Commission Decision

of 28 June 2000

declaring a concentration incompatible with the common market and the EEA Agreement

(Case COMP/M.1741 - MCI WorldCom/Sprint)

(notified under document number C(2000) 1693)

(Only the English text is authentic)

(Text with EEA relevance)

(2003/790/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area, and in particular Article 57 thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1), as last amended by Regulation (EC) No 1310/97(2), and in particular Article 8(3) thereof,

Having regard to the Commission decision of 21 February 2000 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission,

Having regard to the opinion of the Advisory Committee on Concentrations(3),

Whereas:

(1) On 11 January 2000, the Commission received a notification of a proposed concentration pursuant to Article 4 of Regulation (EEC) No 4064/89 by which MCI WorldCom, Inc. (MCI WorldCom) merge, within the meaning of Article 3(1)(a) of the Regulation, with Sprint Corporation (Sprint) by way of exchange of shares.

I. THE PARTIES

(2) Both MCI WorldCom and Sprint are global communications companies. MCI WorldCom provides a wide range of telecommunications services to businesses and consumers, including facilities-based local, long distance and international freephone, calling card, debit card and Internet services. Sprint provides, in the USA, local, long-distance, and wireless communications and Internet services. Sprint's activities in Europe were (until Sprint's withdrawal from its participation in Global One, a joint venture with Deutsche Telekom and France Telecom) conducted through Global One.

II. THE OPERATION AND CONCENTRATION

(3) On 4 October 1999, MCI WorldCom and Sprint signed an agreement and plan of merger under which Sprint stock will be exchanged for MCI WorldCom stock. Sprint will be merged into MCI WorldCom and will lose its separate corporation existence while MCI WorldCom will continue as the surviving corporation. The proposed concentration is therefore a full legal merger within the meaning of Article 3(1)(a) of Regulation (EEC) No 4064/89, as amended.

III. COMMUNITY DIMENSION

(4) The undertakings concerned have a combined aggregate worldwide turnover of more than EUR 5 billion(4) [...]*(5)(6). Both MCI World and Sprint have a Community-wide turnover in excess of EUR 250 million [...]*, but they do not achieve more than two thirds of their aggregate Community-wide turnover within one and the same Member State.

(5) The notifying parties contested the Community dimension of this transaction in letters sent on 20 October 1999 and 26 October 1999 and again in their response to the statement of objections. According to the parties, Sprint's share of Global One's turnover should not have been included in the turnover calculations when computing Sprint's turnover in accordance with Article 5 of the Merger Regulation.

(6) Applying Article 4(1) of the Merger Regulation, the transaction in this case was to have been notified within seven days of the signature of a binding merger agreement. Calculation of turnovers to determine the Community dimension has therefore to be made at the time and under the factual circumstances of the signing of the merger agreement or at the latest at the time the duty to notify arose(7). Turnover attached to certain activities may only be excluded when the notified agreement commits irrevocably as a condition precedent to dispose of those activities or if such activities have been divested between the closing of the accounts and the signature of the final merger agreement.

(7) As the exit of Sprint from Global One was neither effected at the time of signing the merger agreement nor a condition precedent to the notified concentration, the notified operation therefore has a Community dimension.

IV. PROCEDURE

A. PROCEDURAL ISSUES

(8) On 2 February 2000, the notifying parties submitted, pursuant to Article 6(2) of the Merger Regulation, an undertaking that Sprint will use every endeavour to complete, without undue delay, its withdrawal from the Global One joint venture. In the meantime Sprint would not participate in any respect in the management of day-to-day operations of Global One. The parties argued that Sprint's withdrawal from Global One will not only significantly reduce the competitive overlap in the international carrier services market and the global corporate telecommunications services to multinational corporations (MNCs) market. The parties also argued that the proposed commitment would remove any concerns regarding the compatibility of the notified concentration as regards any affected market.

(9) On 21 February 2000, after examination of the notification, the Commission concluded that the proposed commitment was not sufficient to remedy the competition concerns raised by the proposed transaction and accordingly the operation fell within the scope of the Merger Regulation and raised serious doubts as to its compatibility with the common market, and decided to initiate proceedings pursuant to Article 6(1)(c) of the Merger Regulation.

(10) On 9 March 2000 and 14 March 2000, the Commission addressed additional requests for information to the parties pursuant to Article 11 of Regulation No 4064/89. The period to supply the information requested expired on 17 March 2000 at 12.00 CET. At the date of expiry of the deadlines set by the Commission, the parties had not provided full responses to the requests.

(11) By decision of 20 March 2000, the Commission required MCI WorldCom and Sprint to supply the outstanding information necessary to complete its investigation no later than 24 March 2000 at 08.00 CET. On 24 and 27 March 2000, the parties provided the outstanding information. This had the effect, in application of Article 9 of the Implementing Regulation(8), of setting back the final deadline by which the Commission has to adopt an Article 8 decision from 4 July to 12 July. In their response to the statement of objections, the parties contested the date of 27 March 2000, arguing that they had provided the requested information through electronic mail on Friday 24 March. However they represented in a letter dated 26 May that the electronic copy of the reply to the Article 11 decision was not complete until the Article 11 response was filed in multiple hard copies on 27 March. Given the date of adoption of the present Decision, it is not necessary to conclude on the correct filing date.

(12) The Commission sent a statement of objections to the notifying parties on 3 May 2000. The parties replied on 22 May and an oral hearing was held at the request of third parties on 30 May. On 27 June 2000, the parties informed the Commission of their intention to withdraw formally the notification because they did not any longer propose to implement the proposed merger in the form presented in the notification. However, this did not amount to a formal withdrawal of the merger agreement signed on 4 October 1999 that is the object of the notification. In addition, the parties left open the possibility for them to implement the proposed merger in a form different to the notification. For these reasons, the Commission could not accept such notice as a formal withdrawal of the transaction.

B. COOPERATION WITH THE UNITED STATES DEPARTMENT OF JUSTICE

(13) The MCI WorldCom/Sprint merger proposal was also notified, inter alia, to the Antitrust Division of the United States Department of Justice (DoJ). The parties granted appropriate waivers in order to enable the DoJ and the Commission to exchange information and documents supplied by the parties to the two agencies. Many firms who responded to parallel enquiries from both the DoJ and the Commission were prepared to let the two agencies exchange information, or supplied the same submission to both.

(14) In the course of the investigation and analysis of the merger proposal there was a considerable degree of cooperation between the two agencies, involving preliminary exchanges of views on the analytical framework, coordinated requests for information, attendance of DoJ observers at the oral hearing and Commission officials at a "pitch meeting" at the DoJ and joint meetings with the notifying parties.

(15) On 15 May 2000, the Director-General for Competition sent a letter to the United States Assistant Attorney General requesting the cooperation of the DoJ in evaluating the impact of the merger on the US long-distance market and its consequences on the international telephony field.

V. COMPETITIVE ASSESSMENT

A. THE INTERNET

BACKGROUND

(16) The Internet is an interconnected "networks of networks" that carries bits of data between two or more computers through thousands of interconnected networks. Approximately 300 networks providing Internet connectivity operate long-distance transmission networks that, together, form the global Internet's international "backbone". A handful of these operate networks that connect to multiple countries in more than one region. It is estimated that the 10 largest Internet connectivity providers control 70 per cent of international Internet bandwidth(9). Below the top tier providers are a number of Internet connectivity providers that operate at regional level (Europe, USA and Asia). There are also an increasing number of national providers. In addition, academic and research networks operate as international connectivity providers on regional basis(10).

(17) Access to the Internet for end-users comes, inter alia, from Internet service providers (ISPs) who provide Internet access and related services, as well as from telecommunications and data communications companies and from companies in other businesses who give away Internet access as a means of selling their own products. Larger Internet connectivity providers then provide the underlying connectivity between the different ISPs, content providers, web sites, etc. and other network providers. End-users could be residential customers, corporations, governmental institutions and universities. Given that the users need and demand universal connectivity, Internet connectivity providers need interconnection to all parts of the Internet.

Interconnection

(18) Any Internet connectivity (network) providers obtain connectivity through one of two means (a) transit arrangements, which provide access to the global Internet and (b) peering arrangements, which provide for the exchange at particular points of roughly comparable amounts of traffic for termination between two networks of roughly equivalent geographic coverage.

(a) Transit

(19) Transit is a commercial service granting access to the Internet for a fee. Transit can take three forms: dedicated access (a dedicated line to another network provider or large customers), retail dial-up access (to consumers and residential and business customers) or wholesale dial-up access to Internet service providers(11).

(b) Peering

(20) Peering involves an agreement between two networks to accept traffic from each other's customers for termination on their respective networks.

(21) Peering is in turn categorised as either "public" or "private" (also referred to as "direct" peering). Public peering occurs at established public interconnection points where a number of Internet connectivity providers may agree to exchange traffic at a single location, often referred to as a network access point, or "NAP". Private peering occurs between large Internet connectivity providers at designated points suitable for the two networks.

