Month: February 2014

Telefonica/KPN: hard time for consolidation and weddings in the mobile market

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The Competition directorate of the European Commission, lead by Joachim Almunia, has started an in-depth analysis of the proposed merger between the German mobile branches of Telefonica and KPN. The procedure, so called “Phase II” under the merger rules, will analyze in details the effects of the merge in the German market and may bring to whatever result, including banning the transaction or imposing some remedies (including structural or access remedies). The Commission will have to take a decision by May 14.

No official news are available by the European Commission.

The start of the Phase II is not a good news for big telcos in Europe that, by contrast, are going around asking for relaxation of merge rules, in order to allow more consolidation.  According to them (recently Vodafone’s CEO Mr. Colao in Barcelona) an enhanced concentration of the telecom market will allow more investments.

The move from Almunia is not surprising. The EU institutions are not against consolidation in the mobile market, if this is a result of efficient market dynamics. However, merge rules have to contrast mergers aiming at reducing competition in a given market. This is why Mr. Almunia is considering seriously mobile mergers taking place within members states, because such deals end up simply with the reduction from 4 to 3 operators and subsequent reduction of competition. Instead, the offices of DG Comp will see favorably cross-borders mergers (i.e. deals concerning companies operating in different countries) because such transactions would lead to the creation of big pan-European operators able to compete at international level. By contrast, the simple merge between national players is not going to provide any benefit to European integration: rather, it will be a deal permitting the operators left to better coordinate their commercial policies to the detriment of consumers and competition. This is particularly true when the acquired company is the so-called “Maverick” operator, i.e. the company being more dynamic from competitive point of view. The disappearance  of such operator may be seen as a move to make stop competitive offers in the market, rather then looking for synergies or cost reductions.

Because of the above, the European Commission took a serious approach vis-à-vis a merge in Austria between Orange and Hutchison in 2011, which was approved only after deep analysis and imposition of remedies. For the same reasons, last year the US antitrust authorities objected the possible merge between T-Mobile and AT&T in the US market.

European telcos will probably complain about the approach taken by Almunia, however they should  recognize the the path indicated by European institutions is clear: green light for cross-border merges and M&A, likely stop for pure national consolidation transactions.       

The Netflix/Comcast deal: nothing to do with Net Neutrality?

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(SEE UPDATE BELOW VERIZON/NETFLIX DEAL)

Today the press is reporting about a deal between Netflix and Comcast, which will allow the movie provider to connect directly to the network of the broadband provider. I understand that this is a direct peering agreement, but not for free (as it often happens in the peering environment), since Netflix has committed to pay Comcast for the disturb (details of the price are not public).

By virtue of this agreement, Netflix’s subscribers will enjoy a better quality when watching their movies. In fact, Netflix stream services will be conveyed to subscribers directly to them  and will not pass through other networks and long routing – unlike now, since most of Netflix’s movies were normally transmitted via Cogent, a carrier which then delivered the traffic to Comcast.

The deal between Netflix and Comcast seems therefore a normal commercial transaction, since content providers may have the choice to connect directly to the network of their users or instead to deliver traffic to a carrier, which will do the rest directly (via own peering agreements) or via further carriers. As far as we know, this was a pure commercial decision, which had to take account of various factors: the coverage of the ISP and its customers base, the routing architecture, the price negotiated amongst the parties, the alternative price to be negotiated for transit. Of course, Netflix will not make direct peering agreements with all ISPs of the world, because it will be impossible and insane. However, it make sense to negotiate such a deal at least with the main BB providers, including Comcast – the latter being the main provider in the largest market for Netflix – if the price is fair. Comcast’s customers will have a benefit from that, because they will enjoy better quality when watching Netflix’s movies, as the streaming signal will be delivered directly to them without too many loops and routing.

One could argue whether this deal has something to do with the NN debate. It depends whether Netflix’s decision was driven by autonomous commercial decision or by the potential threat by Comcast to restrict the video-streaming traffic to its subscribers.

A pure commercial decision?………

In the previous case, this deal should be seen as an alternative to a solution altering the neutrality of the net. In fact, Netflix’s traffic will not be prioritized, privileged  or favored, therefore net neutrality remains “safe”. By contrast, some “quality” effects will be perceived by the users because of the network solution in place permitting to the video stream to reach households with less potentially congestion points. Thus, this kind of deal demonstrate that most of the arguments against net neutrality are fake or inconsistent, because:

(i) in order to provide enhanced quality to end-users, it is not necessary to prioritize, discriminate, impose bandwidth caps ecc ecc; it is sufficient to arrange the Internet traffic via different routing or peering agreements;

(ii) it is a pure commercial matter – if the price is fair it may be done. No need to regulate;

(iii) it is up to the content provider, OTT or end-users to decide whether a given quality may be desirable, and then the market will provide offers and solutions. By contrast, the entire net neutrality debate in Us and especially in the EU is whether specific “specialized” services should be guaranteed or recognized by regulation, even when nobody in the market is asking for that!

…. or the result of a  NN abuse?

One should investigate the reasons why Netflix decided to close this deal. If, for instance, the deal was forced because of traffic congestions artificially created by Comcast, the scenario becomes more complex. Interesting to see, there are news that also At&T may be interested to close the same kind of deal with Netflix.

