[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 29.3.2007

SEC(2007) 403

VOLUME 1

COMMISSION STAFF WORKING DOCUMENT ANNEX TO THE COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

EUROPEAN ELECTRONIC COMMUNICATIONS REGULATION AND MARKETS 2006 (12th REPORT)

{COM(2007) 155 final}

TABLE OF CONTENTS

INTRODUCTION 5

MARKET AND ECONOMIC DEVELOPMENTS 6

Main market developments 6

Key horizontal themes 7

FINANCIAL AND ECONOMIC OVERVIEW OF THE SECTOR 9

THE MOBILE MARKET 13

Mobile take-up 14

Market players 15

3G and data services 17

Interconnection and access 18

Mobile Number Portability 19

FIXED VOICE TELEPHONY 21

Competition 21

Pricing 25

Interconnection 26

BROADBAND 28

Take-up 28

International Comparison 29

Broadband technology trends 31

Competition and regulation 32

LLU Pricing 35

Wholesale access to the incumbents’ networks 36

TECHNOLOGY TRENDS 39

Wired technologies 39

VoIP 39

Wireless Local Loop (WLL) 40

Mobile TV 41

REGULATORY DEVELOPMENTS 42

Main Regulatory developments 42

Regulatory environment 45

Implementation of Regulatory measures by sector 53

THE CONSUMER INTEREST 59

Tariff Transparency 59

Universal Service 60

Directory services and directory enquiry services 63

Disability and social needs 63

Number portability 64

Out-of-court dispute resolution 65

Emergency services 65

Must-carry 68

E-Privacy 68

HORIZONTAL REGULATION 73

Administrative charges 73

Rights of way 73

SPECTRUM MANAGEMENT 76

Spectrum liberalisation and secondary trading 76

Implementation of spectrum decisions 76

Assignments of spectrum 77

MONITORING AND ENFORCEMENT 78

ANNEX 1 - IMPLEMENTATION IN THE MEMBER STATES

BELGIUM 82

CZECH REPUBLIC 90

DENMARK 99

GERMANY 107

ESTONIA 114

IRELAND 122

GREECE 130

SPAIN 139

FRANCE 149

ITALY 159

CYPRUS 169

LATVIA 178

LITHUANIA 185

LUXEMBOURG 192

HUNGARY 198

MALTA 206

NETHERLANDS 213

AUSTRIA 220

POLAND 227

PORTUGAL 236

SLOVENIA 246

SLOVAKIA 254

FINLAND 263

SWEDEN 270

UNITED KINGDOM 279

ANNEX 2 – MARKET OVERVIEW (see volume 2)

INTRODUCTION

This Commission Staff Working Document accompanies the Commission’s Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on European Electronic Communications Regulation and Markets 2006 (12th Report).

It provides a detailed analysis of electronic communications services markets, the regulatory environment and the consumer interest, together with the customary overview of the situation of the sector in the individual Member States (‘country chapters’) and the detailed market data on which the Communication is based.

The regulatory situation described here is that at 31 December 2006. Market data, unless otherwise indicated, cover the period up to 1 October 2006.

MARKET AND ECONOMIC DEVELOPMENTS

MAIN MARKET DEVELOPMENTS

The e-communications services sector continues to represent the largest segment of the overall ICT sector, accounting for around 44.5% around the same as the previous year.[1] In 2006, the sector was worth approximately €649 billion1 of which €289 billion was fixed telephony, mobile telephony and fixed/data services. Overall revenue growth was approximately 2.3%[2], i.e. lower than the revenue growth rate for 2005 (between 3.8% and 4.7%); traffic volumes increased in all segments.

Mobile

Revenue from mobile services grew at 4.6%1, though at a slower pace than last year. While take-up and usage of mobile phones continued to increase, the mobile voice market is showing clear signs of maturing. Prices have continued to fall as a result of intensifying competition although there is scope for more progress in some areas. Mobile penetration has now exceeded 100 per cent and stands at 103% when compared to 95% penetration last year. There are now 478.4 million mobile subscribers in the EU. There are signs that 3G take-up is increasing. There continues to be downward pressure on mobile termination rates through regulatory intervention in most Member States.