(22) The historical basis for peering developed as networks of roughly equivalent size agreed to exchange traffic. The first peering points were the NAPs that were created after privatisation of the Internet by the US Government. These NAPs are owned and operated by commercial entities such as MCI WorldCom and Sprint. The commercialisation of the Internet in the 1990s meant that many of the NAPs became congested during the transition to a fully commercial market. NAPs continue to be congested and are used mainly by tier-two providers that do not have the same need of high-capacity interconnections. In response to the congestions in the NAPs, larger networks that had exchanged significant traffic with one another at the NAPs shifted to direct peering agreements, and established interconnection at points convenient to the two networks. This has continued to be the preferred practice of the larger networks. Typically larger networks will use private peering points (with some legacy public peering) while smaller networks will use public peering.

(23) The importance of private peering has also been shown by the requirement of large corporate clients for private peering points. Many large business customers issuing requests for proposals (RFPs) for global telecommunications services insist that Internet connectivity providers bidding for their business have a specified volume of private peering (both number of points and size of interconnections) with particular Tier 1 Internet connectivity providers. This is required since it adds reliability.

(24) Top-level connectivity providers have an incentive to peer privately and for free with carriers that have networks that are similar in size, traffic volume, geographic reach and quality. This allows the top-level networks to retain all revenues from their subscribers without having to make payments with other network providers. If the traffic is symmetrical this arrangement benefits both parties equally. Geographical balance also brings more parity in terms of costs of the network (the Internet network providers have an economic incentive to deliver their traffic to their peers at the shortest possible point of interconnection to limit network costs). This means that top-level connectivity providers have an incentive not to peer with others than those with more or less the same traffic volumes and equivalent geographic coverage. As soon as the traffic becomes too asymmetrical, it would be more beneficial for the larger providers to charge for the interconnection [...]*(12)[...]*(13)[...]*.

(c) Differences between peering and transit

(25) Transit differs from peering in three respects:

- the party receiving transit services obtains global dedicated (always-on) connectivity, i.e. the ability to send traffic via, and to receive traffic from, all the routes available to the provider and the provider's peers - virtually anywhere on the Internet, and not merely access to customers of the transit provider itself,

- transit is provided as a commercial service, i.e. for a fee, and also includes technical and customer service support,

- the relative infrastructure costs between the two networks are allocated differently than under peering (in the case of peering, each party bears its share of the infrastructure costs, in the case of transit, the transit provider bears the fixed infrastructure costs of providing connectivity and the customer pays for the service).

(26) Peering is essentially a barter arrangement (although some Internet connectivity providers do provide peering under a fee arrangement). In terms of traffic, this means that both sides are of roughly the same size. Both networks swap the benefits of their customer base. The balance of interest between both networks in a peering relationship also imposes that neither party can choose the other one as a route of last resort. If Peer A receives traffic from Peer B, Peer A will not, under the peering arrangements with B, hand off B's traffic to A's other peer, Peer C. In order to transmit traffic to C, B must either peer with C or buy transit from C or another Internet connectivity provider.

(27) Peering is more economical than transit as long as not too many peering agreements have to be entered into, hence the hierarchical nature of the Internet. This is also implicit in the parties' own business strategies. Had it been more economical for them to purchase transit than to rely on peering they would do so. The Commission's investigation shows that neither party to the transaction pays for connectivity. On the other hand they are paid for providing connectivity. [...]*(14).

(28) In addition, without a direct connection the traffic has to pass through additional hops (i.e. intermediate stages in transit) and the quality of service decreases, leading notably to increased latency (i.e. it takes longer to transport the traffic) and increased likelihood of packet loss. Direct peering relationships allow the peers to minimise these quality of service issues. MCI WorldCom's Internet division UUNet is required by its own service level agreement (SLA) to provide average monthly latency of no more than 85 milliseconds roundtrip within UUNet's network in North America and of no more than 120 milliseconds between New York and UUNet's international gateway hub in London. [...]*(15). The importance of hops for the quality of service was contested by the notifying parties in their reply to the statement of objections but this position was contradicted by third parties statement during the oral hearing (see further below at recital 63).

Intranets and extranets

(29) An intranet is a private network that is limited to a company or organisation. It may consist of many interlinked local area networks (LAN) and also leased lines in the wide area network. An intranet normally includes connections through one or more gateway computers to the outside Internet. The main purpose of an intranet is to share company information and computing resources among employees. An intranet can also be used to facilitate working in groups and for teleconferences. An intranet looks like a private version of the Internet allowing companies and organisations to send private messages through the public network, using the public network with special encryption/decryption and other security safeguards to connect one part of their intranet to the other.

(30) Larger companies and organisations allow users within their intranet to access the public Internet through firewall services that have the ability to screen traffic in both directions so that company security is maintained.

(31) When part of an intranet is extended to customers, partners, suppliers or others outside the company, this part becomes the extranet. Extranets require firewall server management, the issuing and use of different user authentication, encryption of messages and the use of virtual private networks (VPNs) that tunnel through the public network. Extranets can be used to exchange large volumes of data, share product catalogues, provide or access services provided by one company or organisation to a group of other companies, such as an online banking application managed by one company on behalf of affiliated banks

Web hosting and data centres

(32) A web-hosting provider offers web-hosting centres (or data centres) featuring access-controlled buildings with servers that are monitored from a central, web-hosting operations centre. The data centres are specially built to house Internet servers and equipment. Customers of the data centres connect to the data centre and the web-host then ensures the connection to the Internet through its own servers that are directly connected to the Internet backbones(16).

(33) Web hosting can be used by e.g. websites that want to ensure that data is secure, their equipment is safe and that the access to the website is fast and reliable. It also allows for more flexibility to expand when more capacity is needed or to decrease capacity when demand is lower. Today, all the larger Internet connectivity providers offer data centres/web hosting as part of their integrated Internet services to their customers.

DEVELOPMENTS SINCE 1998

(34) During the last couple of years new techniques such as controlled content distribution, mirroring and caching have developed to move content closer to the end users (the eyeballs). In addition, multihoming has developed as a practice whereby Internet access providers and Internet connectivity providers connect to more than one network.

Multihoming

(35) The practice of network providers and Internet access providers of being connected to more than one network is referred to as "multihoming". A multihomed network retains connectivity to the Internet when one connection is disrupted, and can route traffic to any destination over the connections it has that offer better service and to avoid congestion to that destination.

(36) Given that quality of connection matters (speed, reliability and redundancy) one way for Internet access and network providers to ensure themselves of universal access to the Internet is to multihome. The Commission's investigation has shown that multihoming is mainly used for back-up and redundancy to ensure quality of service. However, multihoming does not necessarily prevent traffic from passing over a network with a degraded connection. The path of the outbound traffic can to some extent be influenced so that passing over a degraded network is avoided. But, the return traffic would not be possible to control to any significant degree. Multihoming may also be used to ensure connections to certain regions (e.g. the USA or Europe). Multihoming also gives new entrants an opportunity to connect to customers.

(37) Multihomed networks normally have one main provider of connectivity and then one or more other providers as back up. Normally, customers of Internet connectivity providers have their main connection to the provider that can connect it to the largest amount of customers and the back up to the smaller provider(s). This is confirmed by the Commission's investigation which shows that the majority of second level or smaller Internet access and network providers are multihomed to either one of the merging parties or both of them.

Caching, mirroring and content delivery networks (CDNs)

(38) The primary function of caching and mirroring is to distribute content to the edges of the Internet, closer to the end-user (the eyeballs). These technologies improve the quality of content delivery given that they reduce delivery times, network congestion and bandwidth costs and move the content closer to the end-users. However, these techniques are not yet widely deployed and they have their technical limitations (see further below at recital 172). In particular, they are more efficient for static and stable material that does not change that often.

Caching

(39) Caching is the oldest of the techniques. Caching creates temporary copies of information such as web pages, image files or multimedia files (collectively referred to as objects), that reside on computers (caches) other than the host from which the information originated (the origin server). Caches do not copy the entire content of the website but those parts of the website that contain dynamic content, in order to reduce the bandwidth load on these centralised servers. Caches are installed by the network owner/administrator at selected locations in a given network.

(40) A cache may be an ordinary PC that runs publicly available software or it may be a highly specialised computer (or network of computers) running special software designed to run on those computers. When installed in a network, a cache intercepts requests from hosts to the home network for objects located on other networks, and checks to see whether the object is stored in the cache. If the cache determines that the requested object is stored in the cache (a hit), the cache server delivers the stored object to the requesting host. If the object is not located in the cache (a miss), the cache server allows the information request to continue on toward the origin server.

