indication of the undertakings’ position in the relevant markets concerned. Those same indications are the data here reported. 96 NCA(I), n. 88, supra, § 28. 89 90
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pages services - both hard copy and on-line97 - was then given, under an exclusive agreement, to SPG. For this reason, in 1999, this company occupied 88% of the market98, while its strongest competitor, Pagine Italia, occupied the remaining 9%. NCA deemed then that this transaction would have resulted in the permanent and definitive integration of TI’s rights, in respect of the database on public telephone service subscribers, with the activities of SPG, the dominant company in the markets based on the commercial exploitation of that database, thereby creating a competitive distortion to the detriment of the leading competitor, Pagine Italia, and potential new entrants 99. c) Sale of on-line advertising space The NCA considered the sale of on-line advertising space market as distinct from the traditional market of sale of advertising space due to its peculiar features. The main difference lies in the interactive means here used, Internet, which allows direct purchase of the advertised products. At the same time, within this market can also been individuated a more specific subset of advertising space sale in the telephone directory and yellow pages on-line as, in these latter, the advertiser can even insert a product or service advertisement into the category to which it belongs100. Channels used for the on-line advertising space sale are the Internet portals offering to the end-users a wide range of services such as news, interactive services, e-mail service, e-commerce services. NCA listed four operators offering portals on the net, namely telecoms operators; browsers (as Microsoft and Netscape); research engines (as Virgilio, Yahoo and Lycos); and the main newspaper web -sites 101. At time of Merger I, TI, having already signed collaboration contracts with two research engines (Excite and Yahoo), was occupying 1-5% market share; while SPG, offering white and yellow pages on-line through Virgilio, was occupying 45-50% of the whole market. NCA found thus that this transaction was likely to strengthen TI’s dominant position since the high aggregate market share resulting (45-55%) 102 would have made possible selling advertising space through the three most important and frequently visited portals in Italy, controlling the leading on-line directory, and influencing vertical integration between TI and SPG in determining the conditions of access by competitors to the database containing information on telephone service subscribers 103. ii) Evaluation of the parties’ measures
See II(2.1.2), supra. NCA(I), n. 88, supra, § 37, 37. 99 Id., § 72. 100 Id., § 39. 101 Id., § 42. 102 See n. 95, supra. 103 NCA(I), n. 88, supra, § 74. 97 98
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In the course of the investigation, TI and SPG submitted to NCA a series of commitments aimed at removing the transaction’s possible anti-competitive effects. These commitments regarded, inter alia: the disposal of shareholdings; an undertaking by the parties to allow the marketing of competitors’ telecommunications products; a commitment by TI to offer the entire database (business and residential users) free of charge on-line to certain categories of persons, including other licensed operators and Internet service providers, without any restriction of use; a commitment by the parties to accept bids for the sale of advertising in the official directory of TI subscribers from 1 January 2008 onwards104. In addition, with the aim of reducing the effects of integration of the activities carried on by the two companies in the telecommunication products and services distribution, NCA deemed appropriate to supplement the proposed commitments with an order to maintain separation between TI and SPG’s distribution structures and the related brands for a period of three years. iii) Resolution This decision suggested that TI occupied a dominant position in almost all relevant markets due to its infrastructure ownership which allowed it to develop the technology useful to offer the telecoms services (PSTN, ISDN and x-DSL). Moreover, its monopoly position enabled it to create a highly articulated distribution network. SPG’s market power in the relevant markets was, in contrast, evaluated less highly by NCA, even though SPG’s recent merger with Buffetti, possessing a highly articulated franchising network105, and its dominant position in the relevant market of advertising space sale on the directory and yellow pages seemed able to jeopardise competition within these relevant markets. NCA considered that services integration between TI and SPG would have produced the first Italian company operating at all levels of the Internet market. In addition, it also appeared to be aware of the technological advantages gained by TI during the monopoly period, enabling it to be the first to offer new services in the telecoms market. However, NCA did not really take into account the vertical effects of the transaction. Rather, it considered the merger a vertical integration only from a theoretical point of view without addressing whether and how it could affect the telecoms market. At the same time, the authority did not appear to consider that SPG, simultaneously, was undergoing an expansion involving a number of acquisitions, enabling it to integrate its Internet offer, although SPG notified the authority of these transactions 106. As a result, NCA(I) could be deemed illogical and inadequate because, although it appeared to take into account all anti-competitive effects raised by Merger I, it did not, nor did it explain how the conditions imposed addressed the anticompetitive effects that it did consider.