In addition, one should consider potential problem deriving from the changing landscape in the US ISP market. If Comcast will succeed in buying the competitor Time Warner, then it may become dominant in the Internet access market in US and it may be tempted, as a consequence, to abusively rise peering fees (to Netflix or any other content provider or carrier) or discriminate. In such a case, a competition or regulatory issue may arise.

 

UPDATE 29 APRIL 2014: Netflix has announced to have executed a similar direct paid agreement with Verizon. This is a sign that the competitive landscape is changing. The question is whether the deal could be seen as a pure commercial move or there might be previous behaviors from Verizon (such as artificial shortage of bandwidth) which have forced Netflix to enter into the peering agreement. Commercial details of the deal are not public.

Hyperlinks, interrupted

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The Court of Justice of the European Union released today a sentence (Judgment in Case C‑466/12 Nils Svensson and Others v Retriever Sverige AB) which may have unpredictable impact onto the Internet environment.

The parties in front of the Court discussed whether publication of clickable internet links (so-called hyperlinks) referring to protected content should be subject to the authorization by the person owning the concerned copyright. The European judges dismissed the request of the plaintiff (i.e. a rights-holder claiming that his authorization was due to refer his content via hyperlink) stating that:

(i) the owner of a website may, without the authorisation of the copyright holders, redirect internet users, via hyperlinks, to protected works available on a freely accessible basis on another sit;

(ii) this is so even if the Internet users who click on the link have the impression that the work is appearing on the site that contains the link.

While this reasoning  may be seen as a positive outcome for some (libertarians, ISP) and not for others (content industry), a more deep analysis of the decision shows that the legal background can give rise to more controversial effects. This is why the various stakeholders waiting for the outcome of this proceeding may have, at the end, different views whether the final decision is favorable or not. For sure, a battle, not a war, was wan  – however it is not sure who wan the war and who wan the battle.

To clarify: hyperlinks are a reference to data that the reader can directly follow to find an already available content and their function is therefore to link any given information to other information over the Internet. Hyperlinks are therefore tools inherent and necessary for the functioning of the World Wide Web. In my opinion, an hyperlink should not amount to a transmission or communication of the work but a reference to an already available work. Fact is, sharing hyperlinks on the Internet is one of the most common activities amongst people surfing in the Internet. In this light, requiring the authorisation of a rights-holder before sharing a hyperlink would not only be cumbersome for the Internet but would also undermine the fundamental right of freedom of speech.

By contrast, the European Court took a different legal approach, holding that the provision of clickable links to protected works constitutes an act of communication under the Copyright Directive (Directive 2001/29/EC). According to the European judges, such an act is defined as the making available of a work to the public in such a way that members of the public may access it. This means that an authorisation from the rights-holder should be required in principle, save for the exceptions.

In the present case, the Court decided for the exception. Thus, the judges found that the authorization was not needed because of the specific circumstances: whether or not the public accessing the protected content was “new” and whether the hyperlinks may be used to circumvent restrictions from a right holder. However, the general principle stated by the Court remains valid. If an hyperlink is an act of communication under the Copyright Directive, every company or citizens sharing content and information in the Internet via hyperlinks could potentially face uncertainty and risks. In fact, the lawfulness of their behavior will depends on the law, rather on some exceptions indicated by the jurisprudence, which by the way could be challenged case by case by rights-holders.  This delicate situation may have a relevant impact on business and also on fundamental rights, including freedom of speech. I do not know whether the European Court understood the deep implications of their reasoning, some under-estimation is possible

About the concrete case: press articles written by several Swedish journalists were published on a freely accessible basis on the website of the Göteborgs-Posten. Retriever Sverige, a Swedish company, operates a website providing its clients with hyperlinks to articles published on other websites, including the site of the Göteborgs-Posten. Retriever Sverige did not, however, ask the journalists concerned for authorisation to establish hyperlinks to the articles published on the site of the Göteborgs-Posten. Thus, the question was whether the provision of such links constitutes an act of communication to the public within the meaning of EU law. If so, the establishment of hyperlinks would not be possible without the authorisation of the copyright holders.

In this respect, the Court pointed out that the “communication” (pursuant to the Copyright Directive) must be directed at a “new public”, that is to say, at a public not covered  at the time the initial communication was authorised. According to the Court, since the works offered on the site of the Göteborgs-Posten were freely accessible, then the users of Retriever Sverige’s site must be deemed to be part of the public already taken into account by the journalists at the time the publication of the articles on the Göteborgs-Posten was authorised. Therefore, the owner of a website, such as that of Retriever Sverige, may, without the authorisation of the copyright holders, redirect internet users, via hyperlinks, to protected works available on a freely accessible basis on another site. However, according to the Court the position would be different should hyperlink permit users of the linking site to circumvent restrictions put in place by the site on which the protected work appears in order to restrict public access to that work to the latter site’s subscribers only: in that situation, the users would not have been taken into account as potential public by the copyright holders when they authorised the initial communication.

A positive interpretation of this reasoning would lead to conclude that any time the “hyperlinked” content is available for free, the hyperlink referral is valid (i.e. an authorization is not needed). However, most of protected content in the Internet is available for free, since the remuneration is provided by other means (mostly advertising). Therefore, some stakeholders will continue to maintain that hyperlink may be infringing copyright of third parties, even when referring to “free” content. The solution of the Court will not be sufficient for this problem and further litigations will follow, for sure.

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Thanks to Joshua Porter for the use of the cartoon on the top!