Misuse of Information

Dominant providers of local telephone services and certain other monopoly services are in position to collect competitively valuable information on their interconnecting competitors. For example, a competitor might require a local access circuit from an incumbent operator in order to provide a dedicated internet service to a business customer. The competitor would order the circuit from the incumbent.

An incumbent should not be able to misuse the information obtained in its capacity as a supplier of essential facilities to the competitor. For example, the incumbent should not be permitted to approach the customer to switch to (or remain with) the incumbent's own dedicated internet services.

Most of the information received by an incumbent, who is subject to competitive misuse, is received in the course of interconnection arrangements. Therefore, the types of potential anti-competitive abuse, and the remedies for such abuse are discussed in Module 3 of this course.

"Locking-In" Customers

Telecommunications network operators may attempt to capture particular subscribers through agreements that make if difficult or impossible for a customer to move to another network operator or service provider. Examples include long-term contracts and discounts for exclusive dealing, as well as agreements that tie a customer to a particular technology or hardware platform.

Not all agreements that lock-in customers are anti-competitive. Most do not warrant regulatory interference. However, there are cases, particularly where a dominant competitor locks in customers in advance of the introduction of competitions, which merit regulatory review. Dominant firms certainly can injure the prospects for competition in a market by locking customers into exclusive arrangements. Theses arrangements can amount to an abuse of dominance.

One clear form of abuse involves a requirement by a monopoly operator that a customer enter into a long term exclusive contract in advance of the introduction of competition, as a condition of receiving continued service. Regulators should prohibit such practices. Clearly, monopoly services should not be discontinued if customers refuse to enter into long-term contracts that would undermine the introduction of competition.

Other cases of locking-in customers are less clear. Much will depend on the degree of competition in the market and the effect of the locking in-arrangements on competition in the market. The more dominant a telecommunications operator, and the more injurious to competition the locking-in arrangement is, the stronger the case for intervention by the regulators, and competition authorities will be more vigilant than others regarding the potential harm through locking-in arrangements.

A practical example of the approach taken by a competition authority to a case of lock-in telecommunications customers can be found in the EU's "SIM Lock" case. This is illustrated in Box 1-10.

 

Box 1- 10:

Case Study: DG IV Intervention in “SIM Locking”

The following approach was taken by the Director – General for competition (DG IV) of the European Commission in the case of the “SIM Lock” feature on mobile phone handsets. This feature was, at one time, common on European handsets.

The SIM Lock feature had at least two characteristics: It could be used as a theft deterrent (since the “Subscriber identification module” – or “SIM – integrated circuit card was uniquely associated with a particular handset); and It effectively locked a particular handset and subscriber to a single mobile telephone service operator. The SIM card authorised a particular handset and subscriber to use a particular service provider’s network. Locking the SIM card and preventing its replacement in the handset prevented subscribers from changing their service provider. The SIM Lock feature could be “unlocked”. However, service providers tended to impose significant charges for overriding the SIM Lock feature.

On 30 May 1996, DG IV wrote a letter to the manufacturers of the handsets and to network operators notifying then that it considered the SIM Lock feature as having anti-competitive effects. Further consultations and correspondence ensued. As a result, manufacturers agreed to modify their handsets and include the ability for subscribers to unlock the SIM Lock feature. DG IV also set out a number of additional restrictions on the use of the SIM Lock feature. These included full disclosure to consumers that they could unlock the handsets. Where service providers had subsidised handsets prices, the amount of the subsidy and specific commercial terms for recovering the subsidy had to be disclosed. Providers also had to disclose any effect that this subsidy might have on the subscriber’s ability to unlock the feature. DG IV permitted service providers to keep the handsets until such time as the subsidy had been recovered.

Tied Sales and Bundling

A tied sale is the sale of one product or service on condition that the buyer purchases another product or service. Bundling is the practice of assembling multiple products or services (or multiple product/service elements) together in an integrated offer.

Tied or bundled sales are not necessarily abusive or anti-competitive. The sale of one product or service may be tied to another for reasons of consumer safety or technical interdependence. Bundled sales may also be provided to respond to consumer preference or convenience.

Anti-Competitive Aspect

Tied sales can be abusive when they have significant adverse effects on consumers or competitors. An example of an abusive form of tied sales is tying a product or service offered in a highly competitive market to another product in a monopolistic or less competitive market. The first product would typically have low prices and profit margin; the later, higher prices and profit margins. Another example is tying a requirement to a maintenance service contract with the sale of the product itself, where the service market is highly competitive but the product market is not.

Bundling has become a popular market approach in the telecommunications industry. Many incumbent operators and competitors are offering bundled packages of services. A popular bundle in Canada, for example, includes wireless telephone service, Internet access service and cable TV service, sold together for a price which is 10% lower than the combined price of the individual services. Like tied sales bundling can be convenient to customers. Among other things, it cuts down on the number of bills to pay. However, regulators have been asked to deal with anti-competitive aspects of bundling in various countries.