Average retail prices for calls made while roaming continue to be significantly higher than the equivalent prices for domestic mobile calls despite initiatives to increase transparency of tariffs, including the launch of a consumer website by the Commission.

Fixed voice

Fixed voice telephony has continued to decline but still remains the most important source of revenue to players in the fixed market. Intensifying competition leading to falling prices and substitution by mobile services (and to a lesser degree by VoIP) are the primary factors. The decrease in revenues from fixed is estimated at between 4.5%1 and 5.1%2.

Broadband

Broadband is the fastest growing segment, with growth in revenue estimated at between 7.8%1 and 8.5%2. EU countries are world leaders and there are now six Member States with penetration rates exceeding the 20% mark. More than 20 million fixed broadband lines were taken up in 2006, representing an increase of 39% on the previous year. Increasing revenues from broadband services are helping to offset the decline in revenues from traditional fixed services. Consumers continue to benefit from lower prices, higher speeds and a variety of broadband offers due to increasing competition in the broadband market. New bundled offerings are fuelling consumer demand for broadband services.

Effective regulation has contributed substantially to broadband rollout in many Member States. Whilst it is true that growth in broadband resale arrangements was particularly pronounced in 2006 (up by 124%), alternative providers continued to climb the ladder of investment with more than 4.1 million new fully unbundled local loops (up by 79%), investing several billion euros into new infrastructure in the process.

KEY HORIZONTAL THEMES

Overall the electronic communications sector is continuously adapting to changing technologies and market developments. Most operators are gradually upgrading existing infrastructures and deploying new networks in order to enable higher data speeds and delivery of converged products. The divisions between the previously well-defined markets within the electronic communications sector are continuing to blur.

Convergence has a wide range of implications that affect how the different networks are rolled out and packages of services are offered to end-users. Converged devices are enabling new communication behaviours, while content is assuming a growing importance. Convergence of platforms and services, together with the development of new technologies, constitutes an important challenge for stakeholders and regulators.

Operators are investing in Next Generation Networks (NGN), which should allow more efficient provision of multiple services over the same infrastructure. This movement is especially important for incumbent operators, who have inherited a variety of networks dedicated to the provision of different services, and it represents an important challenge for stakeholders and regulators. Interconnection between NGNs and between NGNs and traditional networks is likely to be extremely important in order to maintain connectivity.

Mergers and acquisitions in 2006 continued to achieve scale and created the conditions for further pan-European consolidation. In addition, strategic partnerships were signed with content providers, as content is becoming a more important factor with the development of new services such as IPTV, mobile TV or DTT in allowing market players to differentiate offers.

There is a trend towards bundled products, where operators offer a variety of services for a single overall price, provided through different platforms for the benefit of consumers. An EU survey[3] on the evolution of communication services in European households showed that 19% of EU households subscribed to at least one bundled service with higher percentages in some Member States (Denmark: 38%, Estonia: 35%, the Netherlands: 32%, Spain: 29% and Luxembourg: 27%). The most frequently purchased service package is a double play offer of fixed voice telephony and Internet access (8% of EU households). Triple play and quadruple play offers have been taken up by only 3% and 1% of EU households respectively.

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This survey also found that the majority of residential internet access is now based on broadband, with an EU average proportion of 32% of households, against 12% of households with narrowband access (compared to 23% and 16% respectively almost one year earlier[4]). In recent years, the growing number of services requiring high data rates has prompted subscribers to shift from narrowband to higher speed offers and increasingly to demand symmetric connections.

