Commission Decision

of 13 October 1999

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case IV/M.1439 Telia/Telenor)

(notified under document number C(1999) 3314)

(Only the English text is authentic)

(Text with EEA relevance)

(2001/98/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 of 30 June 1997(2), and in particular Article 8(2) thereof,

Having regard to the Commission decision of 15 June 1999 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 28 April 1999 a notification was received pursuant to Article 4 of Regulation (EEC) No 4064/89 ("the Merger Regulation"), by which the Swedish and Norwegian Governments announced that they would acquire joint control, within the meaning of the ECMR of a newly created company, Newco, set up to hold the shares of Telia AB ("Telia") and Telenor AS ("Telenor").

(2) On 25 May the notifying parties submitted certain proposed undertakings, which were conditional on the Commission's adoption of a decision pursuant to Article 6(1)(b) of the Merger Regulation.

(3) After examination of the notification, the Commission concluded that the notified operation fell within the scope of the Merger Regulation and raised serious doubts as to its compatibility with the common market, because it could create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it and in the territory covered by the EEA Agreement. Therefore, on 15 June 1999, the Commission decided to initiate proceedings pursuant to Article 6(1)(c) of the Merger Regulation.

I. THE PARTIES

(4) Telia is the largest telecommunications operator in Sweden and is wholly owned by the Swedish State. It is also the parent undertaking of the Telia group. Telenor is the largest telecommunications operator in Norway and is wholly owned by the Norwegian State. Both companies provide within their respective countries the full range of telecommunications services as well as television services, and also provide such services elsewhere in the Nordic area and internationally.

II. THE OPERATION AND THE CONCENTRATION

(5) Under the terms of the notified operation, Newco, a new company to be incorporated under the laws of Sweden, will acquire all the shares in Telia and Telenor from the respective governments. In return, the Swedish and Norwegian Governments will be issued shares equal to 60 % and 40 % respectively of the equity share capital of Newco.

(6) The Swedish and Norwegian Governments have entered into a Shareholders' Agreement, dated 30 March 1999. Under the Agreement, each Government will have a veto over the approval of the group business plan and consolidated budget of Newco, major strategic acquisitions and disposals, appointment and authorisation of committees of the Board of Newco and the appointment of the Boards of Directors of Telia and Telenor (as subsidiaries of Newco). Each Government will therefore have the possibility of exercising decisive influence over Newco, and hence the Governments will share joint control over it. As Newco inherits the two telecoms and television businesses formerly owned by the respective States, it will perform the functions normally carried out by a telecommunications company, and therefore can be expected to perform on a lasting basis all the functions of an autonomous economic entity.

III. COMMUNITY DIMENSION

(7) The worldwide turnover of the Telia group in 1998 was just over EUR 5600 million and its Community-wide turnover of Telenor was just over EUR [...](4) million. The worldwide turnover of Telenor was just over EUR 3400 and its Community-wide turnover was in the order of EUR [ > 250](5) million. Telia achieved more than two thirds of its Community turnover in Sweden but Telenor does not achieve more than two thirds of its turnover in any Member State. Both Telia and Telenor achieve over two thirds of the EFTA-wide turnover in Norway, and the combined turnover of the undertakings concerned in the EFTA States equals 25 % or more of their total turnover in the EEA territory. The notification therefore falls to be treated as an EEA cooperation case.

IV. COMPATIBILITY WITH THE COMMON MARKET

I. TELEPHONY AND RELATED SERVICES

Introduction to telephony and telecoms services

(8) This is the first case to be considered under the Merger Regulation which involves the merger of two incumbent national operators in Europe. There have been earlier cases involving the merger, or possible merger, of European telecoms operators, but one of the two parties to the operation has always been outside Europe (for example, BT/MCI(II)(6)). There have also been arrangements notified under Regulation No 17 which fell short of a full integration of two parties' entire telecoms activities(7). However, as the present case goes a step further, it raises issues which did not need to be considered in such detail in those earlier cases, and therefore some initial review of market definitions is required.

(9) Before dealing with the overall assessment and with individual product markets in detail, it may be helpful to set out some basic explanation of how the industry operates and also to clarify certain essential principles involved.

Structure and operation of switched circuit telephone networks

(10) For most of this century, and for most countries in Europe, the telephone industry has been structured in the form of vertically integrated national monopolies, usually publicly owned. These PTOs (public telephone operators) offered their final user customers ("subscribers") basic voice services. Such basic voice services provided connection to any other subscriber within the country and, through international agreements with other PTOs, access to the international PSTN (public switched telephone network).

(11) In recent decades efforts have been made in a number of countries to liberalise national telephone markets by introducing competition. For these purposes national telephone networks have generally been considered as consisting of three distinguishable segments: local loop, which is essentially the network between subscribers and the point of interconnection(8) at their local exchanges; long distance, that is, the network of cables and switching equipment which connects the local exchanges to higher levels of exchange known as transit exchanges; and international; namely the network of cables and related switching equipment which leads traffic from the international gateway (often in a capital city or at some key node in the network), via "backhaul" cables to the international cable head or landing point, and hence out of the country and to PTOs in other countries.

(12) A subscriber for such voice telephony services gains access to the network by paying a subscription fee which generally covers the operator's cost for the provision of the infrastructure, in particular the fixed line from the local exchange to the subscriber's premises. The line itself is usually a pair of copper wires twisted in a certain characteristic fashion and referred to as a "twisted copper pair" or "twisted pair".

The physical shape of the two wires between subscriber and exchange can be thought of as a loop, consisting of one elongated piece of wire which starts on the main distribution frame and runs down to the subscriber, is connected across the handset, and returns via the return wire to the main distribution frame, where all the loops from that exchange area are connected.

(13) When a call is made, it is necessary to set up a complete voice path(9) by connecting the loop of the originating subscriber to the loop of the intended recipient. If the recipient is connected at the same local exchange as the originating subscriber, the two callers can be connected at that exchange.

(14) A call destined for a subscriber on a more remote local exchange might be sent direct to the local exchange concerned. This is unusual however, and it will normally be sent first up to one or more "transit" exchanges(10), from which the call will then be directed back down the network to the relevant local exchange and hence to the subscriber.

(15) As the call is set up, an appropriate connection must be made across each intervening bridging point or switch in order that a complete voice path from originator to recipient can be constructed. Once made, this circuit has to remain in place for the duration of the call, irrespective of how much voice traffic is actually carried during the call.

(16) An international call will be sent to a convenient international switch or "gateway", from which it will be sent on international connections (cables, satellite or radio links) either to the network operator in the country where the recipient subscriber is located, or transited through the networks of other operators if no direct network-to-network connection is available.

(17) The only reason for which monopoly PTOs needed to interconnect with each other was to exchange international traffic. The physical connection between the two networks was usually made by an international cable terminating in each of the countries concerned. The relations between operators were generally described as correspondent relations. Under such relations, the price of traffic between the two countries would be agreed at a fixed per-minute cost known as the accounting rate(11).

Different methods for new operators to access the local loop

(18) In principle new entrants could build their own networks. However, all the existing local loop networks were normally built up over substantial periods of time, and financed when the telephone companies concerned were public sector bodies. For an entrant facing an established incumbent, the high cost and long time periods involved in building out new networks means that there is a significant economic disincentive to entry in this way.

(19) Where there is a powerful incumbent, the potential entrant faces some basic challenges. The first is to persuade potential customers, who are currently subscribers of the incumbent, to switch to the new entrant as their chosen service provider. A second is that subscribers will probably remain physically linked to the incumbent, and it will be necessary for traffic to pass through some of the incumbent's network in order to get to and from the new entrant. A third is that the vast majority of outgoing calls from the new subscribers will still have to be terminated on the network of the incumbent, and the entrant has to be able to hand off these calls to the incumbent without incurring charges for the use of the incumbent's network which make his offering uncompetitive.

(20) Competition in the territory of former monopolies has generally begun by entrants attacking the incumbents on their most profitable routes, namely the international and long distance routes for outgoing calls. The simplest form of entry is resale, whereby the entrant purchases an "end to end"(12) retail service from the incumbent. The entire line continues to be owned and operated by the incumbent, but the entrant "resells" the retail services provided by the incumbent. The customer will remain connected to the incumbent for all technical and practical purposes other than for the ordering of services, billing, branding and customer care, and sales and marketing. The supplier of resale will generally receive the resold services at a wholesale price or at a discount compared to the price at which the incumbent offers them. The opportunity to make a profit depends on the reseller's ability to keep the costs of the overheads under his control (generally for sales and marketing, billing and a service centre) lower than the equivalent costs which the incumbent would have incurred.