(41) There are three types of caches, traditional, transparent and pre-fetching caches. Traditional caches, or older caches often known as proxy servers, required the requesting server to have configured its browser to send object requests to the proxy server rather than directly to the website in question. Transparent caches, unlike traditional caches, may be installed directly in the network and can capture all object requests that pass through them. They are "transparent" in that the requesting host need not configure its browser to use a proxy server and are not aware that it may be receiving objects from a cache server. Ordinarily, caches only store information that has previously been requested by a previous user. By contrast, some traditional and transparent caches will "pre-fetch" objects, i.e. they will request information from websites according to pre-defined criteria, and update that information on a regular basis. This allows the cache server to "anticipate" requests, further improving the performance of the cache. Pre-fetching is particularly useful where content is relatively dynamic (e.g. such as web pages that are updated on a daily or more frequent basis).

(42) Caching as such is not provided as a stand-alone service. Rather, it is a network enhancement installed by the network operator/administrator to improve network transmission speed and quality, and ISPs purchase and install caches in their networks for two reasons: (a) to remove bandwidth requirements and (b) to improve delivery responses times to customers. Both considerations are important to all cache purchasers, but the ranking of the priority will depend on the particular ISP.

(43) Caching is especially attractive to corporate customers but not to content providers since it does not enable the content providers to count the number of hits (visits to the site) which is necessary to calculate and generate advertising revenues. [...]*

Mirroring

(44) Mirroring is basically the same as caching. Data which are (or will be) repeatedly requested is replicated on different computers, and are served to anybody who requests them from a computer that is closer than the original content provider. The objective is to reduce reliance on the central servers, and to serve the content more effectively and quickly to the local viewers.

(45) Whereas caching is a network management technique by which a network operator installs a computer that operates special caching software in order to improve the network's transmission speed and reduce bandwidth requirements, mirroring is a technique by which content is replicated on geographically dispersed servers.

(46) Mirroring is not generally offered as a stand-alone service. In some cases, a content provider may decide to locate its own servers on other networks closer to end-users. This is most common where a content provider has a small number of large files that it wishes to locate closer to specific sets of end-users. For example, Microsoft and Netscape use separate download servers to enable European customers to download software more quickly than they would if they needed to download the files from the origin server in the USA.

(47) More commonly, however, mirroring is offered as part of the package of web hosting (see above at recitals 32 and 33) or collocation services companies. These maintain data centres that are located throughout the world and connect to multiple Internet backbones. All major Internet connectivity providers provide web-hosting and collocation services. For example, MCI WorldCom announced on 31 May 2000 that it will build 13 large data centres in Europe to target ISPs, ASPs (application service providers) and large multinationals. The new centres will be added to WorldCom's 28 existing smaller centres in Europe(17). The mirroring provided by these data centre operators involves the placement of multiple servers housed in geographically dispersed locations, each of which is capable of processing the same requests and providing the same information. The geographic dispersion allows web-hosting providers to use the domain name system (DNS) either to direct requests to the closest server or to distribute requests among different servers to balance the load on different servers.

Content delivery networks (CDNs)

(48) The combination of caching and mirroring techniques has given rise to a more advanced form of content distribution, CDNs. CDNs operate by locating cache servers or similar devices on multiple networks and in diverse geographic locations. A CDN provides the customer (a content provider) with software that automatically reconfigures the customer's web pages to point the end-user's request for large objects to the CDN server that is either closest to the end-user, or, in some cases (on the basis of real-time network monitoring and routing algorithms), is able to deliver the content most quickly to the end-user (e.g. if congestion would slow down the closest server).

(49) CDNs perform a similar function to caching, although whereas ISPs use caches to improve their ability to "pull" content onto their networks (so that it is closer to the ISPs' customers), CDN enables content providers to "push" their content onto other networks. As such, the two approaches are complementary in their effects on the usage of Internet backbone networks.

(50) Content providers, first and foremost, wish to deliver their content to the end-user as quickly as possible. The high growth of the amount of information carried over the Internet has led to capacity constraints and increased response times to websites. CDN reduces the response times by reducing the amount of data that needs to traverse the different networks. Relying on a CDN reduces the content providers' bandwidth and equipment costs for the same quantity of data. A content provider that uses a CDN service requires less capacity and requires fewer of its own servers because the content provider no longer serves the bulk of its content directly. The CDN must incur a portion of these costs, but can shift them back to the content provider. However, a content provider may still find it more economical to use a CDN than to provide content from its own servers or from servers located on a web-hosting service's data centres.

(51) In addition to the above techniques, the Internet is now witnessing the development of new services such as e-commerce, video online, voice over IP, etc. that necessitate much more capacity than required up until today and also are provided in real time. To be able to be performed, these services need to be transported over networks that present no risks of failures or "packet loss" (otherwise the quality of say the video or the voice conversation would be severely affected).

B. RELEVANT PRODUCT MARKETS

TOP-LEVEL OR UNIVERSAL INTERNET CONNECTIVITY

(52) In the WorldCom/MCI decision of 8 July 1998(18) (WorldCom/MCI), the Commission identified three distinct markets: (i) provision of host-to-point-of-presence connectivity, (ii) provision of Internet access services and (iii) provision of top-level or universal connectivity. The Commission concluded that there was substantial competition on the Internet access market and the analysis therefore focused on the market for the provision of top-level or universal connectivity where both parties to that transaction were active. The market investigation conducted in the current case confirms that for the purpose of this transaction, the focus should again be the market for top-level or universal connectivity assessed in the WorldCom/MCI decision.

(53) The Commission defined in the WorldCom/MCI decision the provision of top-level or universal connectivity as a separate market since it found that only organisations which are capable of delivering complete Internet connection entirely on their own account are the top-level Internet connectivity providers (top-level or top-tier Internet connectivity providers) and that their connectivity was supplied entirely by peering agreements between those top-level networks or internally. Secondary Internet connectivity providers (or second-tier providers) may be able to deliver some of their own peering-based connectivity, but had to supplement it through bought transit. It was found that second-tier ISPs could not avoid continuing to buy transit from the top-level networks and second-tier ISPs could not provide a competitive constraint on the prices charged by the top-level networks. The same conclusion could be drawn for resellers. Thus, it was concluded that the relevant market on which MCI and WorldCom were active was the market for the provision of top-level or universal Internet connectivity.

(54) At the time, MCI and WorldCom challenged the Commission's proposition that the Internet has a hierarchical structure. However, Sprint asserted at the time that the Internet has hierarchical characteristics, and it has not disclaimed those assertations(19). In the current transaction the parties allege that the Internet is non-hierarchical. [...]*(20)[...]* The Commission's investigation has however confirmed the Commission's finding in the WorldCom/MCI decision that the Internet is a hierarchical structure and that there is a tier of top-level network providers that achieve their connectivity entirely by peering agreements between the top-level networks or internally. The investigation also shows that top-level network providers continue to rely among themselves on settlement-free peering at private peering points. On the other hand, smaller (second-level) network providers continue to rely on national or regional peering agreements (including MCI WorldCom's European subsidiaries) to obtain national, regional and, perhaps, European connectivity. Nevertheless, in order to obtain global connectivity even large European network providers purchase transit from one or more of the top-level Internet connectivity providers. The next segments consists of regional network providers and the Internet access providers that purchase connectivity for their retail customers. Other customers of large Internet connectivity providers include websites and dedicated corporate access customers [...]*. In summary, all undertakings involved in the provision of Internet services purchase transit and are direct or indirect customers of the top-tier connectivity providers. None can achieve global connectivity without having access to the top-level connectivity providers networks.

(55) The parties' own submission also confirms the geographical hierarchy of the Internet, meaning that the US networks are treated as more important than others. MCI WorldCom has three regional backbone networks: AS 701 (North America), AS 702 (Europe) and AS 703 (Asia Pacific). [In order to obtain peering for global connectivity, the network provider needs to meet the criteria set by UUNet for peering in North America.]* Sprint provides Internet services in only the USA. Sprint's agreements with its peers offer them connectivity to its US network only if the peers offer a worldwide network.

(56) The parties argue that any analysis of the relevant product market must take account of the recent developments in the nature and scope of the Internet. They argue that with increased demand for universal connectivity has come increased supply both in the USA and Europe. In particular the liberalisation of the EU telecommunications markets have lead to successful and ongoing entry of significant new Internet network providers and has increased the role played by European network providers. The emergence of controlled content distribution (CCD), regional peering arrangements and greater use of mirroring, caching and multi-homing have also played a critical role in the last two years by reducing ISPs' and Internet content providers' reliance on the US-based backbone providers.

(57) The investigation conducted by the Commission shows that despite significant entry of new ISPs at the retail level, in Europe and elsewhere, there is no significant entry of new top-level Internet network providers. The only two large top-level providers that have entered the market are Cable & Wireless(21), which bought MCI's Internet business, and AT & T, through its acquisition of, inter alia IBM Global Networks. These transactions did not alter the level of concentration in the market as the acquired networks already belonged to the top tier of Internet connectivity providers.