Id., § 82. Buffetti is a franchising chain offering offices supplies. Its distribution network is developed in the Italian market and its exploitation by the incumbent to offer its telecoms services would have represented a strong competitive advantage compared with the competitors’ distribution networks. NCA did not consider the strong competitive advantages it might represent until NRA, in its opinion, underlined it and advised to introduce the measure of maintaining the parties’ distribution networks separated for a certain period of time. See II(2.2.1.2), infra. 106 At the time of Merger I’s notification, SPG was carrying on its expansion plan to enlarge its activity over all the Internet services levels. Thus, it was notifying many small acquisitions, among whom Merger II. 104 105
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2.2.1.2 NRA’s opinion NRA gave its opinion on Merger I and warned that the transaction was presenting many anticompetitive and market-damaging aspects: a) the merger would have strengthen TI’s dominant position and its ability to raise barriers to entry because of its distribution network increment; b) Merger I’s vertical features should be more carefully considered in order to know whether it would enable TI to increase the number of offered services; and c) to avoid these effects, brands and distributions network separation could be required107. 2.2.2 Merger II: Seat Pagine Gialle/Cecchi Gori Communications Merger II consisted of the acquisition of CGC by SPG, already a Telecom group’s subsidiary. As noted, this transaction was notified to both NCA and NRA, which decisions produced completely different outcomes. NCA authorised Merger I108. NRA considered it to infringe its sector-specific regulation109. A separate analysis is here necessary to understand the different approach underpinning the authorities’ resolutions (hereafter NCA(II) and NRA(II)). 2.2.2.1 NCA’s proceeding Despite the NRA already prohibiting the merger110, NCA carried out its proceeding to perform its statutory obligation of considering each notified merger. It authorised it subject to conditions. As with NCA(I), it is interesting to follow NCA’s reasoning here from the relevant market’s definition to the final resolution through the evaluation phase of the measures proposed by the parties. i) Relevant markets NCA examined Merger II’s effects with regard to the following markets: a) access to local telecommunications networks; b) unencoded television broadcasting and the related advertising market; c) payTV; d) new markets deriving from convergence of telecommunications and broadcast television; e) sale of advertising space in white and yellow pages; f) sale of on-line advertising space, and; g) Internet access services. The first three markets are summarised. For the latter, the considerations of the NCA mirror those it expressed in NCA(I). a) Access to local telecommunications network services
As NRA’s opinion is not published see its summary reported in NCA(I), n. 88, supra, § 89-100. As already mentioned in II(1.3.3), NCA must indicate why the NRA’s opinion is disregarded. Then, NCA asserted that brand and distribution network separation, coupled with the other measures above reported, would eliminate the risk of strengthening TI’s dominant position. 108 Agcm, Seat Pagine Gialle/Cecchi Gori Communications, Resolution no. 9145 of 23 January 2001, in Bollettino 3/2001, www.agcm.it 109 Agcom, Trasferimento di proprietà della Cecchi Gori Communications Spa a Seat Pagine Gialle Spa, Resolution 51/01/CONS of 17 January 2001, www.agcom.it. 110 See II(2.2.2.2), infra. 107
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Access to local telecommunications network services market is upstream of the Internet access services market. It consists of the offer of that part of the infrastructure allowing the operators to supply the telecoms services to the end-users (“the last mile”). The local network can be constituted either by traditional copper network or optical fibre. At Merger II, new technologies were developing as wireless, cable and satellite loops111. TI, to which group SPG belongs, owned both the copper local network, the optical fibre backbone plus the optical fibre local network through which telecoms services to business clients were supplied. Moreover, it owned weather pipes, inside which all cables have to pass, and had the technology to build infrastructures 112. The incumbent’s virtually monopolist position emerges without doubt from NCA’s market definition although the authority highlighted that a few competitors were building their own optical fibre networks: Infostrada, Albacom, Wind and Autostrade Spa113. Even the local level was dominated by the incumbent since only few competitors, e.Biscom, Colt, Acea Telefonica and Infostrada, were cabling Italian main towns (Rome, Milan, Torin) 114. Notwithstanding