(21) The problem for resellers is that the bulk of the costs of providing the telephony service remain under the control of the incumbent. Resellers can only re-offer services which the incumbent has itself provided over its own network. There is therefore no possibility of innovation, in terms of offering new technical solutions which go beyond those which the owner of the line is able or prepared to offer. Furthermore, the exercise is only profitable in so far as the incumbent (or the regulator) is prepared to allow the resellers to survive. If there are no regulatory obstacles to its doing so, the incumbent can easily cut its retail prices whenever it chooses in order to make the offering of resellers uncompetitive, and thus force entrants to reduce their margins to the point where their operations are no longer profitable.

(22) The next form of entry, which involves a more substantial commitment in terms of network development by the entrant, is call-by-call carrier selection. The final user remains a subscriber to the incumbent, but also becomes a subscriber to whichever other entrant operator(s) provides the competing outgoing call service. At all times the subscriber remains physically linked to the network of the incumbent, and still remains a subscriber of the incumbent. When the subscriber wishes to use the services of the competing operator, he enters a special code before dialling the desired number. The code is recognised at the local exchange as the access code of the competing operator. The call is handed off to the competing operator at the nearest interconnection point between the two networks.

(23) Another form of entry, carrier pre-selection, is essentially the same as described above, except that all outgoing calls are automatically diverted to the new operator, unless the diversion is manually overridden by the subscriber.

(24) Carrier pre-selection or call-by-call selection are normally used mainly for long distance or international calls, where the prices charged by incumbent carriers are sufficiently above cost to allow an entrant the opportunity to compete by running traffic over its own network, and charging its customers less for doing so.

(25) Under either type of carrier selection the domestic subscriber continues to pay the incumbent the subscriber fee for the fixed line. In principle there is no direct charge levied by the incumbent on its subscribers when those subscribers make a call using carrier pre-selection or call-by-call selection, even though the traffic must travel over some of the incumbent's network. Instead the chosen entrant has to pay the incumbent for the use of its networks from the subscriber up to the point of interconnection with the entrant's network. This payment is sometimes referred to as "originating interconnection", and will usually be recovered by the entrant from the subscriber as part of the entrant's call charges.

(26) The calls taken over by the entrant might have to be terminated back on the incumbent's network, on the entrant's own network, or on a third-party network. The majority of domestic calls will need to be terminated back on the incumbent's network, simply because the vast majority of subscribers in the country concerned will remain connected to the incumbent. A further payment therefore, terminating interconnection, has to be made by the entrant to the incumbent to cover this service.

(27) An important limitation to these ways of entry is that both carrier pre-selection and call-by-call selection apply only to outgoing calls. A carrier who manages to attract 1 % of the incumbent's customers may be able to persuade the customers to use it for all their outgoing calls, but all incoming calls destined for the subscribers concerned will still have to be terminated on the incumbent's network. Therefore an entrant offering carrier pre-selection or call-by-call selection cannot earn the call-terminating revenue which an operator in full control of the local loop can expect to earn.

(28) A more substantial form of entry is local loop unbundling (sometimes referred to by the acronym LLU). Although the details may vary slightly according to the way it is implemented, the new entrant will generally connect his cables directly to the subscriber's copper pair at the point where the subscriber's twisted pair has previously been connected onto the incumbent's main distribution frame. Local loop unbundling will usually require the new operator or operators to co-locate in the same local exchange building, which implies the entrant setting up its own network switch to take the traffic off from that point onto its own networks.

(29) The effect of such unbundling is as if the subscriber concerned had had his cable connections taken from one local exchange operator and placed onto the main distribution frame of another operator (the entrant). All the subscriber's relationships are with the entrant. The only respect in which the incumbent continues to have control of any of the diverted network is that it retains ultimate ownership of the twisted copper pair to the final user. The entrant must generally pay the incumbent for the lease of the copper pair from the incumbent's premises to the subscriber.

(30) In theory there is no reason why the new operator should not take over outright ownership of the copper pair. In practice however, the copper pair usually runs for a substantial portion of its length in cables which contain other twisted pairs, and which will continue to be controlled by the incumbent. It is therefore important that the use of the diverted copper pair does not create unacceptable interference with the other wires in the cable, for example by "crosstalk" or radio interference with other circuits in the incumbent's local loop cables. A cable in which several specific circuits were owned outright by someone other than the owner of the cable might give rise to difficulties in allocation of responsibilities for maintenance. For these reasons leasing arrangements are generally preferred.

(31) There are other possibilities for getting local loop access, that is fixed access to final subscribers, but which avoid the need to use the incumbent's fixed links. The most usual alternative to the incumbent's fixed links is the use of cable television connections.

(32) Cable networks were usually designed to transmit traffic in one direction only, and so have a "trunk and branch" or "cascade" structure which is not ideal for telephony. By contrast, in the traditional telephone system each subscriber has his individual local loop to the local exchange, which only ever carries his own traffic. The copper loop wires are less likely to be overloaded no matter how many subscribers are simultaneously using their phones. By contrast, with traditional cable networks there is a risk that the "trunk" connections within the system can be overloaded by return telephone traffic. However the networks can be adapted. The first step is to reserve some of the bandwidth on the cable to create an outward and a return path for telephony traffic. The system must be reconfigured so as to break it down into separately served units of say, 500 to 1000 subscribers, in order to ensure that the arterial routes are not overburdened at times of peak demand. There may be a need to create more capacity in the key trunk lines, by putting in extra cables, or replacing the copper coaxial system with fibre optics, in order to enable the system to deal with all the traffic. If so, investments are needed in the electronics required to "light up", to bring into operation, the optical fibres. Cable modems are required at each end of the line. Undeveloped cable networks are therefore not an immediate substitute for the telecom network, but can be made so with some investment.

(33) In some countries, the UK being one example, cable networks were built out not only with the usual coaxial cable for the supply of television services, but with an additional twisted copper pair with the intention that it might be used for telephony. In other countries the cable networks consist only of coaxial cable and so the technical and financial challenges involved in developing the network for telephony are greater.

(34) Other alternatives to the use of the incumbent's fixed lines involve the use of relatively new technologies, such as the conveyance of traffic over electricity cables entering the subscriber's premises. However, as this is not commercially developed, it does not provide an immediately available competitive alternative for the bulk of telephone users.

(35) There are also methods designed to avoid the use of fixed links entirely, such as radio link. This requires the use of high frequency radio signals beamed at receiving/transmitting equipment located at the subscriber's premises. The disadvantage of this system is that it uses very short wave radio signals. These require line of sight transmission, so the use of radio-loop systems might be limited to country areas rather than built-up town and city centres, or to businesses with high buildings or aerial masts on which to locate the receiving antennae. The use of such radio frequencies might generate unacceptable levels of interference with other equipment. Moreover significant investments must be made in the equipment at the subscriber's end of the line. An attempt to set up a commercial operation in the UK using such radio links has recently failed.

(36) An important distinction should be drawn between local loop services which give the entrant the subscriber's outgoing call business only, such as carrier pre-selection, and call-by-call selection, and technologies which place the new operator in a position analogous to that of the incumbent (unbundled local loop access, radio link, access by power cables and cable networks). The second group gives the operator the possibility to earn revenue from incoming as well as outgoing calls. Arguably only the second group, and of these only unbundled local loop access at least in the short term, is really capable of allowing competitors to enter on the same terms as the incumbent.

Interconnection: correspondent relationships and the accounting rate

(37) Interconnection is the means by which two separately owned networks exchange traffic between one another. The accounting rate system, which was referred to briefly, is a particular form of interconnection. It is essential for any telephone company to have sufficient interconnections to be able to send traffic to, and receive it from virtually everywhere on the PSTN, including the international PSTN.

(38) In the era of monopoly national telephone operators, calls which had to be switched between local and transit exchanges, or to international gateways, were switched entirely within the network of the national PTO. In this context "interconnection" would have had relatively little meaning. The price of the service as paid for by the subscriber, a combination of the fixed rental charge and a usage charge for individual calls based on their duration, destination and perhaps time of day, would be a bundled charge which covered all the necessary switching activities within the network.

(39) Where international operators deal with one another, the financial relationship between them was and usually still is governed by a system referred to as the accounting rate system. A price is agreed between the two national telephone operators concerned, and the originating operator (the operator whose subscriber initiated the call) pays an agreed percentage, usually 50 % of the accounting rate, to the other operator for delivering, or terminating, the call. As there is usually a two-way exchange of traffic between the two operators, the accounting rate is usually accompanied by a settlements system, in which the net flows of traffic between the two operators over a period are counted, and payments in one direction or the other made at regular intervals on the basis of the imbalance.

