Month: July 2013

European Single Market: the honeymoon between Kroes and big telcos is over

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Background: the European Commission intends to radically reform the regulatory framework for electronic communications services, in order to overcome the current fragmentation (28 countries and respective markets) and create a Single European Market. The challenge is open. The proposer, commissioner Neelie Kroes responsible for the Digital Agenda, must hurry up because her mandate expires in 2014 and the approval procedure of the proposed regulation, involving Council and European Parliament, may take 1 year or longer.

The plan of Commissioner Kroes to pave the way for the creation of a European Digital Single market is getting more and more complicated. Following the interservice consultation ended on July 26,  it is (unofficially) reported that many directorates espressed comments vis-à-vis the draft, while 2 of them, namely Justice (Reding) and Budget (Semeta) even filed a negative opinion.

Negative or doubtful positions from other directorates do not represent a dramatic stop for the proposal. However, Kroes’ offices will now have to engage in discussions, meetings a drafting sessions in order to solve the issue, with potential escalation at political level. The original legislative draft may be changed substantially and the scheduled process could be delayed. Kroes was planning to officially present the Single Market Proposal on September 10th, however it is not clear now whether this deadline remains realistic.

So many critical positions from various services of the European Commission may reflect the increasing disaffection of various stakeholders vis-à-vis the Single Market Proposal and one could argue whether some of them have been lobbying, openly or secretely, to make the project to fail.

ETNO, the association of incumbents operators, is still officialy supporting the Single Market project, despite the fact that the proposal does not really meet their interests any longer. At beginning of the debate (in January 2013) ETNO was urging and supporting Kroes’ ambitions with the scope to achieve market consolidation at domestic level, reducing mobile players from 4 or 5 to not more than 3 in each national market, and similar number reductions were claimed in the fixed national markets. However, the Single Market proposal does not really address this request (and it could not, by the way, because this is an antitrust issue eventually), although some public speeches of Commissioner Kroes have been generically echoing this subject. More importantly,  European commissioner Almunia (competent for competition) made clear that antitrust rules will not be lifted and consolidation should happen at cross-border level instead. As a result, ETNO is likely to abandon Kroes and the Single Market initiative sooner or later, although for the time it is convenient to show support in the hope to get from the Commission a favourable (i.e. pro-incumbents) intervention in some national cases, primarily against the decision of the Italian regulator AGCOM to lower copper prices in Italy (a decision from the Brussels offices is expected by August, 12). However, it is not clear whether such as trade-off machiavellico will ever work and for how long, because ETNO’s membership is complex and various  members may not agree to continue to support Kroes just in exchange for potential (and not guaranteed) help in single national cases.

As regards other stakeholders, GSMA (the association of mobile operators) is really irritated about the lowering of roaming tariffs and in general about the umpteenth reform of roaming  (the fourth since 2007, while the 3rd one is still ongoing). ETNO shares the same view, because many of its members are dominant mobile operators (such as T-Mobile, Orange and O2). ECTA, representing the alternative fixed operators, is mainly trying to reduce potential negative impact on competition. Even consumers associations and civil rights organizations, which normally support enhanced market integration, are reported to be strongly concerned about the net neutrality clauses included in the Single Market proposal. Irrespective of the concrete intention of Kroes, the proposed provisions are puzzling and may be susceptible to affect net neutrality (in the meaning currently perceived by the public) rather than protecting it.

At the end, the Single Market proposal remains a MUST in the agenda of the European Commission and should remain the main scope of the European institutions up to completion.  Unfortunately, Kroes’ commendable proposal seems to arrive too late, since the Commission should have been acting much earlier, possibly at the beginning of the term when Kroes had more time to carry on a so disruptive proposal; to the opposite, now, at the end of the 5 years mandate, most decision-makers are concerned about closing pending files rather than opening new ones, and it become easier for unsatisfied stakeholders to interfere.

Furthermore, I believe that nothing can be realistically achieved with the support of  stakeholders, namely incumbents and mobile operators, which have no real interest in market integration because they enjoy dominance and extra-profits thanks to the fragmentation of the European market. Their support for any Single Market initiative will always be grey, instrumental and byzanthine, and it may stop in any moment. The only way to have such operators onboard is to convince them that, in the long term, they will extracts more profits from a single market rather than from a puzzle of 28 national markets. This is very difficult, however, because such operators prefers status quo and short-term objectives, therefore they will never support market integration, rather they will be victims of it.

Net neutrality and competition: the European Commission shakes the European market

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The European Commission has started investigations over dominant European ISPs (at least Orange, Deutsche Telekom and Telefonica) in order to verify whether they are abusing of their dominant position in the broadband market with regard to Internet peering services.

The European officers intend to verify the peering policies of such dominant operators because there are suspects that they may refuse or restrict peering (i.e. exchange of Internet traffic with other ISPs, normally for free) for anticompetitive purposes.

The entire case has strong connection with the net neutrality debate: in fact, the refusal of peering may cause artificial scarcity of Internet bandwidth (since the interconnection between the various ISPs is kept at a level which is insufficient for the flow of the Internet traffic) with the results that congestions, interruptions and delays may easily occur in the net. At the end, the Internet users will suffer because of low-quality services.

The potential objective of such alleged anticompetitive beahaviour is questionable: dominant ISPs could aim at forcing other operators (carriers or other ISPs) to pay a (potentially abusive) price for peering directly with them. In case of refusal, the Internet traffic of (refused) ISPs will be routed through other destinations via transit agreements and will in any case reach the dominant ISPs (and its users) after a longer path, with the result that the quality of the Internet service will be affected. Another scope of the alleged anticompetitive beahaviour may be to force hosting providers (such as Youtube, Google ecc) to move some of their servers towards the dominant ISP’s network in order to reach the latter’s clients with better quality conditions.

It must be stressed that operators like Orange, Telefonica and Deutsche Telekom are not dominant in the peering market (which is normally regarded as competitive by the European Commission). However, they are dominant in the broadband access market (where they normally have 50% of the broadband users) and therefore the European Commission intends to verify whether such ISPs are leveraging their dominance to get higher prices (from carriers or hosting providers) in the competitive peering market.

The investigation of the European Commission apparently starts from a French dispute between Orange and Cogent last year. The latter was refused a free peering agreement and lost a case in front of the French competition authority, since it was recognised that Orange could charge a price in case there is a strong inbalance of traffic with the other part (in fact, Cogent was inter alia hosting the Megaupload streaming service). Orange was however  required to clarify its peering policy.

In Germany there was a debate in the industry, without formal complaints however, about the reluctance of Deutsche Telekom in upgrading peering facilities, which could induce other ISPs to pay for direct interconnection in order to avoid congestions.

In Italy Tiscali made the same trick around 10 years ago, however the market ignored this decision because of the irrelevant market position of the Sardinian ISP. However, now in 2013 Telecom Italia is starting this game again. According to industry information, Telecom Italia is recently engaged in a de-peering policy, consisting in closing or withdrawing from peering relationships, in order to (eventually) induce other carriers and ISPs to accept a paid direct interconnection. It is not clear whether the raids of the European Commission concerned also Telecom Italia in this case, however is is evident that the commercial practices of the Italian ISP have strong similarities with the facts investigated by the European Commission in Germany, France and Spain.

More to follow, no doubt.