the NRA’s resolution 2/00/CIR on the unbunding of the local loop - whether copper or optical fibre -, imposing on the incumbent the obligation to allow competitors to use its network to supply telecoms services, NCA stressed that this market still constituted a de facto monopoly as TI was the only operator offering dial-up connection to the competitors. b) Unencoded television broadcasting and related advertising market and pay-TV market Unencoded and pay television constitute two different relevant markets in that the former offers advertising space to advertisers; the latter procures pay-television to end-users 115. Moreover, while the unencoded television market’s incomes derive from the advertising spaces offer; pay-TV market’s incomes derive from the programs offer. NCA included in this second relevant market also those interactive services previously supplied only by computer, such as data transmission, home banking, e-mail services. At mergers’ time - and currently – the main operators of the unencoded television broadcasting market are RAI Radiotelevisione Italiana Spa, Mediaset and CGC, which shares in the market of advertising were at that time 56.2%, 30.2% and 2.6% respectively116. As to the pay-television market, TI was active through the company Stream, already offering interactive channels, with a 30% market share117. NCA(II), n. 108, supra, § 25. Id., § 26. 113 As for market shares in NCA(I), percentages reported, measure in kilometres of network owned, are only indicative: 4.000-7.000 km Infostrada, 8.000-12.000 Albacom, 8.000-12.000 Wind, and 8.000-12.000 Autostrade Spa. However, these networks can not compete with Telecom’s network that amounted to 200.000-600.000 km. See NCA(II), n. 107, supra, § 27. 114 NCA(II), n.108, supra, § 27, data not reported. 115 Id., §12. 116 Id., § 15. 117 Id., § 21, where Stream’s market share is reported as not superior to 30%, other competitors (and respective market shares) are not. 111 112
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c) New markets deriving from convergence of telecommunications and broadcast television NCA defined the market of convergent services as those offered either by television or by personal computer. Digital technology’s introduction allowed television users to receive both digital audiovisual content and interactive services such as e-mail, Internet access, e-commerce, and other related services supplied by broadcasting companies118. On the other hand, telecast digitalisation allows ISPs to both offer these same services and such audiovisual content. However, in order to supply these interactive services deriving from convergence, ISPs need both large broadband capacity and content. In particular, since the most useful technology is the optical fibre or, at least, x-DSL, ISPs need access to such telecommunications network unless they build their own infrastructure. Within this new services market, therefore, TI was the sole operator owning the infrastructure. Merger II, then, enabled it to integrate its telecommunications services with the two broadcasting licenses owned by CGC, permitting the incumbent to exploit its converged content and interactive services on all its networks: satellite, optical fibre, cable, and telecommunications network (fixed and mobile)119. ii) Evaluation of the parties’ measures NCA considered the parties’ proposed conditions inadequate and ineffectual. The authority accordingly instructed the undertakings to provide within the transaction: a) beginning 1 June 2001, for all operators so requesting, access - for the purpose of laying optical fibre cables for multimedia and interactive services - to all TI infrastructure facilities on non-discriminatory terms and at accost-based prices; b) inclusion under the general conditions of contract for TV advertising offered by TI of a ban impeding advertisements on TMC and TMC2 (i.e. advertisements on programs broadcast by these two channels) to refer to SPG’s yellow pages; c) a three-year ban, from the date of authorisation of the concentration, on clauses providing exclusive rights in contracts between Telecom group and Cecchi Gori group for the acquisition of content for distribution via the Internet; d) any testing or marketing of interactive TV services only on the condition that TI makes the same transmission band capacity effectively available to competitors120. iii) Resolution As with NCA(I), NCA(II) appears illogical. NCA realised that the circumstances raised by Merger II were anti-competitive. Although it subjected the undertakings to explicit conditions behind to ameliorate the competitive restraints of such transactions in relevant markets derived from convergence, it did this without giving reasons. 118 119
This is possible absent a digital television by applying digital set -top boxes and modems to analogue televisions. NCA(II), n. 108, supra, § 107.