(40) The physical cable structure between the two PTOs would be considered as owned by each up to a notional mid point (either on their common border or on the mid point of an undersea cable). The subscriber making the call would pay his operator the full price of the call (which in theory should be related to the accounting rate but might not be), and this operator on whose network the call began would then generally pay the terminating operator an agreed proportion, usually 50 % of the accounting rate, to terminate the call on the receiving network. The fact that traffic might be roughly in balance between the two operators concerned, and that payments would be subject to a settlement regime, means that the actual amounts of money changing hands between the two operators would be relatively small compared with the overall traffic volume. It will be noted that under this system the price for a call to the telephone companies involved reflects the agreements reached between the two countries concerned, and the terminating operator gets paid the same irrespective of how far the call has to travel on his network to reach his intended subscriber.

Interconnection at local or long distance level

(41) With the advent of liberalisation, there was a need for the new competing networks who entered a domestic incumbent's territory to be interconnected with the incumbent, and of course with one another. Such interconnection is especially important to new entrants, because the vast majority of their subscribers will probably want to make calls to subscribers who are still on the incumbent's network.

(42) The model for domestic interconnection usually differs slightly from the accounting rate model used in international calls. The originating operator (that is the one on whose networks the call begins) usually pays the receiving operator a minimum set-up charge for each call, as well as a per-minute charge for the termination of traffic sent over the physical points of connection between the two networks. The per-minute usage charge may vary depending on the time of day at which the traffic is being sent, and how far it has to be sent on the receiving network from the point of interconnection.

Interconnection models

(43) The pricing structures for interconnection vary from country to country. A country may be divided into regions, and the entrant will have to decide on the specific regions in which it wishes to interconnect, and to fulfil certain minimum standards set by the incumbent. For example, it might be required to interconnect at specific points within the region as designated by the incumbent, and/or at a certain minimum number of points within the region as stipulated by the incumbent. Under this system an entrant will pay a certain charge if a call can be delivered within a region, or segment, where it is interconnected, and it might pay more if the incumbent has to take the call to another region where the entrant is not interconnected.

(44) An alternative, which may amount to much the same thing depending on the geographical layout of the PSTN, is where the entrant can choose to interconnect at various levels in the exchange hierarchy. Thus if he interconnects at a high level in the hierarchy, he may have access to all the exchanges in the country or a substantial part of it, and if he interconnects at local level, he may have access only to the local exchanges served from the exchange he has chosen.

(45) The incumbent will generally set prices based on the amount of his network which the interconnecting operator will need to use. Thus in order to reach a specific customer on the incumbent's local loop the cheapest interconnection is generally at or as close as possible to the local exchange where the relevant twisted pair is terminated. If the point of interconnection is at a transit exchange, higher up the exchange hierarchy, then the call will have to be carried over more of the incumbent's network in order to reach the local loop. The entrant can then expect to pay a higher charge than for the same call terminated at a local interconnection point. Hence individual local exchange level interconnections are more direct and cheaper, but give access to fewer overall customers. In general the fewer points of interconnection an entrant has, the more it will have to pay the incumbent for call termination. Conversely the more points of interconnection it has, the less it will have to pay the incumbent, but the more it will have to spend on building out its own network.

(46) In principle the way for an entrant to lower his interconnection costs is to make as many interconnections as possible, as far down the exchange hierarchy as possible. However this involves significant capital costs of building out networks to each and every local exchange which it might wish to reach. Furthermore, if interconnection charges are high relative to the price at which the incumbent offers services to its own subscribers, it can be difficult for an entrant to make a profit on the operation. But even if the prices of interconnection are reasonable, a possible disincentive to large investment in new networks is that new entrants are entirely dependent on the incumbent, in the absence of regulatory action, for the price at which interconnection is offered. If the price of interconnection rises so as to make the entrant's operations uneconomic, their investments in rolling out networks will be of little value. Thus entrants may be unwilling to have their costs at the mercy of the incumbent unless they are satisfied that sufficient regulatory controls are in place to keep interconnection costs low enough to make their offerings competitive, and to prevent the incumbent from abusing its position of power.

(47) For new entrants the most desirable state of affairs would be to interconnect at chosen points, whether at transit exchanges or local exchanges, selected on the basis of where it was necessary for them to send the most traffic. Thus in an area where a new entrant found itself delivering a high volume of traffic, say to a particular group of subscribers in a specified area of a city, it might want to interconnect at some selected local exchanges, or even at all of them in the area. In another area where a new entrant sends little traffic, it might want to interconnect only at the transit exchange level in order to avoid significant investment in little-used capacity. It could even choose not to interconnect at all in such regions, and to accept that this means paying the incumbent higher interconnection charges in respect of the delivery of such traffic.

(48) Incumbents sometimes insist on interconnections being made in accordance with certain criteria which make it difficult for the entrant to "cherry pick" the most desirable points of interconnection. It is common for example for an entrant operator to be required to interconnect at a minimum number of points, normally two, in each region in which he desires to interconnect. The incumbent may refuse to allow any interconnection at the local exchange level (as distinct from the more expensive interconnection via a transit exchange) unless the entrant is prepared to interconnect at a minimum number of exchanges, or perhaps even at each and every local exchange within the region. The incumbent may impose limitations on the networks to which it will connect.

(49) As to who pays the costs, there is usually a one-off cost for setting up each interconnection, and a continuing periodic payment. The incumbent may insist that the entrant pays the entire cost of setting up the physical infrastructure required to make the interconnection, even if the incumbent will be able to benefit from being able to send some traffic over the physical link. Such strategies give the incumbent a significant degree of control over entrants' costs because they determine the level of investment which the entrant has to make before it can begin operations. In addition the incumbent may carry out quality degradation strategies.

Supply of capacity or capacity-related products

(50) A national telephone operator is a significant owner of network infrastructure in the form of cables and switches. Most such operators lease out some of their unused capacity. Such leasing can be of the "wholesale" variety, whereby products are offered to other telecoms operators or large users, or it can be retail, whereby products are offered on an end-to-end basis, sometimes to suppliers of telephone services, but also to private users, such as data network operators.

(51) The alternatives for the supply of the raw cabling may include utilities such as railways and electricity companies, which have their own private telephone systems or rights of way along which networks can be rolled out more quickly. Such offerings may provide "backbone"alternatives, but may not have the coverage or "capillarity" of the incumbent's own networks. Consequently the incumbent may be better placed than any other supplier of leased capacity in terms of the reach and coverage of his physical network.

(52) The price at which leased lines and related products are offered has a relationship with interconnection prices and prices for local loop access. It was noted in the discussion on interconnection above that it was generally cheaper for an entrant to keep its traffic off the incumbent's network as far as possible, and to make the interconnection with the terminating network as near as possible to the point of delivery of the traffic. However, this assumes the entrant has the capital resources to build out his networks to each desired local exchange point. If the entrant chooses to lease lines, and is substantially dependent on the incumbent for the supply of such leased lines, then its ability to avoid hostile interconnection pricing on the part of the incumbent is further undermined by its being financially and operationally dependent on the incumbent for his leased lines. The ability of the incumbent to take such action may be lessened however, to the extent that regulation or other competitive constraints provide an effective constraint on its freedom to set prices for such offerings.

Circuit switching versus packet switching

(53) In the model of telephony described above, one of its features is that a complete end-to-end voice path must be set up between the originating subscriber and the intended recipient of the call, and must remain in place for the duration of the call, irrespective of how much or how little is said on the line by the participants to the call. Accordingly significant amounts of network resources (cables, switching equipment) have to be dedicated exclusively to individual calls.

(54) Packet switching is an alternative to traditional circuit switching, initially used to enable computers to exchange data over telephone lines, but increasingly being used as a means of carrying traditional voice telephony messages. In packet-switched data communication, the information contained in the message is broken up into separate "packets" of data. Packets are sent from the originating terminal to a computer known as a router, which examines the heading information on the packet and directs it on to another router, and so on until the packet reaches the intended addressee. Packet data systems are described as connectionless(13), in that the connection between two cable runs need only be held open for as long as it takes one packet to cross over the switch point from one cable to the next.

(55) The first experimental packet-switched networks were locally confined, often within a university, and would be described today as LANs (local area networks). However, the types of routers and switches used in packet-switched data networking can be placed at the "nodes"(14) of traditional physical telecoms cable networks. By this means data networks can make use of the underlying physical cable of telecoms networks, thus obtaining the wide reach and coverage of the relevant networks, whilst avoiding the physical switching required at the nodes in a traditional circuit switched network. The advantage is that the same physical circuitry no longer needs to be dedicated to each user on a call-by-call basis, but can be used to carry the traffic from many simultaneous data transmissions.

Packet-switched data networks in use: business data communications and the Internet

(56) A data network can be constructed using cabling, switches and routers which are entirely divorced from the PSTN, and which have no connection with it. Many LANs, e.g. those found within an office building can be considered examples of such private data networks. Larger wide area networks ("WANs"), such as those which may connect the multinational sites of a large company, might use some telecoms fibre leased from PTOs (such as private international leased lines) but in principle these too are private networks and they do not need to be connected to the PSTN.