FINANCIAL AND ECONOMIC OVERVIEW OF THE SECTOR

This section provides an overview of the current economic and financial state of the electronic communications sector. It will look at price developments for the consumer, at investment as the source of dynamic gains in the future and at the financial health of the industry as reflected by the financial markets.[5]

One of the principal advantages that liberalisation and ensuing competition have created for consumers is lower prices for existing communications services. The benefits flowing from this constitute one of the most important parameters against which the functioning of EU regulatory policy should be judged; and they are highlighted throughout this implementation report. On this score, it is no surprise that the data show that in 2006 consumers continued to benefit from deflationary price developments for most standard communications services.

As illustrated in annex 2 of this report, the OECD baskets measuring prices in mobile services for typical consumption patterns show price decreases of up to 13.9% between 2005 and 2006 across EU-25. Similarly, in the UK, quarterly consumption of mobile voice minutes went up from 16.4 billion in mid-2005 to 18.3 billion minutes in mid-2006, whereas over the same period industry revenues for the provision of these services increased only from €3.76 to €3.95 billion – indicating that prices for the consumer actually fell by 5.7%.[6] Finally, in Germany, the price index for all electronic communications services fell by 3% in 2006, with specific decreases in prices for standard internet usage amounting to 5.1% and for fixed voice calls amounting to 0.2%.[7]

Clearly, the evidence assembled in this report and these examples show that the average European consumer of electronic communications services in 2006 was better off than the year before, and that the static gains in consumer welfare resulting from falling prices are a strong indication that the regulatory framework is functioning well overall.

Positive price developments were underpinned in the past year by increased investment in the electronic communications sector. Investment is a necessary condition for both consumer gains from innovation over time and the ability of operators to provide consistent levels of quality of service. In 2006, aggregate investment in the electronic communications sector – measured in terms of capital expenditure – is estimated to have risen to more than €47 billion, representing an increase of 5% over 2005. It was the fourth consecutive year of increased year-on-year investment levels since 2003. The steady nature of this overall increase points to a continuation of the current investment cycle and a broadly favourable structural environment.

Disaggregating this figure, it can be seen that the typical incumbent firm in the fixed sector invested approximately 13.3% of its revenues, whereas the typical incumbent firm in the mobile sector invested approximately 12.7%. Both of these percentages are slightly below the levels seen in the late 1990s, although they are in line with long-run historical averages for the sector. Incumbents continue to outspend their competitors in absolute (though not always in relative) terms; and approximately 70% of total EU 25 investment is accounted for by the five largest markets.

The increase in investment has to be attributed to both cyclical and structural factors. On the cyclical side, all major operators – while under significant pressure from strong price-based competition in most of their business lines – continue to extract sizable cash flows from their legacy businesses. Moreover, servicing debt and repaying principal was facilitated by continued low interest rates in the period under review. Both of these factors provided the basis, in the fixed sector, for strong investment in next generation networks – widely seen as the principal source of future profits and rendered even more urgent by sometimes powerful competition from alternative cable operators.

In the mobile sector the cycle is slightly more advanced, and, on this level of analysis, investment can be expected to remain flat or even to decrease slightly over the coming years. Most operators are reticent to commit to new infrastructure investments in the light of the comparatively slow take-up of 3G services, and there is evidence that future services will probably be based on existing networks.

On the structural side, arguably, where regulatory action has been appropriate, it has created an environment of regulatory certainty and flexibility, in which remedies can be applied that are commensurate with national economic circumstances and thus conducive to investment. For example, while most national regulatory authorities have opted for the imposition of LLU-obligations on the dominant integrated provider of fixed services with a view to encouraging network investment by alternative players, the UK regulator has chosen to go one step further and to separate functionally the wholesale from the retail arm of the incumbent operator.

Broadly speaking, as in the past, it can be argued that genuine platform-based competition is more conducive to investment and more desirable than simple service-based competition. Therefore, it is important to realise that in economic circumstances where for historical or accidental reasons platform-based competition has yet to emerge, the framework’s concept of the investment ladder is useful. A regulatory focus on removing barriers to entry generally is more appropriate than one that actively privileges investments by specific players.