(58) The Commission's investigation has also shown that even though there has been a change in traffic flows and less traffic originating in Europe is sent to the USA, European Internet network provider's reliance on US connectivity providers is still significant. Even larger European Internet network providers are sending 50 to 80 % of the Internet traffic originating on their networks to the USA. [...]*(22). Third parties generally agree that this ratio is likely to move down to some degree in the next years due to increased national content. However, despite this trend they expect a continued strong reliance on the large US network providers for connectivity. This is because European customers still require access to the world's most popular websites, which are located in the USA. Extended use of mirroring and caching is not likely to change this to any significant degree given that there is also a strong increase in websites and content in the USA. Despite increased use of such techniques, there is a continued strong dependence on top-level connectivity providers to obtain universal (global) connectivity.

(59) In any event, while much of the traffic that was earlier sent to the USA is now directed elsewhere or to a limited extent mirrored in Europe, much of the traffic originating in Europe will continue to be sent to US-based network providers' affiliates in Europe since many of these providers are implementing networks in Europe and other regions with the result that traffic is targeted at these networks. Thus, even with a change in traffic flows, the dependence on (US) top-level connectivity providers would continue. Multi-homing does not appear to have had any significant impact on the traffic flows. The market investigation has shown that European ISPs purchase connectivity from second-tier regional (European) connectivity providers, but also rely on transit with at least one of the top-level connectivity providers to obtain universal connectivity.

(60) The Commission therefore concluded in its statement of objections that despite the developments in the Internet since 1998, there is a distinct market for the provision of top-level or universal Internet connectivity. The increased use of caching, mirroring and multi-homing does not alter this conclusion.

The parties' response

(61) In their reply to the statement of objections (the reply), the parties challenged the Commission's product market definition and hierarchical structure of the market. According to the parties, secondary peers could avoid the top-level providers in order to obtain universal connectivity. In addition, new technological developments would alter the hierarchical nature of the industry.

(62) It must first be noted that the parties acknowledge in their joint reply to the statement of objections, that "[s]econdary peers ... are not part of the 'default-free' core of the Internet. That is, they cannot deliver traffic to all Internet destinations without relying on transit purchased from another ISP"(23). In addition the parties view the relevant product market differently. In the reply, Sprint takes the view that four additional companies should be added to those identified by the Commission as top-level market players. However, Sprint does not dispute the hierarchical order of the Internet. MCI WorldCom continues to argue that the relevant market is much broader than the market identified by the Commission.

(63) A third party also submitted evidence during the hearing of the decrease in quality of its services generated by the absence of direct peering connections with MCI WorldCom in Europe.

(64) The parties alleged that secondary peering relationships (peering among local and regional connectivity providers) allow customers of top-level connectivity providers to exercise a competitive constraint on top-level connectivity providers. According to the parties, in the event that all top-level connectivity providers were to raise transit prices by 5 to 10 per cent, secondary peers would be able successfully and effectively to re-route traffic to such a degree that the increase in transit prices would be unprofitable. Moreover, as a variation of the absence of a hierarchical structure of the Internet, the parties argued in their reply that the Commission's market definition ignores developments outside the United States and the appearance of strong players in Europe.

(65) The parties fail to consider that transit customers of top-level connectivity providers would have no other sources available to them to obtain universal connectivity. To provide a substitute to the connectivity offered by top-level suppliers, second-tier providers would have to enter into a very large number of peering and transit agreements with those ISPs that they beforehand were able to reach only through the top-level layer. Given that there are thousands of ISPs worldwide, such a task would undoubtedly not be cost effective when compared to the relative increase in transit prices(24).

(66) Furthermore, the parties allege that the Commission has not correctly taken into account the effects of content storage and distribution technologies when assessing the relevant market. According to the parties, these techniques are not stand-alone services, but they provide partial substitute for backbone transport. Such techniques bring content closer to the users, thereby allowing "most traffic" to avoid backbone networks.

(67) As stated in recital 38, and also further assessed in recital 172, the Commission's investigation has shown that the increased use of such techniques has had no significant impact on the structure of the market. Most of the traffic is still going through the top-level connectivity providers. In addition, given that these techniques do not allow a complete by-passing of the top-level connectivity providers, there is continued and unavoidable reliance on top-level connectivity providers to ensure universal connectivity. In any event, these techniques are not only used by content and smaller connectivity providers but are also used by the larger connectivity providers in their capacity as data-centre and collocation providers.

(68) It was also argued by the parties that the Commission's market definition fails to consider that the top-level connectivity market has become substantially more competitive, as the relative position of each of the key players identified in the WorldCom/MCI decision has diminished.

(69) This argument is of no relevance to the issue of defining relevant markets as it relates to the assessment of the level of competition in the market. Moreover, contrary to the parties' views, there has been no significant entry into the market since 1998. First, in its WorldCom/MCI decision of 1998, the Commission considered a relevant market consisting of 16 top-level connectivity providers. These market players were those peering with the main four providers. In the current procedure, the Commission has considered there to be 17 top-level providers. These were selected by combining those peering with both notifying parties with views of third parties. It follows that the set of market participants identified in the current procedure has been identified on the basis of more generous criteria than used in the WorldCom/MCI proceeding. In any event, AT & T's entry into the market (notably through the acquisition of existing top-level providers) has had no significant effect on MCI WorldCom's market share. MCI WorldCom's market share during the last two years has been relatively stable depending on the methodology used to calculate market shares.

GLOBAL TELECOMMUNICATIONS SERVICES

(70) Global telecommunications services (GTS) are telecommunications services linking a number of different customer locations, generally in at least two different continents and across a larger number of different countries. They are generally purchased by multinational companies (MNCs) with presence in many countries and a number of continents. The services provided are enhanced services - going beyond the provision of simple services such as basic voice and fax - to provide customers with package solutions including virtual private networks for both voice and data services and advanced functionalities.

Characteristics of demand

(71) The parties explained in the course of the market investigation that the supply of GTS is a two-stage procedure(25). The first stage for customers who want such services is normally to issue a request for proposal (RFP) (which includes a detailed description of their tailored needs) to a list of possible suppliers which are invited to bid. The second stage follows the submission of bids, when the customer conducts limited negotiations with a small number of providers that have been shortlisted before choosing the winner. Detailed negotiations on the contract are then conducted with the winner.

(72) Customers of global telecommunications services demand that their provider be able to provide tailored seamless networks and services. Customers expect the networks to cover a wide range of geographically dispersed locations, some of which may be located in remote areas e.g. oil installations in desolated regions. They also expect to be provided with sufficient bandwidth to support the traffic going to and from all locations in a reliable manner. The largest suppliers of such services may be able to offer the services over their own networks. However, for most providers and/or for some locations, the supplier may have to use (lease) other companies' networks to cover areas it does not serve and seek to ensure reliability on that network.

(73) Most customers require a bundle of services to be supplied, whilst a small number may buy individual services for specific needs and conduct some integration themselves. However, contracts are not divided up in such a way that would allow individual providers to bid for different 'lots'.

(74) When asked about the main parameters applied to select a supplier of global telecommunication services, one respondent quoted a Yankee Group study(26) which suggested that price was only the fourth most important criterion when assessing the product offering for a supplier behind reliability, service/support and connectivity/compatibility/infrastructure. Other parameters included culture/language/time zones, bandwidth/capacity, network management, installation delays/time, global reach, staffing/personnel issues, coordination and competence. Customers responding to the Commission market investigation confirmed that price was not the only criterion they took into account when deciding on suppliers. However, the price was normally not considered as the first and foremost criteria in the initial process. Rather the issue of pricing would become of key importance in the second stage of the procedure (when different shortlisted providers offering were compared to one another).

(75) Credible bidders in the GTS market need to be facilities-based (i.e. have their own networks for most of their traffic to ensure high levels of reliability and quality of service, to be able to provide sufficient bandwidth and to control costs), have global reach and customer support services (some customers require customer service facilities to be located very close to the customer, even though their location may not be a key technical consideration). An existing customer base is also important to convince customers that the supplier is able to deliver the services effectively.

Characteristics of supply

(76) Suppliers have a variety of means of meeting customer needs. Customers may purchase basic elements of the global telecommunications package, such as a data network and the specific applications that run over that network, for example international 800 service, and then self-provide the assembly of those services purchased from distinct suppliers to create enhanced services and providing maintenance and customer support facilities internally. Alternatively, customers may purchase tailored packages from specialised suppliers where the assembly of the package and the ongoing maintenance and customer support are carried out by the supplier, with the possibility that the supplier can offer higher performance guarantees at a lower cost because of the integrated nature of the package. The final option of supply is a complete outsourcing of the customer's activities to the supplier. This will often include the transfer of staff to the supplier, not simply the supply of the integrated service package.

(77) Whatever the customer's precise needs, the services demanded will always involve a combination of similar elements (a network, a data protocol (e.g. X.25, Frame Relay, ATM or IP), other services running over that protocol together with important qualitative elements such as geographical reach, ability to ensure quality of service (through seamlessness, close customer support, high reliability, etc.)) with therefore similar costs. Suppliers will need to be able to offer all of these features. Having the full range of services available will also have benefits in terms of cost control and reliability of the total service package and will thus improve the perception of the supplier in the eyes of the customer.