(57) Direct connection with the PSTN might be required in the case of a combined voice and data network. An example might be the case of a company with a global network with its headquarters in country X but a regional office in country Y. If the system breaks out onto the PSTN only at the head office in country X, then an employee in the regional office in Y who wants to speak to a customer in Y will need to make a call routed through the head office in X, onto the PSTN, and back over international links to the customer in Y. Thus the call from the head office to the customer would be priced as an international call between X and Y. But if the company's voice/data network has an interconnection with the PSTN in country Y, then any traffic which has to be exchanged between the employees of the company in their regional office in country Y and the customer in country Y can be broken out directly onto the PSTN in country Y, thereby incurring lower termination costs.

(58) The normal interaction of the private data network with the incumbent will not be in the form of requests for interconnection to the PSTN as such, but in terms of a demand for network infrastructure (capacity) products. In order to construct the data network, it will be necessary to lease capacity, or buy, probably from the incumbent, virtual network transport services such as Frame Relay or ATM (asynchronous transfer mode), which can serve to some extent the function of leased capacity. Thus a company seeking to construct its own data network (or to construct such a network for others) is dependent on the prices at which such capacity products and related equipment can be obtained.

Internet

(59) The Internet is basically a series of interconnected and overlapping networks which all use the same protocol, the TCP/IP protocol, to exchange traffic. Internet networks can either interconnect horizontally in an arrangement known as peering, or vertically where one network becomes a customer of another for connectivity. The largest Internet data networks may have worldwide coverage, while smaller networks may have coverage only of a region, or of one country, or of a local area. All Internet networks are ISPs (Internet service providers) both to each other and to final users.

(60) Obtaining access to the Internet means getting access to an ISP. This can be done by "dedicated access", that is to say, a dedicated fixed line cable link between the final user and his ISP, or by "dial up" access over a normal PSTN line.

(61) In so far as an ISP has any dial-up customers, it needs connection with the PSTN in order to be able to reach customers who can only be reached via the PSTN. For these purposes, an ISP can be treated either as a business customer of the relevant telephone operator, or as another telephone operator.

(62) If the ISP is treated as a (business) customer, it will pay a line rental to the telephone company, like any other user of telephone services. Calls from Internet users, (that is, customers of the ISP) to the ISP will be treated exactly like any other switched telephone call, except for the fact that modems are placed at each end of the line (i.e. by the customer's telephone and at the ISPs modem port) to render the data stream capable of being transferred over the circuit-switched PSTN. There will be line rental payments made by the final user and by the ISP, there will be usage charges paid by the final user for his use of the PTO's network, and the final user will separately pay the ISP for the provision of Internet services.

(63) However, if the ISP is entitled under national law to be treated as another telephone operator, then the relationship will be different. In this case the ISP (which generally receives more calls than it will make) is the recipient of a stream of calls originating in the network of the PTO, and may be entitled to receive payments from the PTO for call termination services. Because the calls will in general be originated by the customer, and not by the ISP, it is normally the ISP who benefits financially from providing the incumbent with call termination services.

(64) Some "free" ISP services are financed by settlement payments made by the PTO to the ISP, thus relieving the customer of any need to pay his ISP. A PTO may be obliged by regulation to treat the ISP as a telephone operator or, if it is exposed to significant competition for ISP business, it may find itself commercially obliged to offer call termination payments. If it does not, it could risk losing its subscriber outgoing Internet call traffic to a different carrier (by means of a carrier pre-select arrangement, for example).

(65) ISPs thus need connection with the PSTN, which may be interconnection, if they are treated as a telephone operator, or as a customer, if they are not. Where there is little competition for access to the local loop, a PTO may be able to insist that all ISPs be treated as ordinary telephone subscribers. If it is not capable of doing so, the PTO may be able to lower termination payments to such ISPs to the point where the ISP is little better off than if it were a retail customer.

Higher bandwidth (broadband) services

(66) The term "bandwidth" relates to the physical characteristics of a telecommunications system and refers to the speed at which information can be transferred. In analogue systems, such as traditional circuit switched telephony, it is measured by frequency (in hertz). In digital systems it is measured in the number of binary bits per second. The higher the bandwidth, the higher the speed of the line, and the more information a telecommunications system can transfer. A conventional voice telephone circuit connected at each end to a subscriber by means of a twisted pair can be regarded as a low speed "narrow band" connection, which has only a limited capacity to transmit data. Modern applications, such as Internet, and in particular video on demand require the transmission of much more information, and hence require high speed broadband interconnections if they are to be usable by the final subscriber.

(67) There are two difficulties with the delivery of broadband services to final users. One is the bandwidth limitations of the twisted copper pair. Although many telephone operators upgraded their long distance and international capacity with fibre optic cable in order to make optimum use of packet-switched technology, the local loop represents the point of the network where traditional circuit switching represents an impediment to the use of broadband technologies. The substantial costs of replacing the local loop infrastructure represent a disincentive, even for the incumbent, to upgrading the links, and thus the challenge is to find ways of delivering the service over existing facilities.

(68) Broadband services can be offered over the existing copper line if it is hooked up to "enabling" technologies such as one of the "xDSL" (digital subscriber line)(15) technologies. The xDSL technologies are capable of effectively converting a copper pair into a high speed digital line, and so overcome the technical limitations of the traditional copper local loop. The technology must normally be fitted at the local exchanges, on both the incumbent's and the customer's side of the main distribution frame.

(69) Competing operators who want to offer broadband services via xDSL technologies to customers who are still connected to the incumbent face three main difficulties. First, they must wait for the applicant to install the technology, and hence their technical offerings are limited by the equipment which the incumbent installs. Second, they must interconnect somewhere further up the telephone line, further away from the main distribution frame, and thus expect to pay higher interconnection charges for the use of more of the incumbent's network. And finally such entrants are vulnerable to the incumbent's policy on the pricing and/or quality of his interconnection. If the incumbent increases his prices for interconnection or degrades it, a competitor's xDSL offering may become uncompetitive.

Interconnection between fixed and mobile networks

(70) The principles described above apply equally to interconnection with mobile networks. However, it is customary for interconnection charges to be somewhat higher for mobile networks. This is said to be justified on the basis that the mobile operator has to incur more work in establishing where his customer is, so that calls to that customer can be directed to the appropriate point on his network. In their Reply to the Statement of Objections ("the Reply") the parties argued that charges were higher on the basis of the higher costs for mobile compared to fixed networks, and the fact that mobile infrastructure is still in the "build-up" phase.

(71) "Roaming" refers to the possibility of a mobile phone user taking his phone out of the area of the company to whom he subscribes for mobile phone services, and using it in the catchment area of another mobile phone company. In order for him to do this, there must be a roaming agreement between the two companies. In general, the main features of roaming agreements are as follows: the subscriber of network X arriving in the territory of operator Y will be treated as a customer of network Y. Operator Y will bill operator X for any calls made by the customer when in Y's territory. The bill will reflect the rate charged by operator Y to its own customers, plus a surcharge to reflect that fact that the caller has no subscription with operator Y. Operator X will in turn bill his customer for the calls, with a surcharge based on the additional administrative costs involved.

(72) Roaming occurs both on a national basis, when a subscriber of a mobile phone company goes into the area of another mobile operator, and on an international basis, when a mobile phone user uses his phone in another country, and his call is handled by a service provider in that country.

A. RELEVANT PRODUCT MARKETS

(73) In their notification the parties identified seven relevant product markets, covering their activities in telephony and related services. These included fixed-switch telephony services; business data communications; Internet access (including retail and dial-up); PABX distribution; local telephone directories and local telephone systems; business-to-business telephone directories and mobile telephony.

Markets within the fixed-switch telephony segment

(74) The parties' proposed relevant product market for fixed-switch telephony covered local calls, long-distance calls (meaning those made within a single country), international calls, and calls to mobiles. The Commission considers that, from either a demand or supply point of view, the range of activities falling within this definition comprises offerings which cannot be regarded as economic substitutes for one another. An assessment is accordingly required on the basis of narrower segmentations.

Narrower segmentations

(75) Many respondents to the Commission's market investigations agreed that definitions more in line with previous cases should be used, under which basic telephony services would be split into separate segments. One such segmentation was into local loop, long distance, and international. However, local loop access services are relevant both to subscribers and to other operators seeking to interconnect. A distinction can also be usefully drawn between the supporting infrastructure, and the actual services which are offered.

Provision of local loop infrastructure

(76) Before he or she can access any higher level telephone services, a subscriber has to be physically connected to the PSTN, which is usually done by allocating him or her a twisted copper pair to his nearest local exchange. There is accordingly a demand on the part of subscribers and telecom entrants for connection to the local loop.