Mergers and acquisitions activity remained an important feature of the sector. In 2006, however total transactions in the EU are estimated to have fallen slightly short of the previous year’s €70 billion[8]. Typical driving factors behind deals were the aim of achieving scale through pan-European consolidation, a shift of emphasis from voice to data and a continued inflow of speculative capital from private equity groups profiting from historically still low interest rates. In 2006 – continuing a trend already established in 2005 - private equity groups are estimated to have accounted for one in five transactions. A good example of this was the acquisition of a 4.5% minority stake in the German incumbent by a US buy-out investor. Finally, many mergers and acquisitions had an important cross-border dimension, perhaps best typified by the €26.8 billion take-over of the second-largest UK mobile network operator by the Spanish incumbent.

Mergers and acquisitions activity in 2006 was also linked to the changing financial performance of the sector. After a difficult year in 2005, the financial outlook for the major players in the European electronic communications brightened slightly in 2006. As measured by the Dow Jones Euro Stoxx Telecommunications Index (SXKE), the value of the sector in 2006 increased by 11.53%. Over three years, the increase was 23.84% (see chart 1). While all major sector indices are disproportionately weighted towards the incumbent operators, they can still be seen as a good proxy for the overall financial health of the industry and its future growth perspectives.

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The picture above is slightly more nuanced when assessed in a wider context, as shown in chart 2.

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One reason for the volatile performance of the sector since 2003 may be the uncertainty over the industry’s future business model in the context of ongoing changes in the electronic communications value chain. New players, such as internet companies, are entering the market for IP-based telephony and are leveraging their large and rapidly growing customer base to gain competitive advantages. In this way they exert pressure on traditional fixed and mobile providers to develop new strategies for retaining their customers in the face of innovative pricing models such as flat rates or even advertising-based tariffs. European incumbent operators are still dependent on their traditional voice and access businesses for approximately 60% of their EBITDA[9]. Clearly, the strong competitive pressures in these businesses are currently still outweighed by the high growth-rates in broadband. However, there is considerable uncertainty over what answers the industry will develop once these growth rates start to decrease in coming years.

Similarly, the mobile sector in past years has invested significantly in advanced network roll-out. However, meaningful revenue streams from next-generation services have yet to materialise. In mid-2006, non-voice revenues (the overwhelming proportion of which is standard text messaging) of European operators were estimated at 17.1%; and although these are significantly higher than the comparable figure for the US, this is not nearly enough to compensate for the increasing commoditisation of mobile voice services.

Contrasting with this picture, a benign macro-economic environment with low interest rates combined with solid operative performance has enabled the sector to reduce its debt levels and increase dividend pay-outs. The resulting dividend yields have probably created a floor below which financial valuations are unlikely to fall in the short term – even in the current period of transition that is creating so much uncertainty for investors.

THE MOBILE MARKET

OPERATORS CONTINUED TO REGISTER REVENUE GROWTH EVEN THOUGH THE SECTOR IS NOW GROWING AT A SLOWER PACE THAN LAST YEAR. THE MOBILE SECTOR GREW BY 4 .6% in 2006 compared to 5.9% in 2005, reaching now €133 billion in total. Growth was driven by further increases in penetration and to some extent by data services. The slowdown in growth can be attributed to intensifying competition, falling prices and the fact that, although penetration continues to rise, this does not have as much significance for revenue growth as in previous years, given that much of the increase is accounted for by customers owning more than one SIM.

Over the past two years consumers have begun to see significantly lower prices. This decline can be attributed to domestic prices and does not reflect the continued high prices that are charged for international roaming, which are the subject of a proposal for a regulation on international roaming adopted by the Commission in June 2006. Despite political pressure on operators last year to act and bring prices down, an intervention was deemed necessary since in most cases, standard prices for consumers remained particularly high.

The tables below give an indication of the fall in prices for mobile telephony between 2002 and 2006. A sharp drop in prices was registered at EU level over the period 2004 and 2006.

