Competition policy in telecommunications*

Why competition policy?

Despite the recent setbacks faced by telecommunication markets, the ongoing trend has been towards greater competition. For the majority of countries, competition has become the regime of choice. The number of countries introducing competition in basic telecommunications and wireless services has increased steadily since the late 1990s (see Figure 1). In 2001 for instance, 79 countries allowed some competition in local services, an increase from 68 in 2000. In long-distance services, 66 allowed some form of competition in 2001 as compared to 53 in 2000, while in international services, 69 allowed competition against 57 in 2000.

Growth in competition — especially in a fast-moving sector like telecommunications — naturally raises a host of complex issues. While competition has proven economic benefits and can help drive down prices and improve service provision, lack of appropriate competition policy can result in abuses of market dominance and anti-competitive practices. The role of policy provisions, including telecommunication regulations and competition law, is therefore paramount in safeguarding meaningful competition.

Anti-competitive behaviour

The costs of anti-competitive behaviour affect the economy as a whole, not just the sector. For instance, the European Commission estimates that barriers and bottlenecks in the ICT market slowed GDP growth by around half a percentage point during the 1990s. Anti-competitive behaviour may include conduct intended to harm competitors or abuse of dominant position. Some competition policy authorities also regulate deceptive or misleading conduct or discrimination among customers. The major difficulty in applying competition law in the fast-changing ICT environment is that it may sometimes take several years to resolve a particular case, during which time the market, the technology and the actors involved can change significantly. For instance, a case brought by MFS (now WorldCom) against KPN in the Netherlands in 1998 is not due for resolution until 2003, possibly too late to assist the complainant.

Areas in telecommunications, especially mobile communications, where accusations of anti-competitive behaviour have been made include:

• Fixed-to-mobile call termination, especially in Europe, where rates are considered to be well above costs. Australia decided to regulate this market in 2000 by encouraging operators to mirror reductions in retail tariffs in their termination charges, and by using the threat of ex post action if there was evidence of anti-competitive behaviour. The UK Competition Commission is conducting an enquiry, to be reported in January 2003.
• Mobile roaming, where users typically have little or no information about the rates they will be charged, may not receive the bill until much later, and where no one jurisdiction may be able to handle complaints.
• Pricing for SMS (short message service), where the trend has been for prices to rise, despite a huge increase in the volume of SMS traffic being generated. As SMS is carried over the signalling channel, the costs should be relatively low, but prices are not. Because of the bundling of SMS with other services though, meaningful price comparisons can be difficult to establish.
• State aid to former incumbents. Several incumbent operators have debts that run to tens of billions of US dollars. Should such companies, in some cases still partly State-owned, be permitted to receive State aid?

Mergers, acquisitions and alliances

Mergers, acquisitions and other corporate alliances may be subject to review by competition authorities and/or sector-specific regulators on an ex ante or an ex post basis. While ex post merger regulation theoretically involves a lighter regulatory burden on business, it raises problems in undoing anti-competitive aspects of mergers after they have been implemented. Competition authorities typically consider the effects on competition, applying tests such as whether there has been a “substantial lessening of competition”. Sector regulators may apply similar tests, but may also apply broader sector-related policies or “public interest” standards, which can sometimes appear to conflict with competition concerns.

Another potential problem is the risk of conflicting decisions where both agencies oversee mergers. One solution is to have the sector-specific regulator provide recommendations, including sector-specific policy recommendations, for a final decision to be made by a competition authority. This solution can overcome problems of jurisdictional overlaps, the danger of regulatory capture and the relative inexperience of sector-specific regulators in dealing with the analytical techniques of competition law. A more common approach is to promote cooperation and information sharing between the agencies.

Industry consolidation seems set to continue (especially given the dynamics of the market over recent years) and can be seen as a result of a correction in the market structure stemming from over-capacity in the industry. As such, industry consolidation does not necessarily lead to a lessening of competition. Seen in this light, it may be inappropriate to protect certain industry players from financial failure in the name of maintaining competition levels.

Institutional approaches

While international and global arrangements are likely to lead to a greater harmonization of institutional arrangements, the institutional framework must be consistent with the constitutional framework of each country. A wide range of institutional approaches have been adopted to implement competition policy in telecommunication markets. At one end of the range, in some countries, generic competition legislation is simply applied by the judicial system. At the other end of the range, many countries have only telecommunication sector-specific regulators, and no generic competition authorities. In between lie the increasing number of countries with both sorts of agency. For this dual system to function smoothly, cooperative mechanisms can be developed between the agencies to clarify their respective roles, and to share information and analyses to reduce duplication of efforts and inconsistent rulings.

One approach that is consistent with good competition and telecommunication policy involves defining the relevant product and geographical markets and determining if there are dominant firms in relevant markets based on competition policy analyses. Dominant service providers can be regulated by sector-specific regulators on an ex ante basis in the markets where they are dominant. Markets with no clearly dominant service providers can be deregulated or made subject to much lighter regulation. However, in those markets, competition authorities may be able to intervene on an ex post basis, to apply competition law-based remedies, for instance to deal with cross-sectoral market entry by firms that have a dominant position in a different market segment.

Multilateral approaches

The most significant multilateral instrument governing telecommunication sector regulation has been the Reference Paper on Regulation developed by the World Trade Organization (WTO) as part of its 1998 Agreement on Basic Telecommunications. While many countries applied competition policy to the telecommunications sector before the WTO Agreement, the more than 70 countries that have adopted the Reference Paper are now legally required to do so as part of their obligations under WTO’s General Agreement on Trade in Services (GATS). Depending on the country, some of these competition policies are being applied by both multisectoral competition authorities, but most are applied by sector-specific regulators under sector-specific legislation.

In addition to sector-specific instruments, such as the Reference Paper, an increasing number of countries have adopted competition policies and laws of general application. At the multilateral level, a number of WTO Member governments have proposed the development of a “multilateral framework on competition policy”, which will be discussed as part of the new round of multilateral trade negotiations.

At present, bilateral cooperation agreements on anti-competitive activities represent the most concrete form of international cooperation in this area, but the importance of a multilateral framework to enhance the contribution of competition policy to international trade and development is reflected in the WTO Ministerial Meeting at Doha in 2001, which may help pave the way for greater progress in the development of a multilateral competition policy framework.