Provision of long distance and international infrastructure

(77) There has to be a means of connecting local exchanges together within a country, and to bring traffic to and take it from the international gateways or switches. These services require a physical network of cables and a means of switching between them. The main suppliers of such network infrastructure in the past were the telephone companies themselves, but new options have emerged in recent years, notably utilities such as gas, electricity and rail companies who are prepared to lease out some of the capacity on their private networks.

(78) In terms of demand, the provision of long distance transport is relevant not only for entrant PTOs, but also for companies running private networks, such as Internet service providers, suppliers of network services for business data communications, and companies seeking to "self provide" by constructing their own data networks. Each of these types of player needs access to capacity to complete networks in a given service area, and possibly also interconnection with the incumbent in order to be able to exchange traffic originating or terminating in the country concerned.

(79) In terms of such network infrastructure, a distinction has been drawn in the past between "wholesale" offerings, namely those which are offered on an operator-to-operator basis only, and "retail" offerings, which are offered to end-users (normally businesses) and usually consist of private lines.

(80) In principle the buyer of network infrastructure may be indifferent as to whether the product is obtained from a telephone operator or from any other competing supplier of network infrastructure. There may be advantages in buying a bundled product from a telephone company, that is one in which interconnection is taken for granted, but if the price rises too high by comparison with the offerings of competing suppliers, the user may be ready to buy "dark fibre" (unused and unconnected cable) and to light it himself and to seek interconnection arrangements for it. From the point of view of the person buying access to such infrastructure therefore, the offerings of suppliers such as utility companies may represent a substitute for offerings traditionally provided by PTOs.

(81) It is possible that, where the lessor is a dominant telephone company, it may discriminate between customers whom it recognises as other telephone companies and to whom it will offer not only fibre but also interconnection, and other customers (e.g. business customers attempting to set up data networks or entrant operators), and to whom it will not offer interconnection. A dominant PTO could also refuse to interconnect with (or offer a lower quality interconnection in respect of) fibre leased from a competing (non-PTO) supplier. To that extent a dominant telephony monopoly may be able to limit the attractiveness of competing fibre offerings, simply by refusing or making it more difficult for entrant networks to interconnect if they use fibre obtained from suppliers other than the incumbent.

(82) Thus from the point of view of telephone companies seeking infrastructure, there may be one market covering not only the offerings of other telephone companies, but also those of alternative providers. However, from the point of view of private buyers, such as private data network providers, the market for the supply of network infrastructure may be more limited if they need interconnection with the incumbent, as they may be forced to rent from the incumbent telephone company.

(83) Notwithstanding the above, for the purposes of the present assessment however, separate markets for network infrastructure, both long distance and international, have been considered to exist, and such markets are considered to cover all supplies of network infrastructure, whether supplied by telephone companies or not.

Subscriber access to telephone services: (local, long distance and international)

(84) Once the physical connection to the network is in place, services can be run over the lines. Basic telephony consists of incoming and outgoing calls. Incoming and outgoing calls can be classified according to whether they are "local calls", i.e. they originate and terminate on the same local exchange network; or long distance, i.e. they have to be sent to or are received from somewhere else in the country, or international, i.e. they have to be sent to or received from a foreign country(16).

(85) Irrespective of whatever any additional segmentations might be applied, a question arises as to whether separate markets should be defined for incoming and outgoing calls. This is particularly relevant to the question of the treatment of services such as carrier pre-selection and call-by-call selection, which apply only to outgoing calls.

(86) Subscriber access to telephone services is generally offered by the incumbent on the basis of a bundled product for both call termination and call origination. The price of the service to a final user who receives but never originates calls consists only of the line rental. The price to a final user who originates but never receives calls consists of all the variable usage charges as well as the line rental. The calculation of pricing between the two services is more difficult where a fixed line is used both to receive and to make calls. As part of the fixed line rental has to be considered as attributable to the cost of outgoing calls, and part as a charge for the incoming calls(17). The proportion of the fixed costs to be attributed to outgoing calls will vary according to the relationship between usage for incoming and usage for outgoing calls. Therefore it is difficult to unbundle the individual price elements of the service for a final user, suggesting that incoming and outgoing calls should be treated together.

(87) Despite the foregoing, it might none the less be argued that call origination and call termination constitute different service markets, because in theory a subscriber facing local loop competition could rent one line only for incoming calls, and a separate line only for outgoing calls, thus allowing him to buy different services from two different providers. But he would then incur two charges for fixed line rentals instead of one, and the exercise is unlikely to be cheaper than having the one line for both incoming and outgoing calls. Accordingly, the relevant markets are taken for the purposes of the assessment as comprising incoming and outgoing calls.

(a) Local calls

(88) Conventionally the service markets for basic telephony are split into local, long distance and international. In demand terms it is the subscriber who decides whether he or she wants to make a local, a long distance or an international call. However, if the various layers of the telephone hierarchy are separated, then the supplier of local loop services may not necessarily be able to offer long distance or international calls directly to their subscribers, and may have to refer the call to another operator. Thus the layers can be treated as separate markets.

(b) Long distance calls

(89) Where a PTO is a vertically integrated operator, the transition between local loop and long distance is merely a switching between different exchange levels. But where the different layers are segregated, a long distance operator will need to interconnect with the local loop network on which the call originated in order to accept the call, and carry the traffic to somewhere else in the country or region. From there it may be sent back onto the incumbent's local loop network closer to the point of delivery, or handed off to some other operator. Demand for such long distance services would also arise where local loop operators need to send traffic to, or receive traffic from, an international "gateway" or access point leading to the international public switched network, and equally when traffic has to be routed to a mobile network.

(90) The product or service which is offered can comprise a combination of elements. It comprises an offering by the long distance network operator of transport over its fibres, and can include interconnection with the receiving network(s) at each end. The transport element could be provided over fibre which is owned by the long distance operator, or fibre which is leased by him from another telephone operator. There are also other capacity products which can be used for the transport of long distance traffic. For example, it could be done by the purchase of wholesale switched minutes from the incumbent, or even by running communications over virtual networks, such as data networks provided on a retail basis by another operator.

(91) Competition for the carriage of long distance calls (and also international calls) is generally introduced by means of resale, carrier pre-selection and carrier call-by-call selection. Such services generally apply only to higher margin areas such as long distance or international calls, and are not used for purely local calls. They allow the customers to access another operator or reseller who will handle the call for them.

(c) International calls

(92) From within any given country there will be a demand from subscribers for the carriage of telephone traffic to other countries. This is the area in which resellers and call-by-call or pre-select carriers are most likely to be active.

(d) Calls from fixed to mobile

(93) Calls to mobile telephones can be considered, for the purposes of this assessment, as similar to long distance calls, in so far as they require access to the incumbent's network for call origination, and have not been dealt with separately below.

Mobile telephony

(94) The parties proposed mobile telephony, which means the operation of mobile communications networks, as a separate relevant product market. Most third parties who responded to the Commission's investigations seemed to support a market definition at this level, and there was little or no suggestion from third parties as to the need for further sub-division of the market (for example into analogue and digital). As to the question of "convergence", namely the tendency for mobile telephones to become substitutable for fixed-line telephony, many respondents made the point that mobile telephony services cannot be considered yet as substitutable for fixed-line telephony as, inter alia, fixed lines can be used for purposes, such as Internet access, for which mobile phone services do not provide the same functionality. Mobile phone services are therefore taken as a separate product market in their own right.

Operator access to networks (local, long distance, and international)

(95) In the same way as subscribers need access to networks in order to be able to make calls, operators need access in order to terminate calls on other networks, or to receive calls for termination. There is thus a parallel, at the operator level, with the discussion above about outgoing and incoming calls.

(a) Operator access to local loop networks

(96) Just as a subscriber needs access to the local loop in order to make outgoing and to receive incoming calls, other operators also need to be able to interconnect with local loop networks. Thus a demand for such access services exists, and some form of contractual consideration, either payment or a return of reciprocal services, must normally be given.

(97) Interconnection will normally be arranged in the form of an agreement often referred to as terminating interconnection. Under such an arrangement, the operator with the traffic to hand off will pay the terminating operator for his services in delivering the call. Thus the total cost can include a set-up charge for origination for each call, and a per-minute charge which may vary depending on how much of the incumbent's network the call has had to travel through before it reaches the local loop subscriber.

(98) The Commission therefore considers that, where deregulation has permitted the entry of competing operators, a market exists for operator access to the local loop network.

(b) Operator access to long distance or international networks

(99) In practice most of the incumbent telephone companies in Europe are vertically integrated, and have sufficient capacity not to need (apart from international calls) to hand off their traffic to local, long distance or international operators. However, new entrants without their own facilities may want to make use of the services provided either by the incumbent or by another telephone company with the ability to deliver long distance or international traffic.