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Against this decision, NCA authorised Merger II even though it found that Telecom group dominated access to local telecommunications networks market and exclusively supplied Internet access services. Moreover, NCA also asserted that TI’s former legal monopoly enabled it to transfer to SPG exclusive rights to advertising in white pages, and to gain a dominant position in advertising in yellow pages market (both hard copy and online), and that the incumbent was operating in pay-TV market via its subsidiary Stream. NCA carried on its analysis considering Merger II’s effects in the light of the vertical integration occurring and enabling Telecom group to exploit to the full, and more than its competitors, a series of synergies that could produce a restriction of competition in those markets 121. That is, TI is the only operator possessing a local access network that can reach final users with infrastructure, consisting in spare cable capacity, extending over the entire nation. Thanks to this endowment, TI is regarded the only firm capable of providing final user broadband access services adequate for multimedia and interactive content, both via Internet and via TV. In order to provide such services to their subscribers, NCA highlighted that TI’s competitors would need a network of their own or have physical connection to the local telephone network (neither cable nor broadcast networks have been here mentioned)122. Control of the local network together with its infrastructure ownership were thus deemed by NCA to give a unique advantage to TI, with the possibility of moving promptly into all the markets deriving from the convergence between TV and telecommunications and to provide multimedia content requiring broad band transmission capacity 123. NCA concluded that the announced concentration could strengthen the dominant position of the Telecom group in on-line advertising, telephone book and yellow pages advertising and Internet access, and create a dominant position in the new markets deriving from TV-telecommunications convergence capable of eliminating or causing a substantial and lasting reduction in competition in these markets. However, it reckoned the measures imposed enough to balance Merger II’s anti-competitive effects 124. 2.2.2.2 NRA’s proceeding NRA(II) is grounded on the sector-specific regulation NRA itself issues to promote competition in the telecoms market.
Id., § 143-147. Id., § 123-132. 122 Id., § 115. 123 Id., § 126-131. 124 Id., § 132, 133. 120 121
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NRA denied Merger II’s authorisation on art. 4, law 249/97 which prevents the public telecommunications services concessionaires from owning broadcasting companies. It considered article 4 still in force even though public concessionaires were transformed into private licences in 1997 125 and, the Italian telecoms market, following the liberalisation process, no longer had a public operator.126. Two arguments underpinned NRA’s position: (a) European telecoms legislation allowing Member States to maintain or adopt necessary dispositions in order to increase competition in their own countries 127, and the consequent NRA’s decision to maintain in force a provision that, even if transient for its antitrust and asymmetrical nature, was however necessary for the market 128and; b) NRA’s function itself, consisting of competition development in telecoms market, requiring that TI - still possessing a monopolistic position due to its infrastructure ownership (either backbone or local networks) - be subject to appropriate regulation129. Moreover, the authority even asserted that a de facto competition would operate in the market of access to local telecommunications network services only when TI would adopt all the measure necessary to supply desegregate access to the local loops or alternative cable and satellite local networks would be built by TI’s competitors. NRA(II) was adopted before NCA(II)130, and suspended Merger II131. The parties, then, immediately appealed to the competent courts to obtain a temporary authorisation to merger132. It is interesting to note that the courts asserted that the appellants’ claim was reasonable and NCA had already eliminated any doubt on Merger II anti-competitive effects. These involve affirmation of NCA’s pre-eminent competence to decide mergers, even those involving broadcasting operators, (under art. 6, law 287/91) over NRA’s competence deriving from art. the art. 1(6), c), n. 13, law 249/97. Nevertheless, before the appellate decision on NRA(II), NRA adopted a further resolution reconfirming its position on the grounds that NCA and NRA’s proceedings are independent 133. It asserted that when ex-ante evaluation is provided by the legislation as in art. 4 law 249/97, a new evaluation, as the one in NCA(II), shall be regarded useless and unable to replace legislation’s ex-ante evaluation.
