The DT Margin Squeeze Case

1. The DT Margin Squeeze Case Stefan LechlerHead of Competition Law and Merger ControlDeutsche Telekom AGGlobal Competition Law CentreLondon, 10 December 2004

2. The DT Margin Squeeze CaseMain issues • Future analysis of all types of wholesale access and retail charges in the telecommunications sector • Overlap/interaction of EC competition rules and Member State sector-specific regulation • Economic principles applied by the Commission to complex price squeeze situations

3. The EU Commission's decisionHistory • Spring ‘99: Several complaints of competitors • Summer ‘99: Requests for information During 8 months no reaction by EU COM • Spring ‘00: EU COM informs DT that proceedings were initiated against Germany (Art. 226) No further steps/communication for more than a year • Spring ‘01: Several further requests for information until January 2002 • May ‘02: Statement of objections (amended in February 2003) • Fall/winter ‘02: Hearing, further requests for information • 21.05.03 Commission decision

4. The EU Commission‘s decisionSummary • EU COM: DT abused its dominance in the local loop by charging unfair prices for wholesale access and retail access (“Margin Squeeze”): • Insufficient margin for competitors between the tariff for ULL and the tariff for retail access • Price-Cap 1998 until 2001: Decrease in call charges could have been used for an increase in retail access charges • From 2002: Tariffs for ULL were lower than retail access tariffs, however the ULL tariff plus product-specific cost was higher than the average weighted retail subscription • The Commission’s decision of May 2003 is pending before the CFI

5. Procedural issuesThe EU Commission has exceeded its jurisdiction • No jurisdiction to act as a Super-Regulator • All of DT‘s relevant tariffs were subject to price regulation: • Access: approved by RegTP within Price-Cap • ULL: set by RegTP (cost based) • RegTP decisions: "no price-squeeze in Germany" • Commission’s decision undermines regulation by the RegTP and puts legal certainty at risk • If the RegTP or the Price-Cap-regime contravenes EU law, the Commission must take infringement action against Germany • The Commission’s decision infringes principles of good faith

6. Substantive issues DT has no discretion to set wholesale prices for ULL • DT is bound by RegTP’s approved wholesale rates • RegTP would not have approved lower wholesale rates • EU law: ULL access rates to be cost-based • Cost of efficient service provision is determined by RegTP via its own cost model • Result: DT could only have restricted competition by charging too low retail tariffs Dumping-test would have been thecorrect method

7. Substantive issues DT has no discretion to set retail subscriber line prices • DT is bound by the RegTP’s approved retail rates. RegTP approval is needed for any price-adjustment. RegTP considerations: • Tariffs have to be based on cost of efficient service provision • Tariffs have to be in line "with other legal provisions" (e.g. Art. 82) • The 2002/2003 price caps precluded DT from increasing subscriber line prices • RegTP rejected DT's application for an increase in excess of the price cap margin for 2003 • Local loop price squeeze cannot be based only on DSL charges • No proof for low price elasticity • No causal link between DT not increasing DSL charges and the alleged price squeeze

8. Substantive issuesEU Commission fails to prove Price Squeeze (1) • Comparison between unbundled access charges and subscriber line fees is economically unsound • Commission compares weighted retail prices for various types of sub-scriber line access with weighted one-off and monthly wholesale charges • Economic analysis is solely based on Commission's market definition without taking into account the reality of the market place • Failure to consider competitor's incremental revenue opportunities is economically unsound • Telecommunication service providers compete on bundles of access and individual call services

9. Substantive issuesEU Commission fails to prove Price Squeeze (2) • US Regulator FCC also includes other revenue in its local loop price squeeze analysis (Verizon New Hampshire & Delaware Order 2002) • Differences in regulatory approaches to unbundled access and subscriber rates • Inconsistent application of the Commission’s own approach due to the inclusion of inefficiency costs • Commission ignores the prospect of positive margins by focussing only on average calculations

10. Lack of market-analysisEU Commission fails to prove a hindrance to competition • ECJ (Hoffmann-La Roche): Hindering "maintenance or growth of competition" is prerequisite for application of Art. 82 • Focus of DT's competitors on attractive market segments creates lively competition • “Mixed calculation" possible • Regional areas as origin of competition • Wholesale charges in Germany are clearly below EU average • New entrants into the German local loop market account for more than 85% of all unbundled subscriber lines in Europe • Germany accounts for half of all European local loop operators • More than 30% of the German population have access to two or more operators; 22% have access to three to five operators

11. Germany is the unchallenged leader for unbundled local loop access The success of competitors is measurableIn comparison with other EU countries, Germany plays leading role Wholesale market Retail subscriber market 944941 • 77% of all subscriber lines can be served by competitors. • The market conditions in certain areas of Germany demonstrate that current ULL charges allow extensive competition. 82100 44061 35000 18828 7800 1558 1509 2810 1043 1181 Source: EU-Commission Implementation Report Dec. 2002