The bidding process

(78) The notifying parties provided an explanation of the bidding process during the course of the Commission's investigation. Customers typically issue requests for proposals (RFPs) to potential suppliers. In some circumstances, they issue requests for information (RFIs) before an RFP, in order to be aware of the options on offer from the major suppliers. RFPs can be long documents: one customer indicated that such a document could be 100 pages long. The RFP document is then communicated to suppliers chosen to bid for the contract.

(79) The response to the RFP can be similarly long, and aims to satisfy the customer's technical requirements. According to MCI WorldCom, the price initially proposed in reply to an RFP is set from previous experience that relates to the services to be supplied and the geographic reach of the service. [...]*.

(80) [The calculation of a carrier's cost in fulfilling a GTS contract is a complex exercise which involves taking into account a broad range of factors that may include management, marketing, sales and support, personnel, administration and equipment costs.]*

(81) [...]*. Once the bids have been received, normally no supplier can match the detailed requirements in the RFP, and therefore clarification meetings are held to understand and evaluate the technical aspects of the bid. This evaluation process can take a team of experts several months.

(82) Once the global telecommunications provider has reached the second stage of the bidding process (i.e. when the potential customer has made a short-list of providers), the parties explain that negotiations on price with the potential customer start. Usually the number of providers selected in the short-list ranges from three to five. From the description of the bidding market provided by the notifying parties and information supplied by third parties, even though each bid is negotiated separately in practice a good bid team will know the identity of their opponents in the second phase of the bidding process. Often, the identity and frequently a broad indication of the competitiveness of certain bids is made available to the bidder.

(83) Once the supplier is decided the contract is awarded and the detailed agreement finalised. Some customers use consultants for part of the bidding procedure: e.g. preparation of an RFP or sometimes to run nearly all of the process.

The provision of packages of global telecommunications services

(84) The provision of packages of customised enhanced and value-added corporate telecommunications services is a relevant product market for the purpose of this case.

(85) In their notification, the parties note the market definitions used by the Commission in a number of decisions covering the area of global telecommunications services to MNCs. The most recent decisions which they quote are BT/AT & T(27) and AT & T/IBM(28). In BT/AT & T, the Commission identified a market for 'the provision of packages of customised enhanced and value-added global corporate telecommunications services, hereinafter referred to as the market for the provision of global telecommunications services'. In their notification, the parties agree with the Commission's assessment in BT/AT & T that the product market should not be broken down into narrower product markets for isolated services included in the range of global telecommunications services. The parties also note that packages of global telecommunication services are tailored solutions, and that they are therefore designed, packaged and managed individually to meet a particular customer's communications need at any given time.

(86) The services offered identified by the notifying parties as belonging to the basket of services to be included on the product market were: domestic and international voice communications; domestic and international data communications provided over a variety of platforms, such as Frame Relay, ATM and IP; enhanced voice and data services; international freephone numbers; messaging services; call centres; video and audioconferencing services; intra/extranets; virtual private networks (VPNs); dedicated Internet access; and corporate calling cards.

(87) The Commission investigated whether this definition of the relevant product market is robust. To that end, it was necessary to assess whether certain or all individual lines of services may be isolated from the basket of global services and be considered as separate relevant product markets. A second step of the analysis was to evaluate to what extent self-provisioning or outsourcing the provision of global telecommunications needs should be regarded as actual or potential competition or simply irrelevant for the competition analysis.

Individual services v package of services

(88) Most customers agreed with a market definition based on packages of global services. However, certain customers also believed that some services could be identified as single product markets. For instance, one customer indicated that they purchased services separately and not in packages. Another, as mentioned in recital 95, stated that they would consider purchasing services separately if faced with a price rise for packages.

(89) In seeking to verify the relevant market definition, the Commission also investigated what would happen if the prices for packages of GTS were uniformly increased by 5 to 10 %. (This helps to predict whether customers would switch to other products and so determine whether these other products are part of the same market). As stated in recital 76, customers do not rank price considerations as one of the main deciding factors when choosing a supplier. This applies mutatis mutandis to the choice between purchasing basic services and self-provisioning enhanced services on top of these basic services and purchasing such services in tailored packages. Only one respondent said that if the price of packages increased, they would evaluate the possibility of buying individual services and bundling them internally. The remaining respondents pointed out that they would not expect price increases or that they would accept such a uniform price increase because they had no choice - they required the services.

(90) To identify a specific line of services as a separate relevant market would be contrary to the economic rationale of the functioning of the market. Firstly, as explained in recital 77, each of these services is built on similar basic elements that are available to the main suppliers. There is therefore some supply-side substitutability from one line of service to another. Secondly, customers establish needs that may be met in a number of ways involving various service lines. Customers may also require additional functionalities or services in the course of a contract that require the use of some other service lines. The relevant product market should therefore be centred around the central network elements (i.e. data protocols) and the other features of GTS. These data protocols are the fundamental element over which the other, more sophisticated, GTS services operate.

(91) The individual services can be subdivided into different groups where there is some substitutability of services within these groups. However, this substitution is not perfect between the different services in the overall range of services, but rather the customer appears to be looking for a package which can meet its needs. Different market participants may offer solutions based on different services for the same customer requirements.

(92) Respondents in the Commission's investigation generally agreed with the product categorisation provided by the Commission based on the listing of telecommunication services provided by the parties. However this was subdivided in different ways by different competitors when they sought to analyse whether the market was narrower. In addition, a third party argued that other services such as X.25, global software defined networks, managed bandwidth, IP services (web hosting, value-added IP services, managed IP, global messaging, caching) and VSAT (very small aperture terminals) were also part of the services which should be included in the product market definition.

(93) The Commission asked for the views of competitors and customers on the product market definition. There was almost universal agreement on the scope of the products included in the market, but certain differences with regard to specific elements.

(94) Two respondents believed that there was a distinct market for a very top-level of customers, which distinguished it from other customers. One respondent characterised this market as where the customers concerned operated on a global basis and required a basket of services over a global private network which could connect all the company's sites. However, it is difficult to isolate such a specific group of companies who require such a service offering. The nature and distribution of any one company's sites is different from every other company, for example the density of the network may be much greater in one country where a company has a large distribution network than the neighbouring one where it has only manufacturing facilities. Company acquisitions can change that market very quickly. In practice, all the market participants in the market for global telecommunications services (GTS), as identified in recitals 206 to 218, can serve both the narrow set of globally based companies as well as those companies who have network requirements across a smaller number of borders. The latter set of companies may have other local suppliers who can provide part of their needs, but only the true global players can provide them with their global network.

Self-provisioning and outsourcing

(95) Customers who choose to self-provide their GTS needs will buy certain elements from within the elements which are contained in packages of GTS services. However, the self-provision in itself does not constitute part of the market as defined above in recital 86. Moreover, as noted in the BT/AT & T decision, to self-provide is a strategic choice. Customers who choose to purchase packages are unlikely to return to self-provision, though this is not impossible, as the costs of switching back and building up the in-house resources and expertise to run the services will be high. Only one customer provided a concrete example of insourcing of raw bandwidth, which was done in one country only. It had been explicitly rejected as an option for a Europe-wide service as insourcing was not scalable to a Europe-wide level, let alone globally. Other customers explicitly rejected the possibility of converting back to an in-house network, except for special services. A similar argument applies to outsourcing, where not only is the network supplied externally, but the staff who operate the network also work for the supplier. For the customer to return to some form of self-provision would be even more difficult under those circumstances. Neither of these activities can therefore be considered to be part of the relevant market.

Conclusion

(96) The Commission's investigation confirms that the BT/AT & T market definition was correct and made more precise by the identification of the distinction between the basic data protocols and the higher value-added services which operate over those protocols.

C. RELEVANT GEOGRAPHIC MARKET

TOP-LEVEL OR UNIVERSAL INTERNET CONNECTIVITY

(97) The Commission found in the WorldCom/MCI decision that the market for provision of top-level connectivity was global. The parties have not disputed this per se and they acknowledge that there is a global demand for connectivity. However, they allege that there is increased regional (European) demand and that the market is not hierarchical. This was also re-stated in the parties' reply to the statement of objections. However, this is contrary to the findings of the Commission in this procedure. The Commission's market investigation has confirmed that the demand for Internet connectivity continues to be universal in scope and despite increased regional content and the entry of a number of new entrants, and the use of mirroring, caching, etc., second-level ISPs remain dependent on a limited number of top-level network providers for global connectivity. Although the majority of top-level network providers that have emerged so far have their centres of operations in the United States, they are the only providers who can provide transit to all parts of the Internet. Given the Internet's hierarchical structure, a rise in prices for access to the top-level networks would affect consumers everywhere in the world. There is thus effectively one global market.

GLOBAL TELECOMMUNICATIONS SERVICES (GTS)

(98) The Commission found in the BT/AT & T decision that the market for the provision of GTS is worldwide. In their notification, the notifying parties agree with this definition. This market definition is also largely confirmed by third parties. One third party has suggested that certain European companies will generally turn to a European provider first for some services, and would only turn to US-based providers if the price were to increase by 5 to 10 %. However, the lists of suppliers provided by customers confirm the view that it is the global players who are regarded as the principal suppliers of GTS.