(100) Because the physical networks in most countries were constructed in the era of national monopoly telephone operators, there are usually a limited number of international switches which connect, via backhaul, to "gateways" - international cable landing points or cable heads. All outgoing internationally bound traffic handled under the correspondent regime (that is excluding self-corresponded traffic and traffic over private circuits) must therefore be brought to the international switches. All incoming traffic to a country arrives at the international switches for termination within the country concerned.

Business data communications

(101) Business data communications are services involving the transfer of often large quantities of data, securely and quickly, nationally and internationally. Business data communications services connect a company's local area network (LAN) in one location with its other LANs located elsewhere; these services can also link third parties to a company's network. The customers of these types of services are companies with substantial communications requirements.

(102) "Business data" services form separate product markets from those related to traditional switched voice telephony. From a technical point of view, data networks are based on the physical configuration of the underlying telecom cable network, but use different types of switches and routers at the points of interconnection and access ("the nodes"). Business data communications often use packet switching or similar technology, such as Frame Relay or ATM. Business data networks are commonly described as "virtual" networks. When a connection is set up a "virtual circuit" is created, a data stream is broken into packets which are then placed on lines which are shared by different streams. This technology provides the advantage that it is not necessary to reserve network resources for a given connection and that switching time is minimised.

(103) Providers of business data communications services may either build their own network, combining their own infrastructure with leased lines, or buy network transport services (such as Frame Relay services) from the telephone operator and in general from network infrastructure providers. In any event business data communications providers need to have access to the local loop. To this end they may use leased lines, optical fibre, PSTN and ISDN(18). Long distance connectivity may also be obtained from providers of network infrastructure by using leased lines and/or network transport services.

(104) The provider of such data communications services assembles the offer from these various elements, and presents it to the customer as one "seamless" package. For many business customers the attraction of buying such a product is that it avoids the need to deal with multiple national level telephone companies in each of the countries required to be covered by their data networks.

ISP services

(105) ISPs offer their customers connectivity to the Internet at large, in other words, access to any point on the Internet to which a customer may want. A demand exists, therefore, for the supply of Internet access services. In the assessment below, figures have been provided to show market shares for dial up and dedicated access combined and separately. However, as competition concerns would arise whether they are defined separately or together it has been unnecessary to decide between the two.

Wholesale ISP services

(106) Wholesale ISP services comprise the resale of transit in Internet terms, which involves an obligation by offering ISP to provide connectivity to the whole of the Internet to its customer ISP. This market is global. The information supplied by the parties shows that neither of the merging parties would have fitted the definition of a top-level network as applied in Commission Decision 1999/287/EC (WorldCom/MCI)(19) and they are in part resellers of transit obtained from such networks. Moreover, as will be described below in the Internet section of the competitive assessment, Telenor's business as an Internet transit provider is marginal; Telia is stronger at a European level, but still small on a global basis. Therefore, this market does not need to be considered further as the notified operation does not raise any competitive concerns in the field of wholesale ISP services.

Internet advertising

(107) In the Scandinavia Online decision(20), concerning the creation of the joint venture Scandinavia Online (SOL) between Telia, Telenor and the Norwegian media group Schibsted, the Commission identified, amongst others, a market for advertising over the Internet. On this market providers of Internet content compete with each other for advertising revenues. In their reply to the Statement of Objections, the parties disagreed that there was a separate market for Internet advertising, claiming that it was extremely rare for companies to use the Internet as an exclusive market channel, and that this activity should be regarded as part of a more general market for advertising via newspapers, direct mail, television and radio, etc. The parties have, however, provided no evidence that those other marketing channels exert a competitive constraint on the behaviour of suppliers of Internet advertising space. The fact that most advertisers market their products through several advertising channels does not demonstrate that these different channels are demand substitutes. It simply shows that advertisers pursue a diversified marketing campaign aimed at as many people as possible.

Sale of advertising space in local telephone directories

(108) In Sweden and Norway, like in many other countries, local telephone directories are produced once a year and delivered to households and businesses free of charge. Publishers earn revenues from selling advertising space to a range of advertisers, mainly large and medium-sized businesses. Both Telia and Telenor publish and supply local directories and sell advertising space in their directories. In Sweden Telia publishes under the brand rame DinDel and Telenor operates through its subsidiary Lokaldelen Sverige AB ("Lokaldelen"). Telia has no operations in Norway.

(109) The parties maintain that advertising in local directories is not a market as such, but is a segment of the wider market for advertising in other media (e.g. local free newspapers and radio). However, the information gathered in the course of the Commission's investigation suggests that there are a number of features distinguishing telephone directories from other advertising media. First, telephone directories are published once a year. This reduces their advertising strength and makes them a static advertising medium as the information which is made known to the public through telephone directories cannot be changed, integrated or updated. The once-a-year issue has a bearing on the price for advertising space in telephone directories compared with other printed media. Advertising in telephone directories tends to be less expensive, if the longer lifespan of the directory is taken into consideration, than advertising in daily newspapers or monthly magazines. For these reasons, customers would not easily switch between the advertising media because of a small, but not negligible price increase. In their reply to the Statement of Objections, the parties claimed that the "annuality" of business-to-business directories, i.e. the fact that subscriptions were taken out for longer intervals at a time, typically 12 months, was not a reason to distinguish them from shorter-cycle advertising media. The parties said there were other types of advertising which were let on a full-year basis, such as hoardings at football or ice hockey stadiums, or magazines which only appeared two to six times a year. On this basis they suggest that the market in which directories compete for advertising revenues at least include other forms of longer term advertising opportunities. However, the parties have provided no evidence that these other advertising means may restrain the competitive behaviour of the sellers of advertising in local directories. For example, the parties have not shown a correlation between the local directories advertising fees and the other advertising fees, nor any other evidence indicating that these different products are demand substitutes. Therefore, the sale of advertising space in local telephone directories can be taken as a distinct relevant product market.

Sale of advertising space in business-to-business directories

(110) Business-to-business directories are different from the ordinary local directories as they are mainly used by businesses searching for suppliers of products and services. They are generally distributed free of charge as publishers earn revenue through the sale of advertising space. Both parties are publishers and suppliers of business-to-business directories. In Sweden Telia publishes under the Emfas brand and Telenor publishes through its Swedish subsidiary Telenor Företagsinfo AB under Stortele, Sveriges Handelskalender and ISO-guiden brands. Telia has no operations in Norway.

(111) The parties claim that the publishers of this type of directory compete for advertising revenue on the general market for advertising. However, for the same reasons given for local directories, the Commission considers that advertising in business-to-business directories a distinct advertising market. Advertising in business-to-business directories constitutes also a separate market from advertising in ordinary local directories. Business-to-business directories are not generally available to the public, but are targeted at specific users, namely the business community. Advertising in business-to-business directories seems to be less expensive than advertising in ordinary telephone directories. In their reply to the Statement of Objections, the parties claimed that, as for local telephone directories, the "annuality" of business-to-business directories is not a reason to distinguish them from shorter-cycle advertising media. The same reasoning set out above in relation to local telephone directories can be used to dismiss the parties' arguments on business-to-business directories market definition. In addition, it is self-evident that because of the specificity of business-to-business directories (these directories are addressed only the business community) other forms of advertising such as advertising on buses and trams, which are directed to the general public, cannot be considered as demand substitutes.

(112) On the basis of the foregoing, there is a relevant product market for the sale of advertising spaces in business-to-business directories.

(113) It is to be pointed out that the parties distribute, besides the printed version, CD-ROM and Internet versions of the business-to-business directories. The parties also earn income from CD-ROM and Internet version advertising, accounting for less than 0 % to 10 %(21) of the business-to-business directories income. The parties consider that the CD-ROM and Internet versions belong to the same market as the printed version. The information collected in the course of the Commission's enquiry tends to confirm this view. However, it is to be borne in mind that the Internet version has not got the same layout as the printed and CD-ROM versions. In the Internet version the names and addresses of the companies are set out in an objective and even way. The only source of advertising revenues are banner advertisements, which surround the relevant site, and sponsorship. These advertisements and sponsorship are separate from the text of the directory, are not necessarily related to the relevant business information displayed in the directory, and are sold separately to the companies wanting to advertise on that site. On the contrary, in the printed or CD-ROM version of the directory the information on the relevant companies may be displayed in a biased way or in advertising spaces of a different size, which are not separate from the text of the directory. The advertisers pay for having the name of their company displayed in a more noticeable way or for advertising spaces. In any event it is not necessary to take a position on this issue since the operation raises competition concerns irrespective of whether or not Internet advertising is included in the relevant product market.