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For the purposes of the above tables, OECD baskets have been used. Further details on the composition of these baskets can be found in the Annexes.

Despite still accounting for only a small share of the total revenue of mobile operators, non-SMS data services are now showing signs of growth. This growth may become even more pronounced when 3G operators have fully deployed HSDPA which will allow higher speed data transfers.

MOBILE TAKE-UP

The average EU penetration rate continues to grow and is now above 103%. In fact, 17 Member States have now exceeded 100 per cent penetration. The reasons for such high penetration could range from consumers being in possession of more than one subscription to the use of data cards in computers and PDAs. Data cards, however, are still a niche product.

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In terms of Member State penetration, Luxembourg[10] tops the list with 171%, followed by Italy with 134% and Lithuania with 133%. Luxembourg’s high penetration is mainly attributed to trans-national commuters who have a Luxembourg SIM card. The growth in penetration has been less than the previous year, however, suggesting that mobile voice telephony is a maturing market and that growth in terms of penetration will be lower in the coming years. The graph below gives an indication of the penetration levels and number of subscribers in the different Member States.

The highest growth in percentage terms was registered in Poland where subscriptions were up from 72% in 2005 to 91% in 2006. This means that, in just two years, penetration in Poland has gone up by 36%. Italy and Lithuania also registered strong growth of 15%. Cyprus also registered further growth of 14% following strong growth in the previous year.

On the other hand, some Member States have shown only slight growth, indicating that their markets have matured. It is interesting to note that low growth was also registered in Member States that have not reached 100% penetration, which may indicate potential for further growth in subscriptions in these Member States in the coming years.

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Pre-paid customers continue to be very important for mobile operators, with an EU average of nearly 60% as against 40% for post-paid customers. In Italy and Malta, in particular, pre-paid customers account for more than 90% of the market. On the other hand, in Finland pre-paid customers account for just 7%, while in Denmark only 18% are pre-paid customers.

Market players

While competition is intensifying in the mobile sector, as the situation with roaming charges shows, there is scope for even more competition. The number of mobile network operators has remained static and, while the number of service providers has continued to increase year on year, there are still many Member States where mobile service providers are not yet present.

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In total, compared to the previous year, the number of mobile service providers which are defined as mobile virtual network operators, enhanced service providers or simple resellers has risen to 290, an increase of 76 on the previous year.

While not all service providers are already active in the market, the number of authorisations for these types of operators has continued to increase in many Member States with the highest number of service providers being found in the UK (70) and the Netherlands (60). However, as the table below indicates, 10 Member States still have no mobile service providers.

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Despite the fact that competition may be deemed to be increasing in many EU countries, the following table shows that the actual decrease in the market share of the leading operators was relatively small between 2004 and 2006. In percentage terms, the decrease in the leading operator’s market share in terms of subscribers between 2005 and 2006 was only 0.2% while the main competitors increased their market share by 0.1% between 2005 and 2006.

Although there are Member States such as Cyprus and Slovenia where the leading operator has a market share of over 90% and 70% respectively, in general the leading operators in most Member States have between 40% and 50% of subscribers. The leading operator with the lowest market share can be found in the UK (23%), which also reflects the impact service providers have on competition.

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3G AND DATA SERVICES

There 70 operators now offering 3G on a commercial basis and 3G services are now available in all Member States. While Japan retains the highest penetration of 3G services, Europe now has the highest number of subscribers. It is estimated that there are around 45 million UMTS subscribers in the EU, indicating that Europe has in fact overtaken Japan as leader with regard to 3G subscriptions.

3G penetration in Europe is highest in Italy, with nearly 20% of total mobile subscribers now using 3G networks for their services. Penetration for 3G services is also high in Portugal, Luxembourg, Ireland, UK and Sweden.

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SMS still remains a very important source of revenue for mobile operators but other data services are growing in importance. Although they still account for only a small percentage of total revenue, non-SMS services - such as access to internet via mobile devices and music downloads - may in future become the primary driver for additional growth. Operators are now starting to report that other data services are beginning to show an important contribution to the overall mix. In fact, one operator reports that 34% of ARPU in Italy came from data.