(99) Accordingly, the Commission has based its analysis on the global geographic market definition identified in recital 98, which it used in the BT/AT & T analysis and because there is no evidence in the investigation which challenges that existing definition.

D. ASSESSMENT

TOP-LEVEL OR UNIVERSAL INTERNET CONNECTIVITY

Publicly available statistics of market shares

(100) In the WorldCom/MCI decision, the Commission found that the combination of MCI's and WorldCom's Internet activities would have led to the creation of a dominant position in the market for top-level connectivity. MCI WorldCom's current Internet activities were contributed by WorldCom after the Commission accepted the divestiture of MCI's Internet business as a condition for the merger between MCI and WorldCom to be cleared. MCI and WorldCom were at the time of the Commission's decision the market leaders with a combined market share in the region of around [30 to 40]* % for the former WorldCom Group and [10 to 20]* % for the former MCI Group. Sprint was at the time found to be the second largest top-level network provider with a market share in the range of 10 to 15 %.

(101) The parties argue that, as stated by the Commission in the WorldCom/MCI decision, there is no reliable publicly available estimate of the size of either the Internet sector as a whole or any relevant subsector and there is no consensus on a preferred unit of measurement. Further, as was noted by the Commission in the decision, the parties argue there is no specific reporting obligation on ISPs in relation to Internet revenues and no consistent reporting. Accordingly, the parties are not able to provide an accurate estimate of the size of the Internet sector or a measure of the market. Even Internet revenues, which MCI and WorldCom advocated as the appropriate tool to measure market shares in the WorldCom/MCI decision may, according to the parties, easily be inaccurate. Traffic flows, as used by the Commission in the WorldCom/MCI decision, would have even greater shortcomings and cannot be accurately measured from a technical viewpoint, given the lack of generally accepted measures. [...]* However, Sprint estimates the top-level network providers market shares based on revenues in 1999 at [35 to 40]* % for MCI WorldCom, [10 to 15]* % for AT & T, [less than 10]* % for Sprint and, for Qwest, [less than 5]* %(29).

(102) The parties submitted a number of publicly available sources that provide estimates of market shares(30). According to these sources, MCI WorldCom and Sprint's market shares are estimated from a minimum of 17 % and 3 % respectively to a range of 21 to 45 % and 13 to 21 % respectively. The estimates relating to the 17 % and 3 % shares are based on Internet service providers' revenues and share by vendor. These should however be excluded given that they include companies such as AOL and MSN that are not present in the relevant market as they do not own any networks providing top-level connectivity. This leads to combined market shares in the region of 34 % to 55 %. Also, estimates by independent third parties provided by the parties, place the merging parties market shares between 20 to 25 and 13 to 20 % for MCI WorldCom and Sprint respectively and the merged entity to between 34 to 45 %(31). These market shares are also in line with figures provided by respondents to the Commission's market investigation(32). The size of the merging parties traffic-flows should also be linked to the merged entity's global network (capacity). MCI WorldCom's Internet division UUNet has "over 2000 POPs, 500 of which are outside the United States. This is bigger than any other IP network on the planet by at least a factor of 2 and bigger by a factor of 4-5 than most of the IP backbones around the world"(33). In addition, UUNet has a very large modem bank that serves wholesale dial-up customers [...]*.

Commission's estimates of market shares

(103) Market participants are those equipped with a set of peering agreements that provide them with 100 % settlement-free connectivity across the Internet. Identifying these market players involves reviewing all peering and transit connections between Internet connectivity providers and isolate those who only get their connectivity either from their customer base or from peering agreements with other networks. Given the quality issues raised by public interconnection points, it is likely that only those who peer privately with other networks are really able to obtain top-level connectivity.

(104) Many of those consulted during the course of the Commission's investigation mentioned the same five top-level networks (MCI WorldCom, Sprint, AT & T, Cable & Wireless and GTE) as having a position stronger than all the others. Accordingly, the Commission reviewed the peering agreements involving these key players to determine a list of candidates for top-level connectivity providers. As the disclosure of peering relationships raises confidentiality issues, the Commission selected those companies who peer with both MCI WorldCom and Sprint to determine who might be regarded as a top-level provider. This examination led to identify the following companies as market participants: [...]*.

(105) However, a third party proposed its own list of top-level connectivity providers by measuring the number of routes available to access their networks. If these networks could be accessed directly rather than through a third-party network, then they would be added to the list. The examination of this list showed some discrepancies with the list of those who peer with both the MCI WorldCom and Sprint networks. Companies that did not feature on the third-party list were not withdrawn from the universe of market participants while those included but not peering with both networks were added. This led to the addition of the four following companies: Exodus, Digex, Abovenet and Epoch. Overall, the analysis led to a universe of 17 networks (or groups of) participating in the market for top-level Internet connectivity.

(106) Any other Internet connectivity provider not featuring on this list has to purchase transit services from at least one of the top five providers. Failure on the part of a network to peer with at least the five main players as a minimum would imply a substantial absence in their coverage of the Internet as a whole. It is possible that the number of participants who are true top-level networks is actually smaller than the field of those who peer with Sprint and MCI WorldCom. Some of those identified may receive their connectivity through public peering arrangements which do not enable them to provide the best quality connectivity. Also each additional peer, while of course peering with the original two, may not peer with each and every other peer who also peers with these two. To that extent, they may not have complete ability to cover the entire Internet on a settlements-free basis. However, for the purposes of assessment it was assumed that anyone with global peering connections to MCI WorldCom and Sprint would be considered a desirable peer by anyone else who had the same connections. This assumption runs in the parties' favour by widening the field of market participants.

(a) Market shares based on traffic flows

(107) The parties have argued that traffic-flow measurements have great shortcomings. Traffic-flow measurements measure traffic passing through specific parts of the network at specific points in time and, because IP routing is dynamic, the same information sent between two hosts may not always travel over the same networks. Moreover, because traffic flows through more than one network from source to destination, estimating the total amount of traffic by aggregating the amounts served by each backbone inevitably involves double counting. Therefore, because the amount of double counting will differ between backbones, market shares based on traffic estimates can be misleading.

(108) The parties also argue that traffic-flow estimates may reflect the particular architecture of the network involved. A backbone provider with many nodes may generate a small amount of backbone traffic when compared to one with few nodes, simply as a result of the network architecture it employs. This is because a node may directly route traffic to all end-users reached through that node and send to the backbone only traffic intended for destinations reached through other nodes, and may count only the latter as backbone provider.

(109) However, as market power may be derived from the overall size of a given network, it can be argued that market shares measured on the basis of traffic flows is a more accurate proxy to estimate market power.

(110) There are no statistics directly available on the overall traffic volumes sent or received by networks. Accordingly a "bottom-up" approach had to be adopted in order to calculate market shares based on traffic. This requires the identification of market participants and the addition their respective measurements of traffic flowing through their networks in order to obtain the size of the market. However it could not be established with certainty that all measurements of traffic flow were made on an entirely consistent basis by the market participants concerned. An alternative way to calculate the traffic-based market shares had therefore to be devised.

(111) The total traffic flow of any given network includes the traffic exchanged with other identified networks and its internal traffic (that is, the traffic between customers exchanged over this network). The market shares can be calculated using traffic ratios without necessarily having to have as an input the total Internet traffic flow, according to the following methodology. The ratio of the market share of network A to the market share of network B, is equal to the ratio of total traffic flowing through network A to total traffic flowing through network B. If both terms of this ratio are divided by the total traffic exchanged between networks A and B, it follows that the ratio of market share of network A to the market share of network B is equal to the ratio of the relative share of network A in the total traffic flowing through network B to the relative share of network B in the total traffic flowing through network A. Therefore the market shares can be calculated on the basis of the relative shares of each network in the total traffic going through each network. Relative shares can then be calculated for each network using only the traffic statistics generated by this network. This avoids the need to add together measurements by various networks to estimate market-shares. This also prevents the market-share calculation being biased by possible differences in measurement methodologies from one network to another.

(112) From the data obtained from the top five networks, it was possible to deduce the relative shares for each of these networks of traffic exchanged with the other four networks and with its other peers. When a company owned a number of networks and some of these would purchase transit while others would peer, all traffic was aggregated and considered as peering traffic. This assumption is beneficial to the parties since this is mostly the case with their smaller competitors.

(113) Combining the relative share of traffic exchanged between network A and B from A perspective and then from B perspective provides a ratio of the market shares of network A and network B. This method can also be applied to networks A and C and then to networks C and B to get another estimate of the ratio of the market shares of network A and network B. The Commission applied that approach to each of the top five networks and obtained the following table of ratios for the purpose of the statement of objections(34):

>TABLE>

(114) When applying this methodology to a hypothetical market comprising MCI WorldCom, Sprint, Cable & Wireless, GTE and AT & T (this corresponds to the relevant market defined by Sprint in their submissions on the WorldCom/MCI merger in 1998), their respective market shares would leave MCI WorldCom group 46 to 51 % of such a market, with Sprint bringing an additional [10 to 20]* %, or [56 to 71]* % in total.