3. The current situation of the Italian electronic communications services market Agcom, Regolamento per il rilascio delle concessioni per la radiodiffusione televisiva privata su frequenze terrestri, Decision 78/98, in GU, n. 73 of 28 February 2000. 126 See II(1.1.2), supra. 127 See art. 1 Directives 97/13/EC and recital 13 Directive 89/552/ECC, both reported in NRA(II), n. 109, supra, § 8. 128 NRA(II), n. 109, supra, § 7. 129 Id., § 14. 130 NCA’s authorisation was adopted only seven days after NRA(II), and both were immediately appealed with opposite complains. 131 The third instance of this case lies outside the scope of this paper. However, to supply a more complete overview it is to be recalled that the competent authority, Latium Regional Administrative Tribunal (Tribunale Amministrativo Lazio, hereafter TAR) made void NRA(II) (T.A.R. Lazio, second section, Sentence 20010185 of 12 March 2001, www.giustizia-amministrativa.it), and confirmed NCA(II) (T.A.R. Lazio, first section, Sentence 200107286 of 7 September 2001, www.giustizia-amministrativa.it). 132 T.A.R. Lazio, Orders 770 and 771, 31 January 2001, unpublished. 133 Agcm, Riesame della domanda di autorizzazione dell’operazione relativa al trasferimento di proprietà della Cecchi Gori Communications Spa a Seat Pagine Gialle, Resolution no.95/01/CONS of 20 February 2001, www.agcom.it 125
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A to the Italian situation under the new regulatory framework, a survey of the current competitive structure and the new powers’ allocation among the NRA and the Ministry of Communications is utilitarian to this work’s aim134. The following will then explore this. 3.1 Competitive structure In the 8th Report on the implementation of telecoms regulatory package, the Commission, assessing the Member States’ situation before the transition from ex-ante to ex-post regulation, expressed concerns on the incumbents’ power in most of the Member States (among which Italy) 135. Situation appears partially improved in the 9th Report, where, however, incumbents’ market shares are still relevant with regard to fixed telephone and mobile markets136. 3.1.1 Telecoms sector Italian fixed and mobile markets maintain a different competitive structure. As to the former, the total number of competing operators are currently no more than four, with the incumbent still possessing a market share of 76, 7% as to local calls, 69,2% as to long-distance calls, and 64,5% as to international calls 137. Although the number of licensed operators (individual license/authorisation or notification/registration procedure) is not decreased (as the Commission refers to be happening in other Member States138), only Albacom, WindInfostrada and Tele2 can compete with TI. As to the mobile market, the penetration rate is sluggishly increasing (3%) due to market saturation and delays to offer innovative products such as UMTS services139. The main operator TIM -still possessing an analogue license - however, is still a subsidiary of the incumbent and possesses a market share of 46,9%140. 3.1.2 Broadcasting sector The television sector maintains the last years’ characteristics 141. Although the high number of free-to-air channels 142, the market is basically a duopoly with two operators, Rai and Mediaset, controlling half each the
As before mentioned (see I(3)), to March 2004 no data are available on the NRA’s relevant market analysis. 8 th Report, n. 8, supra, p. 15-16. 136 9 th Report, n. 8, supra, p. 17, 18, 22. 137 Agcom, Annual Report on activities carried out and work program, Rome, June 30th 2003, p. 59 (English version) (hereafter Annual Report), http://www.agcom.it/rel_03/eng/Relaz_eng_part02.pdf. Market shares are not reported for all the competitors. 138 Commission Staff Working Paper, Technical Annexes of the Ninth Report on the Implementation of the Telecommunications Regulatory Package, COM(2003)715 final, p. 7, http://www.europa.eu.int/information_society/topics/ecomm/doc/all_about/implementation_enforcement/annualreports/9threport/a nnex1191103.pdf. 139 Id., p. 40. 140 Id., p. 42. Market shares are not reported for all the competitors. 141 Annual Report, n. 137, supra, p. 68. 134 135
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over-the-air channels in the country, about 90% of the television audience and over ¾ of resources in the sector143. However, innovations have occurred in the pay-TV market where the two satellite platforms - Stream and Tele+ - have mergered into a single operator, SkyItalia, owned by News International (which has acquired Telepiù) and TI, already owners of Stream144. As to the digital television, the two major television broadcasters are preparing the implementation of the digital terrestrial broadcasting networks by purchasing frequencies from local stations145. 3.2 New regulatory powers’ allocation among institutions The 8th Report highlighted the evolution of two models for the regulatory power’s assignment 146. While, in certain Member States “an independent and autonomous body exercises the full range of powers, including those relating to licensing, interconnection, access, price controls, frequency assignment and numbering”147, in others a national regulatory authority shares this power with the relevant ministry. The already complicated power allocation adopted under the 1998 framework results even more complex under the new one as the Ministry of Communications’ competence has now been added to NCA and NRA’s. Under art. 41 of law 3/2003, measures for promoting development in the communications and information sectors have been introduced in order to assign supervisory and monitoring functions to the Ministry of Communications, in respect of the obligations provided in the authorisations and licenses granted by the NRA. In parallel, NCA and NRA have signed a collaborative agreement in order to comply with the obligations introduced by the Code with regard to the relevant markets’ analysis 148 according which NCA is required to provide opinions on NRA’s relevant markets definition.