Some operators are also encouraging their customers to use data services through flat-rate data tariffs. These could be a very important factor for operators since they will need to compensate for the lower projected growth rate in voice services.

Interconnection and access

Prices for mobile termination rates (MTRs) have continued to decline, as can be seen in the table below. This year, no distinction is being made between SMP and non-SMP operators since practically all operators have been designated as having SMP in the mobile termination markets.

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On aggregate, the figure of 12.53 cents in 2005 went down to 11.40 cents in 2006 - a drop of 9%. The most significant reductions in MTRs occurred in France (around 24%) and in Denmark, Austria, Portugal and Sweden (down 20% in all countries). Significant reductions (of between 11% and 17%) can also be observed in Germany, Greece, Spain, Luxembourg, the Netherlands, Hungary and Slovenia. Nevertheless, MTRs remain, on average, more than 9 times higher than the average fixed interconnection charges (double transit).

Mobile Number Portability

The number of mobile ported numbers has increased significantly over the past year (up by almost 6.3 million). As of October 2006 31.4 million subscribers in 24 Member States have ported their number since this facility was introduced (data not available for the United Kingdom).

Apart from the countries that did not introduce number portability until 2006, there has been significant growth in the amount of mobile numbers ported in France, the Netherlands, Finland and Sweden.

Mobile numbers ported as a percentage of total mobile subscribers are higher in Finland (over 64%) and Denmark (32%). Spain and Sweden have over 20%, while Belgium, Ireland, Italy and Netherlands have ported between 10% and 16% of the existing mobile numbers. Most of the new Member States show a very low level of numbers ported compared to the total of number of mobile subscribers owing to the late introduction of number portability. The percentage of mobile number ported is also quite low in Luxembourg (3.4%) and in Germany, Greece, France, Portugal and Austria (not higher than 1.9%).

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FIXED VOICE TELEPHONY

COMPETITION

Competition in the fixed voice market continues to be largely based on indirect access wholesale products such as carrier pre-selection (CPS) and carrier selection (CS). CS and CPS services are now available in all Member States. However, the number of alternative operators using CS or CPS as a percentage of active operators has remained stable, even decreasing in some Member States as a result of either the increased number of unbundled lines or increased investment in networks. The biggest decrease in CS/CPS has been in the UK mainly due to the growth of full LLU services. Wholesale Line Rental (WLR) has been introduced in more countries this year, indicating the potential for even greater competition in time. In countries where WLR products have already been available for some time, demand trends have been positive.

As regards direct access competition, compared to one year ago there has been an increase of about two percentage points, on average, in the proportion of subscribers using an alternative provider and it now stands at 10.4%. Alternative providers are providing these services over their own network via cable lines, unbundled lines, or other means of wireless access, such as fibre or PLC.

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The high percentage of subscribers using an alternative operator for direct access, such as in Portugal, Italy and the UK[11] (countries where the percentage increase was the highest since September 2005) can be attributed to significant investments by operators in their own network and to a significant increase in local loop unbundling. In the case of Portugal, 15.20% of subscribers were using an alternative provider for direct access in 2006 compared to 11.0% in 2005. This increase can also be attributed to cable, LLU, and to the provision of access services using mobile frequencies.

Market share

The EU average incumbents’ market share in the overall fixed voice telephony markets[12] on the basis of retail revenues (but also by volume of traffic) continues to show a declining trend from 67.7% at Dec. 2004 to 65.8% at Dec. 2005 (figures by volume of traffic are, respectively, 66% in 2004 and 63.9% in 2005). Looking at the incumbent’s market share in each Member State separately[13], the biggest rate of decline (around 7%) has been experienced in Cyprus, Hungary, Ireland and Poland. It is also worth mentioning that the incumbent in Denmark increased its market share by minutes of traffic to 64.1% (Dec. 2005) compared to 60.94% (Dec.2004).