(115) To calculate market shares on the basis of the universe of 17 potential top-level networks, assumptions had to be made for the size of the remaining 12 networks. The general assumption, in line with the revenue figures, was that the traffic flowing through one of these networks could not be greater than the traffic flowing through any of the top five networks. Given the ratio of total traffic flowing through the smallest of the top five top-level Internet connectivity providers compared to MCI WorldCom traffic is [...]*, the ratio of the aggregation of the remaining 12 networks cannot be more than 12 times [...]*.

(116) On this basis and assuming that these 12 networks are not of similar sizes, the total traffic flowing through the 12 networks should be equivalent to MCI WorldCom traffic. The market-share estimates give the MCI WorldCom group some 32 to 36 %, with Sprint bringing an additional [5 to 15]* % and no competitor having more than 10 to 15 %. The combined market shares of Sprint and MCI WorldCom is then in a range [37 to 51]* %. This leads to the following market shares:

>TABLE>

(117) Even if it was assumed that the total volume of traffic going through the 12 other networks is equal to twice that of the MCI WorldCom group (which, as seen in recital 115, is impossible since their overall size cannot be more 1,8 times the size of MCI WorldCom) then the combined market share of the parties would still be in the order of 32 to 35 % and [up to]* three times bigger than the following network.

(b) Estimates of market size and share based on revenue figures

(118) On the basis of the above, a total of 17 Internet connectivity providers would have fallen within the definition of a top-level network. As to the total size of the market, the information available was not comprehensive, and estimates had to be made in respect of the turnover of two firms for which accurate figures were not available(35). Revenue for each of the two firms concerned was estimated at USD 100 million each, which was believed to be a considerable over-estimate of their actual revenues.

(119) Market shares were calculated in the statement of objections on the basis of two alternative methods. The first took into account the total Internet revenues (including dial-up, dedicated access, hosting, collocation and others). That led to a market size of approximately USD 6500 million and to market shares of respectively [40 to 50]* % and [5 to 15]* % for MCI WorldCom and Sprint. Only one other player (AT & T) had a market share between 10 to 15 % and two had market shares in the 5 to 10 % range (C & W and PSINet). All of these revenues are linked to the provision of Internet connectivity. [...]*. Similarly provision of dial-up generates traffic, increases the customer base and therefore the market position.

(120) The second method took revenues earned from the provision of dedicated access revenue. The advantage of this method is that it uses only connectivity provisioning revenues, even if it does not cover all connectivity provisioning revenues. However, respondents were not always able to break down their Internet revenues and this approach excludes revenues earned from dial-up. In any event, since this method does not include all relevant Internet revenues, it can only be used as an additional indication of market shares. In the case of firms for which dedicated access revenue figures were not available, these figures were set at the level of one third of the total Internet revenues. This is consistent with the ratio of such revenues to the total Internet revenues of both notifying parties ([...]* and [...]*). If such revenues were assumed to be half of total Internet revenues that leads to a combined market share of [30 to 40]* %. On this basis MCI WorldCom's share was [15 to 25]* %, and Sprint added some [5 to 15]* %, giving the combined group some [20 to 40]* % of the market. The three nearest competitors had market shares in the range 10 to 15 %.

(121) Although the parties repeatedly stressed their belief that revenue figures were the only reliable indicator of market share in this area, many other competitors pointed to the possible dangers of over-reliance on revenue data alone. Although figures based on revenues from basic Internet access were used wherever possible, the companies concerned are under no obligations as regards reporting standards or even disclosure of data. Consequently it was necessary to treat the figures with caution.

(122) Firms which are peered with up to four of the main providers have little claim to be regarded as top-level networks, as a failure to peer with one of the top five indicates a substantial shortfall in their ability to provide Internet connectivity. However, for the purpose of undertaking a sensitivity analysis, market-share estimates were made to see whether the addition of such players not already included in the list of market participants would cause any significant alteration to the figures. On such a basis (which it must be stressed is extremely conservative) combined market shares of [35 to 45 %]* in total Internet revenue terms were still recorded for the notifying parties.

(c) Conclusion on the calculations of market shares

(123) On the basis of market shares calculated on the basis of traffic flows as well as revenues, the merged entity's market share would amount to between [37-51]* % based on traffic exchanged(36) and [30 to 65]* % based on revenue. The market share of the next competitor is never higher than 15 per cent. Irrespective of the methodology used, the Commission's investigation shows that the merged entity will have market shares based on revenue more than three times higher than its closest competitors and four times as to market shares based on traffic. These results remain robust even under the implausible assumption that the combination of the 12 smaller top-level entities would be the twice the size of MCI WorldCom.

(d) The parties' response

(124) In their response to the statement of objections, the parties alleged that the Commission's market-share estimates were too broad and that at the low end of the range the market-share gives rise to no competitive concerns. The estimates of both the Commission and third parties also demonstrate that MCI WorldCom would have lost substantial market share since 1998. Moreover, the parties questioned the use of revenue and traffic measurements in this case since they argue that the methods are likely to overstate the market share of the merged entity.

(125) According to the information available to the Commission at the time of the statement of objections, MCI WorldCom's market share based on total Internet revenue is [40 to 50 %]* in a market comprising 17 top-level connectivity providers(37). This should be compared to a [35 to 45 %]* market share in 1998 for WorldCom. Despite the fact that the assumptions used by the Commission in the current procedure are more generous to the parties compared to the assumptions made in the WorldCom/MCI decision in 1998, it can be concluded from the above that MCI WorldCom's market share based on total Internet revenues has increased since 1998.

(126) However, after the issuing of the statement of objections, the parties informed the Commission that an additional USD 110 million should be added to MCI WorldCom's North American dedicated-access revenue. As a consequence, MCI WorldCom's market share calculated on the basis of dedicated access revenue would increase from an initial [20 to 30]* % (see above in recital 120) to [25 to 35]* %. This would give the merged entity a combined market share of [35 to 45]* %.

(127) Furthermore, MCI WorldCom's market share based on traffic flows amounted to [32 to 36]* % compared to a [30 to 40]* % market share in 1998. The 1998 market share was based on fewer (16) top-level providers.

(128) In their reply to the statement of objections, the parties alleged that the Commission had made mistakes in its spreadsheets and that the methodology used by the Commission to calculate market shares on the basis of traffic flows was flawed. The Commission submitted to each of the three third-party backbones cited in recital 113 all computations made on the basis of information they supplied and asked them to state whether their data was reproduced accurately and whether they believed that the methodology followed by the Commission was sound. Each of the third parties noticed some clerical errors but also declared the data to reflect accurately their measurements and their agreement with the methodology used by the Commission. When re-calculating market shares taking into account all the clerical errors brought to its attention by the notifying parties and third parties, the Commission found minimal variations (less than half a percentage point) in the estimated market shares.

Impact of the merger on competition

(a) Current market characteristics

(129) There are indications that MCI WorldCom today has a very strong market position that does not necessarily translate into a single dominant position in the market for top-level connectivity. However, it is clear that MCI WorldCom is close to achieving such position. Already in 1997, MCI WorldCom's UUNet had a substantial market share compared to its competitors. This was evidenced by its decision in early 1997 to attempt (an attempt that ultimately failed) unilaterally to cease peering with a number of existing peers.

(130) Since the merger between MCI and WorldCom, MCI WorldCom has been able to maintain its number one position and it is perceived by many competitors as close to being dominant. This is confirmed by the fact that MCI WorldCom is able to demand significantly higher prices (20 to 100 %) than any of its competitors and Sprint and at the same time sustain its leading position [...]*(38)[...]*(39)[...]*(40). Nevertheless, for the purpose of this transaction the issue of MCI WorldCom's single dominance can be left open given that the investigation has shown that the merger would create a dominant position.

(131) The parties have contested the existence of a price differential with their competitors notably by explaining that AT & T charges prices similar to those of MCI WorldCom. However, significant price differential can be found as soon as the comparison is extended to other market participants apart from AT & T.

(132) The information provided by the merging parties also shows that between [40 to 80]* % of both parties' traffic is internal traffic (i.e. traffic not exchanged with peers). No other competitors show any higher percentage of internal traffic than 30 to 35 %. Furthermore, even the three largest competitors of the merging parties exchange more than 15 % of their traffic with the merged entity. This shows that the merging parties are much more independent than their competitors and that their competitors' reliance on the merging parties already today is significant. It also shows that the merger removes one of MCI WorldCom's strongest competitors. These figures also underline the importance of a customer base.