III.
Conclusion
The European legislator, deemed to have achieved the goal of liberalising the telecoms sector, has adopted a new regulatory framework introducing a mechanism gradually phasing out ex-ante regulation in favour See II(1.2.2), supra. Annual Report, n. 137, supra, p. 67. 144 European Commission, News Corp. / Telepiù, in Official Journal C255 of 23.10.2002, http://europa.eu.int/eurlex/pri/en/oj/dat/2002/c_255/c_25520021023en00200020.pdf. 145 Annual Report, n. 137, supra, p. 67. 146 8 th Report, n. 8, supra, p. 18. 147 Id., p. 18. 148 Accordo di collaborazione fra l’Autorità per le garanzie nelle comunicazioni e l’Autorità garante della concorrenza e del mercato in materia di comunicazioni elettroniche, not yet pubblished, available on line at the address www.agcm.it 142 143
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of competition law. This transition, driven by technical, industry and services convergence 149, is regarded as necessary to strengthen the international competitiveness of the European electronic communications services sector. The case study is illustrative of both frameworks’ incapacity to deal with the convergence phenomenon in the Italian market. It illustrates the 1998 framework’s weakness and anticipates the new regulation’s possible flaws in dealing with convergence. 1. The 1998 framework’s weaknesses within the Italian telecoms market The 1998 framework was not meant to deal with converged markets as those in the case study. Its failure is due to a partial liberalisation of the Italian telecoms market150 and the competition competence allocation choice between NCA and NRA151. These two factors caused the long history of proceedings, described in section II, which saw NCA directly applying competition law to Merger I and II. Even though NCA appeared to be partially aware of possible anticompetitive effects of industry convergence, it authorised both mergers under certain conditions 152. Should NCA’s application of competition law to Merger I and II presents some weaknesses (for example, no explanation of how the imposed conditions avoid the merger’s anticompetitive effects is offered), even a more strict application would be unlikely to produce a different outcome. Competition law alone is not thought to face convergent mergers in a partially liberalised environment like the Italian telecoms sector. This history of proceedings also saw NRA’s increase awareness of both mergers’ anticompetitive effects due to its sector knowledge. Its effort to apply ex-ante regulation and utilise a more substantial approach153 was frustrated, however, by the competition competence allocation. Separation of NRA’s competition promotion (through ex-ante regulation) from NCA’s competition protection activity (through expost provisions) does not consider how these two functions are blurred in an environment partially liberalised like the Italian telecoms sector. 2. The new framework and... The new framework is even more worrisome because it appears as inappropriate as the previous to face convergence effects, at least in those Member States not fully liberalised (as Italy still is) 154. Although it was the convergence process to trigger this regulation meant to deal with all its features, it appears to consider only advantages but not disadvantages of the convergence phenomenon. The new regulation, thus, appears not to be “equipped” to take into account the competition restrictions arisen by horizontal and vertical convergence effects combination. See n. 2, supra. 8th Report, n. 8, supra, p. 11, 16, 17. 151 See II(1.3) and how this allocation affected Merger II in II(2.2.2), supra. 152 See II(2.2.1.1) and (2.2.2.1), supra. 153 See II(2.2.2.2), supra. 149 150
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2.1 ...convergence horizontal effects 155 The European legislator has adopted a horizontal approach regulating the electronic communications services under the same regulatory framework, irrespective of networks and operators’ nature 156 (Figure 1).