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As the above graph shows, the difference between the EU average market shares of the incumbents in local calls as compared to international calls is still significant (as last year) even though the rate of decline is comparable. Measured by declining incumbents’ market share at EU level, the calls to mobile market (more than -4% since 2005) is more competitive than the international and long distance calls markets (around -3%). The local calls market shows the lowest declining incumbents’ market share (around -2%).

Looking at the market share of the incumbents in individual Member States, the different calls markets reveal a varied pattern:

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Incumbents’ market share on overall fixed market remains particularly high (more than 90%) in Cyprus, Latvia, Lithuania, Hungary, Malta, Slovenia, Slovakia and Finland.

New entrants have managed to gain considerable market share by offering cheaper prices for certain types of calls. This has been observed in the international calls market in Italy, Poland and Slovenia (with a decrease of between 9% and 11%[14]), in the long distance call market in the Czech Republic (-35%14) and Ireland (-15%14), and in the local calls market in Belgium, Ireland and Hungary (between -7.5% and 8.7%14).

Against the background of incumbents with declining market shares and despite the declining growth in the fixed voice sector, the EU fixed market has experienced an increase in the number of requests for new authorisations to provide fixed services during 2006, even if to a lesser extent than last year. As at July 2006 there were 2127 operators authorised to offer public voice telephony services and 2846 public network operators. Around 50% of the authorised operators were actually providing services as of July 2006. Many new entrants concentrate their business on specific segments of the market, thus having a limited impact on the overall level of competition. The chart below shows that only seven countries (Belgium, Germany, Spain, Ireland, Austria, Sweden and United Kingdom) had five or more major competing players (including the incumbent).

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The number of EU subscribers using alternative operators stabilised during the reporting year, with more subscribers opting for an alternative operator when making international calls. While the data in the chart should be considered as indicative, the percentage of subscribers using alternative operators for international calls has shown a substantial increase since September 2005. The fact that the percentage of subscribers using direct access reached 10.4% this year is noteworthy, although incumbents continue to dominate the local access market.

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As the graph shows, the percentage of subscribers using alternative operators has increased only slightly for long-distance calls whereas the increase for international calls was more substantial. The fact that the percentage of subscribers using direct access reached 10.4% this year is noteworthy, although the incumbent’s dominance in the local access market still prevails.

Fixed number portability has continued to contribute positively to the competitiveness of the market. It is currently introduced in all Member States except Slovakia; in Malta, however, the service is not yet effective. Strong growth in the number of ported numbers has been recorded in Spain, France, the Netherlands and Sweden. Since the introduction of fixed portability, a total of more than 15 million subscribers have ported their numbers as of October 2006 (compared to 7 million as at October 2005).

Revenues from fixed telephony are on a long-term downward trend, driven by falling prices due to increased competition between operators and by fixed-mobile substitution. Partly in response to this trend, operators in many EU Member States have increasingly begun to make available triple play services (where television, voice and internet are delivered on the same ‘pipe’ from a single service provider), which are expected to shift the consumer market further towards broadband connections. Quadruple play offers (which also include mobile voice) are also being made available in some Member States (e.g. France, Finland, Germany, Sweden and the Netherlands).

During the reporting year VoIP has become widely available in the EU, showing strong growth in some countries. Both incumbents and alternative operators are responding to this new IP environment by offering VoIP products or bundled packages which include voice services. Companies in a number of Member States have introduced Voice over Broadband (VoB) services. If VoIP continues to grow over the coming years, competition and prices in the fixed voice telephony market may be further affected.

Pricing

THE DECLINING TREND DEPICTED IN THE PRICES FOR 3-MINUTE AND 10-MINUTE CALLS IS EVIDENT IN THE FOLLOWING GRAPHS:

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Prices of both 3-minute and 10 minute national calls have continued to decrease, albeit more slowly and less steeply than the previous decrease since 2000. Prices for 3-minute calls have decreased by 1.1% and for 10-minute calls by 3%.