Regulatory Intervention

Regulatory intervention is usually focussed on a few types of bundling activity. One type occurs where an incumbent offers bundles of products or services on terms which cannot possibly be met by competitors. This concern is particularly serious where the operator includes a service in the bundle, such as basic local telephone service, of which it is the monopoly or dominant supplier.

Another area where regulatory intervention may be required occurs where a dominant operator supplies services to a competitor which the competitor needs as an input to its own service in order to compete with the incumbent. In other words, the dominant operator provides both the upstream and down stream services, but the competitor only provides downstream services. Some concerns about this situation are discussed above under the title Vertical Price Squeezing.

A related concern arises where the dominant operator chooses to provide the upstream service to competitors on a bundled basis. In other words, the dominant operator may require competitors to acquire not only the minimum upstream service elements they require, but also other services. Such bundling would impair the competitors' efficiency. It would also inflate revenue flows from competitors to the dominant operators.

The issues related to the bundling of services provided by incumbents to their competitors are discussed in detail in Chapter Three of this course, under the title Access to Unbundled Network Components.

Unbundling Conditions

Dealing more generally with the issue of bundling of retail packages by incumbents, a number of regulatory approaches are possible to prevent anti-competitive conduct. Outright prohibition should generally be seen as a last resort. Other approaches can often be used.

Steps can often be taken to level the playing field between dominant operators and new entrants, even when monopoly services are part of a bundle. Where this is the case, regulators can impose resale requirements on the dominant operator. In other words, the dominant operator may be permitted to sell monopoly services as part of a service bundle, but only if it makes the monopoly services available to competitors on reasonable terms to resell as part of their own competing bundles.

Box 1-11 provides an example of conditions imposed by one regulator on dominant operators that want to provide bundles of services that include monopoly service elements. The conditions established in this example include a resale requirement, a cost imputation test and a general requirement that competitors must be able to offer similar bundles in competition with the dominant operators.

 

Box 1- 11:

Case Study: CRTC Bundled service Conditions

In 1994, when local services were offered on a monopoly basis in the Canadian market, the CRTC established the following bundling conditions (Telecom Decision CRTC 94-19). These conditions applied to dominant operators that proposed to offer a bundled service, including monopoly service elements and competitive service elements:

The bundled rates for bottleneck network components: Tariff rates for bottleneck network components Bundled service start-up costs Contribution payments (access deficit subsidies similar to those paid by competitors)

Competitors must be able to offer their own service bundles by combining network or service elements acquired from the dominant operator at tariff rates and the competitor’s own network or service elements

The dominant operator must permit resale of the bundled service by its competitors.

Other Abuses of Dominance

When the concept was introduced earlier in this Chapter, it was indicated that abuse of dominance involved two factors (1) existence of market dominance, and (2) conduct by the dominant firm that is harmful to competition. The most common types of abuse of dominance in the telecommunications industry have already been reviewed.

However, various other abuses of dominance are possible. If conduct by a dominant firm exploits consumers, excludes competitors, or otherwise harms competition, it should be reviewed by telecommunications regulators or competition authorities. Box 1-12 lists some other types of abuses of dominance that are found in telecommunication and other industries.

 

Box 1- 12:

Some Others Forms of Abuse of Dominant Position

The following list includes common types of abuses not discussed in detail elsewhere in this Module. This list is not exhaustive.

Excessive Prices – This is perhaps the most common form of “exploitative” abuse of dominant or monopoly position in the telecommunications sector. It is not an anti-competitive abuse but an exploitation of consumers.

Restriction of Supply – A monopolist or dominant firm may refuse to invest in network infrastructure and supply new customers, preferring to service a limited range of customers. This limited range of customers may provide a secure stream of profits, and requires less additional capital.

Refuse to Deal – Refusal by a telecommunications operator to deal with a competitor is not always anti-competitive. Refusal by a dominant operator to do so may be anti-competitive, where the effect is injurious to competition. The most common example involves refusal by an incumbent operator to provide essential facilities, such as local loops required by competitors to compete (see discussions in this Module and in Module 3). However, other forms of anti-competitive refusal to deal occur in telecommunications markets.

Unjust Discrimination – A dominant firm may discriminate unjustly or unfairly between customers, or between competitors (including itself). Discrimination may involve prices or other conditions of service. Regulators have traditionally prohibited such discrimination where it is exploitative, exclusionary of competition or otherwise harms competition or consumer welfare. Regulators generally do not prohibit all forms of discrimination, particularly those that have no harmful effects. Rules on which forms of discrimination are “unjust” vary from country to country.

Abuses Involving Intellectual Property – Anti-competitive abuses of dominance may occur, for example in exclusionary IP licensing arrangements, and in attempts to monopolise adjacent markets.