(133) This is also confirmed by the figures provided by the parties concerning their percentage of multihomed customers. [...]*

(134) The strength of MCI WorldCom and, to a lesser extent, of Sprint is contrasted by the evolution of Cable & Wireless. This network is the result of the divestment of the MCI Internet network in 1998. Its internal traffic relative share has decreased since the divestiture and its market position has degraded. The reasons for that degradation are probably multiple but include the perception by the market place that the transfer was not entirely complete and that the service offering had been degraded.

(135) The comparison of the levels of internal traffic among top-level Internet connectivity networks also underlines the already existing imbalance of size and dependence among market participants. The other networks source a much lesser extent of their connectivity from their customers and therefore depend much more on their peering arrangements (notably with MCI WorldCom and Sprint) to be able to offer universal connectivity than MCI WorldCom and Sprint do.

(136) It is generally acknowledged by respondents to the Commission's investigation that the merged entity's large network and its access to the largest number of hosts and customers as well as key Internet sites is essential to their own performance since their customers would demand connectivity to the merged entity's network. Given that the merged entity would have the largest number of customers it can also provide connectivity to the greatest part of the Internet [...]*(41) [...]*(42).

(137) It has been argued that being facilities based is not important and that there is an abundance of capacity to lease. Firstly, this is contrary to MCI WorldCom's own predictions(43) [...]*(44). The Commission's investigation has also shown that even though the cost of transit has fallen substantially, especially in Europe during the last years, the transit costs have not always fallen as much as the cost of leasing infrastructure. Thus, Internet connectivity carries a premium. That premium is greater for the larger, established networks, with the greater number of routes. In order to circumvent the expense of leasing capacity or paying for transit, larger European ISPs have now laid their own circuits to the USA to reduce their costs for transit. However, they are still purchasing transit from the top-level connectivity providers in the USA.

(138) The parties also allege that having a large network is no guarantee of quality. This is contrary to the result of the Commission's investigation as well as information submitted to the Commission by the parties [...]*(45). As stated above, the importance of private peering has been shown by the requirement of large corporate clients for private peering points(46) since this increases reliability of interconnection. Given that only the largest top-level connectivity providers have private peering arrangements with one another the size of the network and its architecture effects reliability [...]*(47). The Commission's investigation has also shown that the quality of service offered already today by UUNet through its service level agreement (SLA) guarantees a latency rate much lower than any of its competitors. Thus, in addition to its customer base, the merged entity would also have one of the largest networks with reach in at least [...]* countries and a service level so far unrivalled by its competitors.

(b) Impact due to the growth of the Internet since 1998

(139) The Internet has experienced unprecedented growth over the past years. According to the parties the rapid growth has led to significant new entry to the market and increased supply that puts a competitive constraint on connectivity providers. In addition, the increased use of multihoming and content delivery services would have shifted the traffic away from the top-level networks to smaller networks. More importantly, there would have been a change in traffic flows from being US-centric to become more regional, in particular European, due to increased network supply and local content in other parts of the world.

(140) Nevertheless, as acknowledged by MCI WorldCom's Vice Chairman John Sidgmore, it is likely that connectivity providers will not be able to increase capacity to meet the increasing demand. Given that more people are connected to the Internet with faster computers and local high-speed connections they are also sending more data to the backbone networks. Increased use of e.g. multimedia applications also adds to the traffic. "UUNet see demand increasing by eight to 10 times so we need to increase capacity by 800 to 1000 per cent just to meet current usage". He acknowledged that he was concerned about not having enough network space to handle the growing demand(48).

(141) However, contrary to what is alleged by the parties the rapid growth in Internet traffic has not hindered the merging parties from sustaining significant market shares in the market for the provision of top-level or universal connectivity. In particular, contrary to the views of the merging parties this has not led to a reduction in concentration of the top-level network providers. Even though there has been substantial and significant entry of Internet access and network providers, the market investigation has shown that there is still a limited number of top-level (universal) connectivity providers. This is due to the high barriers to entry into this market. Universal connectivity can only be obtained on a settlement free basis if the network in question has a sufficient customer base and sufficient geographic reach. As the top-level networks grow with the Internet, it is getting ever more demanding for third parties to match their size to be able to peer with them.

(142) The majority of the new Internet providers entering the market are small local or regional access and network providers that purchase transit for universal connectivity from the top-level providers. In addition, the top-level connectivity providers that have entered the market (Cable & Wireless and AT & T) have entered the market by acquisition of existing networks (Cable & Wireless bought MCI's Internet business after the merger between MCI and WorldCom and AT & T bought IBM's Global Network (IGN) business) but have nevertheless not been able to take any significant market shares away from the merging parties.

(143) Even though the parties have argued that the market has become less US-centric and that there has been a huge increase in European content, the parties themselves have identified the 50 most significant websites worldwide to be US-based websites. This is also consistent with the Commission's finding that despite increased European content there is a strong demand from European end-customers to have access to US websites. As a consequence, even though there has been a diminution of the traffic originating in the EU going to the US, still between 50 to 80 % of the traffic originating in the EU is to the USA. It is also clear from the Commission's investigation that in order for European Internet access and network providers to provide such services to their customers, and contrary to what the parties allege, even the larger European providers are still relying on transit from one or more top-level connectivity providers in order to provide their customers with services.

(144) The Commission's investigation has also shown that despite increased use of multihoming and distributed content services, there has been no real impact on the market shares of the top-level connectivity providers. This given that all new entrants and users of these techniques, irrespective of whether they are European or based in the USA, need to purchase connectivity from the top-level connectivity providers.

(c) Market characteristics post merger

(145) The merger between MCI WorldCom and Sprint will lead to the creation of a top-level network provider that through its sheer size would be able to behave to an appreciable extent independently of its competitors and customers. Given the global scope of the market, this will impact consumers in Europe as much as any other consumers.

(146) The merger will create a super-tier provider of global Internet connectivity. It will have an inherent strong position due to its absolute and relative size compared to its competitors. Given the size of the merged entity, it will be able to control the prices of its competitors and customers. It will also be in a position to control technical developments. The combined entity will be able to sustain such behaviour due to its capacity to discipline the market notably through the threat of selective degradation of its competitors Internet connectivity offering (see recitals 152 to 164) and also through its essential ability to determine and agree any new technical development to enable advanced Internet services (see recitals 147 to 151).

1. Ability to control technical developments

(147) The network of the merged entity will enable it to provide services of a quality that its competitors may have to agree with the merged entity to be able to duplicate. This will become increasingly important for new advanced Internet services. In order to send voice over IP or video images over the Internet the data transmitted needs to be compressed before it can be transmitted over an Internet network(49).

(148) The technique of packet switching(50) sends the data over the most efficient available route (not necessarily along the same route). In order to have a good quality of service, it is important that all the data is reassembled in the correct order and at the desired time. If there is no agreed manner of giving certain types of data priority as they pass over the Internet, there is the inherent risk that the picture or audio sound will only be transmitted to the user's computer once all the packets have arrived (leading to delay) or perhaps be transmitted in an incomplete form.

(149) In order to provide quality of service for advanced Internet services, such as voice over IP, video conferencing and Internet banking, the reliability of the connection is very important. In order to ensure quality of service, Internet connectivity providers have to agree to a standard (a protocol) that will guarantee quality of these services when passing through different networks. Currently no agreed protocols exist for such services. The merged entity would therefore be in an ideal position to develop standards for such services that would be offered either only on their network or at a much better quality on their network unless its competitors agree to certain conditions. Due to the merged entity's absolute and relative size they would be able to dictate the conditions for such future quality of standards. This is also confirmed by the parties' own submissions [...]*(51).

(150) A combined MCI WorldCom/Sprint would have more than [40 to 80]* % of its traffic staying on-net. All other networks have internal traffic of no more than 32 %. Other top-level Internet connectivity providers will exchange around 20 % of their total traffic with the combined entity while the traffic exchanged with other top-level providers would represent less than [0 to 5]* % of the combined entity's total traffic.

(151) Key new drivers of traffic on the Internet such as voice over IP, live video conferencing and advanced e-commerce solutions are only available when adequate levels of quality of service can be obtained throughout the networks across which such services travel. This is the case with the QoS that can be obtained by keeping all the traffic "on-net", i.e. on a single network end-to-end [...]*(52). In addition, when traffic travels across a peering point, there is the inherent risk of loss of "the package(s)" and delays which jeopardise the possibility of providing these services. The merged entity's high percentage of "on-net" traffic will increase its incentives to degrade interconnection and reduce its incentives to support cross-network QoS standards to reinforce the attractiveness of its own network.

2. Ability to raise prices

(152) Given its combined size and importance of internal traffic, the merged entity will also be able to increase the relative price of its customers connections. The parties would not be constrained by competitors as the latter would be exposed to the threat of selective degradation. The combined entity will be in a unique position to control the quality of its own connections as well as the connections of its competitors and customers. This given that the merged entity will only rely to a limited extent for connectivity on its competitors compared to other top-level Internet connectivity providers.

3. Ability to discipline the market

(153) It could be argued that since "everybody needs global connectivity" and also since the merged entity will be dependent on its competitors to achieve this, the merged entity could not afford anti