PABX

(114) Another type of infrastructure product, albeit used within an organisation rather than as part of the public network, is the PABX. The parties are both distributors of PABXs. These are essentially switches with the capacity to handle a number of telephone lines simultaneously, and are used by businesses and institutions as switchboards for their internal voice telephone systems. Switches vary according to the number of lines they handle. A PABX able to handle less than 100 lines tends to be considered small, and models with capacity of over 100 lines are considered large.

(115) The parties consider that large and small PABXs belong to the same product market, as their function is the same regardless of the size and customers seek solutions which may include both large and small PABXs. Customers do not generally want to deal with different suppliers for large and small PABXs. The information gathered by the Commission in the course of its investigation tends to confirm the parties' view. However, as shown below, for the purpose of the assessment of the present case it is not necessary to conclude whether or not small and large PABXs belong to the same relevant product market.

(116) Distributors of PABX systems tend to focus on the aftermarket, i.e. supplying upgrades to customers already having PABX systems (whether large or small), and service contracts with customers following installation to provide ongoing maintenance and support. After-sale services account for an important part of the PABX business. Most customers expect to take all these services from the company which sold and installed the original equipment. However, as shown below, for the purpose of the assessment of the present case it is not necessary to decide whether or not after sale services are part of the same product market as PABX distribution.

B. RELEVANT GEOGRAPHIC MARKETS

Markets national or wider than national

(117) The parties argue that all the relevant telecoms markets affected by this concentration are national. It could be argued however that even if the markets are currently national, the merger(22) would expand markets, such as for fixed telephony, and possibly also for some other services, and create a two-country market consisting of Norway and Sweden. However, even though this may be the outcome of the merger, it is not its automatic consequence, and the assessment has proceeded on the basis of essentially national markets for fixed and mobile telephony.

(118) Notwithstanding the foregoing, it is difficult to generalise across the range of possibly affected telecoms markets, and the position of each must be considered separately.

Provision of local loop, long distance and international infrastructure

(119) These three markets are considered to be national in scope. If the local loop under the control of one operator were enlarged to cover an area that was wider than national, and if the network is reconfigured to reflect the fact that it is now all under the control of the same operator, then the geographic reach of the market could be wider than national. However, it is not necessary to determine this issue, as competition concerns arise even if, as suggested by the parties, the market is defined as national.

(120) As regards long distance and international infrastructure, similar principles may be applied to determine the geographic dimension of the market definition. Long distance telecoms transport in any given country has been provided historically by the incumbent monopoly who, for similar reasons as those applying to its local loop offering, offered them within a specifically defined national territory.

Subscriber access to telephone services (local, long distance and international)

(121) The markets for subscriber access to telephone services are, from the subscriber's point of view, also generally considered to be national. Service offerings have tended in the past to be nationally limited, because the telephone operators supplying them have not been able to provide services across national borders.

Operator access to networks (local loop, long distance and international)

(122) In the same way as subscriber access services must be considered a national market, the same is true for operator access to the local loop. In the historical situation of incumbent monopoly telephone operators, the question of access to local loop networks was not usually relevant to an outside operator seeking to terminate calls in the country concerned. Responsibility for terminating the call would have been handed off to the receiving telephone operator at a notional mid-point on the cable between the two countries. From there on the call would be handled on the incumbent's vertically integrated network, with call termination on the local loop as the last stage in that process.

(123) International calls, in the sense of access to international call services, can be looked at as a separate segment of business in their own right. In appropriate cases however it may be necessary also to examine narrower relevant markets on the basis of specific "country pair" relationships, which means the routes over which traffic can be exchanged between two given countries. The assessment below has considered the position in terms of a market for access to international services, and also the impact of the merger on specific country pairs such as (Norway to Sweden) and Norway or Sweden to Denmark and Finland.

Mobile telephony

(124) The parties considered that the markets were national, for a variety of reasons, including in particular: that different licensing conditions were imposed on operators in different Member States; that frequency availability limited the number of operators in countries to between two and four, so an operator in one country could not necessarily expect to get a licence in all neighbouring countries; and the conditions in most licences obliging operators to build infrastructure in the territory concerned. Another important factor is roaming charges imposed on calls made while outside the home territory of the service provider, which rarely make it economic for customers in one country to obtain their mobile services on a permanent basis from a supplier operating in a different national market, largely because they would have to pay all domestic calls in their country of residence as international calls.

Business data communications

(125) The parties asserted that the relevant markets for business data communications were national, and provided figures on that basis. In many previous such cases, the market for business data packages was taken to be wider than national, possibly European or even worldwide. Indeed, one of the incentives for businesses to buy such services was the desire to avoid having to deal with a multiplicity of national telephone operators, as would be the case if they had attempted to set up their own trans-border networks on their own account. However, on the basis of the parties' own assertion that the markets for such services are national, the assessment has been carried out accordingly.

ISP services and advertising

(126) It is a common view that the geographical market for ISP services is essentially national, based on the need for a local loop service or the installation of a fixed line in order to connect physically the subscribers with their consumers. This limits the extent to which existing access markets could be wider than national.

(127) As regards Internet advertising, the Commission considered in the SOL decision (Case IV/JV.1, referred to in recital 107) that such a market should be considered at least national in scope, possibly on a linguistic basis. A competitor has suggested that, given the considerable linguistic and cultural similarities between Sweden and Norway the merged entity could provide the same Internet content in Sweden and Norway and thus compete for advertising revenues in both countries. Translation, which given the great similarities between the two languages should be rapid and inexpensive, would not always be required as Swedes can normally read Norwegian and vice versa. Therefore, as a result of the merger the relevant geographic market could be wider than national. In their Reply the parties argued that the same Internet content could not be provided in both Sweden and Norway as, notwithstanding the proximity of the States and the similarity of the languages, there are cultural and linguistic differences. They claimed these differences were significant and that there was no evidence of advertisers procuring advertising space on a combined Sweden and Norway basis. However, it is unnecessary to determine this point as competition concerns arise even if the market is defined at its narrowest extent, namely national.

Directories, local and business-to-business

(128) The parties consider that the relevant geographic market for the sale of advertising spaces in both local and business-to-business directories is national. Both their sales and distribution systems are organised at a national level. They also mention language differences as a barrier to entry into the sale of advertisements' market. Third parties seem generally to agree on a national definition of the relevant geographic market. Therefore for the purpose of this assessment, the relevant geographic market will be considered as national.

PABX

(129) The parties consider the market to be national in scope, inter alia, as it is necessary to have a local sales force, service and marketing staff with the relevant language skills and local contacts. The parties also pointed to the fact that some of their competitors were substantially active in one country but not in the other. The Commission's findings, following its enquiry, do not contradict the parties' position as regards the geographic market for PABX.

C. COMPETITIVE ASSESSMENT

(130) Before dealing with specific markets, some broader consideration must be given to the overall effects of the merger. The merger would bring together two national operators who, prior to the merger, provided the full range of telephony services and who have very strong positions in the markets least exposed to competition (fixed-switched telephony markets), but also relatively strong positions even in those markets where competition has made greater inroads, such as Internet and business data communications. In particular, they have an extremely strong position, amounting to dominance, over the local loop infrastructure. These operators also have reasonable access to the Danish and Finnish infrastructure because of the more liberalised local loop access provisions existing in these countries. Moreover, they constitute the main source of competition for each other. The merger would raise significant competition concerns because of (a) the elimination of actual and potential competition as between the parties; and (b) the increased ability and incentive of the new entity to eliminate actual and potential competition from third parties. As a result of the enlarged footprint which the combined entity would have in the Nordic region it would have the ability to carry out commercial practices which others would not be able to carry out, such as the ability to bundle product offerings encompassing the whole Nordic region.

The regulatory position

(131) An important element of this broader picture is the difference between the regulatory regimes in Sweden and Norway on the one hand, and Denmark and Finland on the other. The most important differences concern methods of price regulation, and access to end-users (by way of local loop unbundling as well as other means such as, for example resale and carrier selection). On price regulation, control on interconnection charges in both Norway and Sweden tends to be ex post rather than ex ante. This implies that the incumbents may apply excessive interconnection rates and implement other anticompetitive practices immediately without prior regulatory approval. In Norway and Sweden, the incumbents are not required to provide the same level of access to end-users to their competitors as in Denmark (where the regulatory regime provides for competitive end-user access, including the obligation to provide unbundled local loops; the obligation to provide wholesale telecommunications services for competitors to resell; co-location; carrier selection and national roaming), and in Finland (where the regulatory system provides for competitive end-user access, including the obligation to provide unbundled local loops; the obligation to provide wholesale telecommunications services for competitors to resell and carrier selection).

(132) In their Reply, the parties have stressed that effective mediation concerning the interconnection conditions imposed by Telia is possible. However, in the course of the investigation competitors have pointed out that the resolution of a disputed condition can be very time-consuming, and might take up to two years. Mediation is also required in Norway as the preliminary step to any regulatory action to resolve disputes.