Outside new regulatory framework Within
new
regulatory
Content
ex-ante regulation (if SMP operators)
framework terrestrial, cable and satellite networks ex-post
regulation
CASs
competition law
end-user
end-user
end-user
Figure 1. Horizontal integration’s regulation in the convergent environment The Commission’s “translation” of pre-defined areas subject to ex-ante regulation to product and services relevant markets under competition law 157 shows that competition law traditional methodology is apparently not the right means to regulate the convergent environment. Recommendation’s Annex I reproduces a very analytical list of product and services relevant markets, some of which connected to the convergence process but none corresponding to the market of convergence, whose definition is not provided under the new regulation. The Commission does not seem aware that convergence horizontal effects may also produce anticompetitive effects due to the possibility of a sole operator to horizontally expand its activity. Rather, it fragmented the electronic services sector in numerous relevant markets giving no possibility to assess mergers
See II(3), supra. For an overview of such effects see Green Paper, n. 2, supra, p. 8-14, and, as to the case study, II(2.2.1), supra. 156 See I(1), supra. 157 See I(2.1), supra. 154 155
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between operators of different relevant markets. So the question arises as to whether it does not represent an antithesis considering the market of convergence by fragmenting it into numerous relevant markets. 2.2 ...convergence vertical effects The new regulatory approach does not take into account convergence vertical effects either 158. Content and conduit separation enables an already horizontal integrated operator to strengthen its position in the upstream market of content production due to content exclusion from the new regulation (Table 1). Since content and conduit are not covered under the same framework, operators’ presence and position at all chain levels can be neglected. Outside the new regulatory
Content
framework Within
the ex-ante
new
regulation
regulatory
ex-post
framework
regulation
Broadcasting transmission services and distribution networks
wholesale market
Market for ancillary technical broadcasting services Market of radio and broadcasting program delivery
retail market
Table 1. Vertical integration in the convergent environment Moreover, the new regulatory framework jeopardises competition in the down-stream retail market of radio and broadcasting program delivery. This market is covered under the new regulation but is not listed in the Recommendation’s Annex. NRAs have discretion to address the presence of SMP operators and adopt the necessary provisions 159. Such a lack does not consider the market for ancillary technologies’ importance in the convergent environment. Broadcasting operators, not present in the up-stream market of broadcasting transmission services and distribution networks, will not be able to operate in the retail market of radio and broadcasting programs delivery if barriers to the ancillary services market entry will be imposed by the up-stream dominant operators (Table 1). The incumbent is likely to strengthen its vertical position, denying network access to broadcasting operators supplying broadcast content or needing return path for interactive services 160. In order to avoid barriers, the Italian NRA requires, under the Code’s art. 43, that all CASs operators offer access to fair conditions, until the relevant markets’ analysis is carried out on the ancillary broadcasting services market 161.
See I(2.2.1), supra, as an example of vertical integration. See I(2.1.2), supra. 160 Market for ancillary technical broadcasting services as “one of the most important regulatory challenges at the crossroads of telecommunications, broadcasting and information technology” - due to its digital bottleneck nature - was highlighted since the adoption of the Green Paper. See European Broadcasting Union (hereafter EBU), Replay to the Convergence Green Paper (hereafter Reply), April 1998, p. 15, www.ebu.ch. 161 See I(3), supra. 158 159
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Such an obligation, however, does not appear to be sufficient to address concerns raised by the convergence process at industry level. Ex-ante regulation in this market is necessary and helpful to maintain a proper level of competition though it does not offer the means to avoid vertical integration whereas broadcasting and telecoms operators converge in the same entity. 3 The new framework’s possible flaws in facing converged markets The above mentioned factors are unlikely to enable the new regulation to produce results different to those produced by the current regulation when facing convergence effects in that it will apply same competition law unable to address converged markets under the 1998 framework. The former framework, not “equipped” to deal with convergence effects, failed because of the Italian telecoms sector partial liberalisation and competition competence allocation choice. The new framework would fail because its inappropriate “equipment” must still face a slightly better situation (partial liberalisation and competition competence separation) 162. Moreover, irrespective of the liberalisation degree of the electronic communications services concerned, the new framework’s inappropriateness is also due to convergence lack of definition and conduit/content separation. Regarding the convergence market’s definition, whenever the choice for competition law principles requires such a fragmentation in numerous relevant markets (as those listed in Recommendation’s Annex I), further criteria is needed in order to consider convergence horizontal effects when assessing mergers, agreements and dominant position abuses within those relevant markets 163. Otherwise, sector-specific regulation should be maintained in order to limit dominant positions’ establishment in the converged markets’ horizontal dimension. Ex-ante regulation’s gradual phasing out mechanism is to carefully be put in place because ex-post regulation does not appear to be the most suitable competition “guarantor” in the convergent environment. As to content and conduit separation, EBU’s concerns on art. 13 Framework directive’s determination of undertakings with SMP should be shared164. The Commission does not take into account potential competition distortion due to a combination of vertical integration and some degree of market power. Thus, SMP definition should have been regarded as either “a position of economic strength affording it the power to behave to an appreciate extent independently of competitors, customers and ultimately consumers” or “sufficient market power at any stage in the supply chain to distort competition as a result of being vertically integrated, that is owning or operating network infrastructure and also providing services itself over that infrastructure” 165.