(133) At the oral hearing the parties contended that the regulatory systems in Sweden and Norway acted as the most important constraint on the parties' behaviour. For example, they argued that interconnection tariffs in Sweden are regulated and cost-oriented. However, it appeared on examination that the obligation on cost orientation is limited to voice services only. And although Telia is obliged to make available a reference interconnection offer, which is published on the Telia homepage, it is not subject to any formal approval by the National Regulatory Authority (NRA) before it is published. Thus there is no ex ante control, nor is there any de jure obligation on the NRA to give such approval. Rather the reference interconnection offer is used as a basis for negotiations between the parties. In effect therefore all interconnection tariffs other than for voice services are set after negotiations between the parties. In Norway, Telenor's obligation to offer cost-oriented interconnection comprises access to PTN, public telephony services and transmission capacity. However, such offers are not subject to ex ante control since there is no legal requirement for their formal approval, nor does the regulatory authority give such approval in practice.

(134) According to the parties the Commission overstates the differences between the regulatory regimes in the Nordic area. The parties maintain that, despite the fact that local loop unbundling legislation exists in Denmark and Finland but not currently in Norway and Sweden, the regulatory regimes in the Nordic area are essentially similar.

(135) The parties do not deny that, unlike Denmark/Finland, there is no mandatory local loop unbundling in Sweden/Norway. This is a material difference since the unbundling of the incumbent's local loop allows new entrants to enter the market at a lower cost. It is worth clarifying that in Sweden and Norway, in the absence of local loop unbundling, in order to have access to end-users, entrants may either build their own infrastructure or resort to switched access (which includes call-by-call selection, carrier pre-selection, and interconnection) or dedicated access (leased lines and permanent virtual circuit). These forms of access are not equivalent to local loop unbundling as they bundle the use of the incumbent's switching or transport infrastructure with the use of local loop. This results in an additional per call margin to be paid to the incumbent. In contrast, with local loop unbundling competitors can access the user by paying only a fixed monthly charge for the lease of the loop. Moreover, the forms of access available in Sweden/Norway, unlike local loop unbundling, would not allow the provision of services such as xDSL, IP, ATM and digital video, or in any case rely on technology controlled and priced by the incumbent.

(136) With respect to the cost base used for the purposes of calculating interconnection prices, the parties say that the use of historic costs in Norway and Sweden is in compliance with Community law and, in particular, with Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision (ONP) (the "Interconnection Directive")(23), as amended by Directive 98/61/EC(24). Two points have to be made in this connection. First the fact that interconnection is cost-oriented would not remove the parties' ability to eliminate actual and potential competition from third parties. Interconnection enables incumbents to force new entrants to continue to rely on their services and is therefore the source of constant revenue for incumbents. Even if interconnection charges are calculated in accordance with Community law, the parties could still degrade the technical quality of the interconnection offered to third parties. As a result, the mere fact that interconnection is available does not remove the advantages which the parties gain from controlling the local loop. Second, as regards the chosen cost base, it can be said that in an increasingly competitive environment telecom companies struggle to reduce their cost base by, for example, replacing old high cost equipment with cheaper more efficient equipment. In the face of this, historical costs should be higher that current operating or incremental costs and would thus enable incumbents to earn higher interconnection margins.

(137) The Commission also observes that the question at issue is not the adequacy of the regulatory system(s) in constraining the merged entity's future behaviour, but rather whether the merger between Telia and Telenor would create or strengthen a dominant position. The regulatory systems in Sweden and Norway are designed to control the behaviour of the incumbent telecommunications companies and to protect consumers. Even on the assumption that these regulatory systems are effective, they cannot be expected to prevent the creation and/or strengthening of a dominant position that the combined entity will enjoy as a result of the merger. Telecommunications regulation is a complex task, which requires careful consideration by the regulator and extensive consultation of the industry. Regulation cannot be expected to address the structural competition problems raised by the merger. Indeed, if, as was confirmed by the Commission's market investigation, the merger between Telia and Telenor were to create or strengthen a dominant position, merger control and not ex post regulation is the only adequate tool to prevent these effects.

Elimination of actual competition between the parties

(138) It was noted that Telia, through Telia Norge(25), was one of the most active entrants in Norway and that Telenor, through Telenordia(26), was one of the more active entrants in Sweden. This entry could be observed not just in specific segments, but across a range of telephony activities, from local to long distance and international activities, as well as in business data communications.

(139) The merger would remove Telia Norge as a competitor from a Norwegian market. Indeed, Telia Norge would become a subsidiary of the merged entity. Telenordia would become an entity jointly controlled by the merged entity. As will be explained in detail, the removal of one of the most active entrants in each country would strengthen each party's dominant position on a number of markets.

Divestment of overlapping interests would not be an adequate remedy

(140) In the phase I investigation of the case, the parties had offered to divest their overlapping activities in order to remove any doubts which they considered might arise.

(141) Such divestments might help strengthen one of the other competitors on the market, or they might allow the arrival of another new entrant. But, in the opinion of many respondents, the concerns about this concentration, and in particular those relating specifically to telephony, could not be wholly removed by the divestment of their present overlapping activities. Telia Norge derives advantages from its association with Telia, such as: branding; technical/financial support; the relative proximity of its relevant supporting networks, and its bargaining position as the subsidiary of an incumbent telecommunications operator in a neighbouring country. Telenordia derives similar advantages from its association with Telenor. An acquirer without a presence in the region might be able to provide financial support, but would be unable to provide the same advantages to anything like the same extent. Telia is the most significant and largest potential competitor in Norway and Telenor is the most significant and largest potential competitor in Sweden. As a result, divestment of either of their interests will significantly reduce the restraint on competitive behaviour imposed by both Telia in Norway and Telenor in Sweden, owing, inter alia, to their unique geographic positions and the advantages conferred on them by their respective regulatory positions in terms of access to their local loops.

(142) In their Reply and at the oral hearing the parties argued that there is nothing unique about Telia and Telenor when compared with other possible buyers of the interests to be divested. The parties suggest that the requirements which, according to the Commission, make Telia and Telenor the most formidable potential competitors, would be fulfilled by other operators. In general, the Commission does not deny that there are other telecom companies fulfilling some of the abovementioned requirements, but no company other than Telia and Telenor is able to satisfy all these conditions. It is the combination of these conditions and their cumulative effect, rather than each one of them considered in isolation, which is important and which makes Telia and Telenor unique as potential competitors one of the other.

(143) The parties maintain that the key elements for effective entry into the home market of a telecom incumbent are the entrant's financial resources and technical expertise. Telia and Telenor do not have, according to the parties, unique financial resources and expertise which may not be duplicated by third parties. The Commission is of the opinion that financial resources and technical expertise are certainly pre-conditions for successful competition in the telecom sector as in any other. The Commission, however, considers that they are not the only elements to be taken into account; there are other elements such as brand recognition, as well as the incumbent's subscriber base and the local long distance and international network (including cable networks) and knowledge of the business environment, which play an equally important role and may determine effective entry into an incumbent's market.

(144) The parties maintain that the Telia and Telenor brands confer no particular advantage as, especially for household customers, it is the pricing strategy of a new entrant, which is important. The Commission does not deny that for certain categories of customers competitive pricing may be the key. Nevertheless, the Commission considers that for some other customer brands may be more important as a guarantee of reliability of the telecom services offered. The parties seem to recognise that for business customers brand recognition is important, even if they say that for these customers the major European and international brands, such as BT and AT& T, would be at least as attractive as Telia and Telenor. However, the parties have provided no evidence showing that in Norway and Sweden those foreign brands have achieved or are likely to achieve the same brand recognition as Telia and Telenor. In this context, it is worth noting that BT chose to enter the Swedish market in combination with Telenor and TeleDanmark using a trademark different from its own but rather related to that of Telenor.

(145) The parties contend that proximity of the neighbouring networks does not offer any significant advantage and there are no business/linguistic/cultural ties or knowledge of the markets unique to Telia and Telenor.

(146) As regards proximity of the network, it cannot be disregarded that the possibility of using neighbouring backbone represents (at least for some purposes) an alternative to payment of interconnection charges, which is available only to the parties. In addition, it is self-evident that an adjacent operator enjoys some advantages such as the possibility of providing services (such as the trans-border dispatching of maintenance department technicians) in the neighbouring area using personnel employed in their domestic market, or using its domestic infrastructure as a basis to develop its infrastructure in the neighbouring market. In their Reply, the parties themselves acknowledge, in a rather contradictory way, that "as liberalisation has progressed some operators have looked first to opportunities in neighbouring markets. This pattern is typical of undertakings in any industry as th