See II(3.1), supra. J. Gaul, Market definition in the Telecoms Industry, September 2002, http://europa.eu.int. 164 EBU, Comments on the EU Commission’s proposals for directives regarding the review of the regulatory framework for communications, October 2000, p. 6, www.ebu.ch. 165 Id., p. 7. 162 163
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Problems like those arising from the competition competence allocation between NCA and NRA are likely to occur under the new regulation as well. Art. 3(4) Framework directive166 requires Member States to publish national regulatory authorities tasks “ in an easily accessible form, in particular where these tasks are assigned to more then one body”, ensuring that consultation and cooperation between these authorities are put in place. It also required that “Where more than one authority has competence to address such matters, Member States shall ensure that the respective tasks of each authority are published”. This substantially maintains systems, such as the Italian example, where competition promotion and protection are devolved to NRA and NCA respectively. Even though cooperation and consultation mechanisms are provided and published (as, for example, NRA'’ non-binding opinion167, and now the agreement above mentioned 168), this does not avoid overlapping activities as in Merger II. No overlap between the different authorities’ tasks would instead be preferable169. Although regulatory favour to convergence at technical and services levels is to adopt, a more critical approach should be maintain when dealing with convergence at industry level 170. The different levels thus deserve not different regulations (that would be a paradox in the convergent environment), rather different consideration171. This goal, not sought under the 1998 framework, is unlikely to be achieved under the new framework172.
See n. 18, supra. See II(1.3.3), supra. 168 See II(3.2), supra, where it is also reported the entry of a new institution in the Italian electronic communications services sector: the Ministry of Communications. 169 It is however to recall that, once ex-ante regulation (which function is competition promotion) will be fully phased out, no overlap will remain and the sole competition protection activity through competition law will be performed. 170 On risks of industrial convergence see A. McKenna, Emerging Issues Surrounding the Convergence of the Telecommunications, Broadcasting and Information Technology Sectors, in 9 Information & Communications Technology Law, no. 2/2000, p.108. 171 Different choices have been made in other countries. Indian government, for example, will integrate infrastructure and content regulation in one institution under a common framework. Singapore and Malaysia have also assembled the regulation of infrastructure and content. Inside the EU, UK has unified five regulatory bodies dealing with communications into one regulator (even though content will be separated from conduit regulation due to the new framework implementation). A Hendersen, R Samarajiva, W. H. Melody, Designing Next Generation Telecom Regulation: ICT Convergence or Multisector Utility?, January 2003, p. 7-11, www.itu.org. 172 See Reply, n. 160, p. 20, “specific regulations covering communications activities should be adapted to the extent necessary, rather than be replaced by general competition principles with other aims. Competition law, on the other hand, should adhere to its primary objective: ensuring fair and competitive behaviour as smoothly as possible (e.g. opening up any bottlenecks), preventing abuse of a dominant position and avoiding the replacement of public monopolies by private ones. In so doing, particular attention must be paid to vertical integration”. 166 167
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