INTERCONNECTION

In the case of two Member States - Portugal and Poland – NRAs have imposed an obligation on the respective incumbents to modify their RIO so as to introduce capacity-based interconnection as an alternative method of interconnection. This interconnection model allows an operator to contract certain capacity for interconnection services from the dominant operator at a specific point of interconnection, paying a fixed cost, regardless of the traffic minutes actually routed. It also gives an incentive to alternative operators to increase traffic volumes, allowing the routing of a higher number of minutes at lower unit costs. This model of interconnection was first successfully implemented in Spain where more than half of the fixed access and termination interconnection is now capacity-based. The increased flexibility offered by capacity-based interconnections makes it easier for alternative operators to provide a varied range of retail offers, such as flat rates for voice or data, bundled offers, free or discounted calls.

EU average fixed interconnection charges for call termination on the incumbent’s network have further decreased this year for all level of interconnection. The decrease in prices, which ranges from 6.5% for local level to 8.5% for single transit, and 10% for double transit, was due to regulatory measures taken by the national regulatory authorities following the analysis of the relevant market or to modifications made in cost-accounting systems used for defining cost-oriented prices for interconnection in some Member States. Operators thus profited from lowered interconnection costs.

A significant development in the EU fixed telephony market in 2006 has been the implementation of operational separation of the UK fixed incumbent’s access network business. This has been achieved by the creation of a new business unit, Openreach, which operates the access and bottleneck network of the UK incumbent. The aim is to deliver key access products to communication providers in a way that guarantees equality of access to the incumbent’s infrastructure on fair and equal terms. The UK NRA, Ofcom, is expecting that investments in infrastructure will be encouraged, that innovations through multiple services will be enabled, and that deployment of next-generation networks will be increased. The overall benefit to the consumer would thus be lower prices and greater choice of products and services.

BROADBAND

TAKE-UP

There has been a further substantial increase in broadband take-up in the EU. The number of fixed broadband access lines is now almost 73 million as of 1 October 2006, compared to 52.6 million in October 2005 - an increase of more than 20 million lines. On average, 55 146 broadband lines were added per day during 2006 compared to 52 482 new broadband lines per day during the previous year.

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As a result the EU average broadband penetration rate has risen from 11.4% in October 2005 to 15.7% in October 2006. Overall sector size reached €58.5 billion.

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Data for Austria as of July 2006.

Growth has been highest in Denmark and Luxembourg, followed by the Netherlands, Finland, the UK and Sweden. Member States with growth higher than the EU25 average also include Estonia, Ireland, Germany and Latvia. The gap between the Member States with the highest and the lowest penetration increased from 23.6 percentage points in October 2005 to 26.5 percentage points in October 2006. The UK is now among the most successful Member States (the Netherlands, Denmark, Finland, Sweden and Belgium) in terms of penetration rates. Among the new Member States, Estonia and Slovenia in particular continue to perform well, whereas Malta has seen a decline in growth.

International Comparison

The Netherlands and Denmark now have the highest broadband penetration in the world and other EU countries are also among the world leaders. However, the EU still lags behind some other comparable world economies on average.

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Data for Austria as of July 2006. The estimate of the Austrian NRA for October 2006 is 16.42%.

The US seems to have performed better than in 2005, while Japan and South Korea underperformed compared to the situation one year ago. South Korea, in particular, has been showing very strong signs that growth potential is flattening out as the country is potentially nearing its natural saturation point.

Comparable 3rd Countries | Broadband Population Penetration Rate (30 June 2006) | Annual Increase in Penetration Rate (% points) | Source |

Iceland | 27.3% | 5.8 | OECD, June 2006 |

South Korea | 26.4% | 1.1 | OECD, June 2006 |

Switzerland | 26.2% | 5.8 | OECD, June 2006 |

Norway | 24.6% | 6.5 | OECD, June 2006 |

Canada | 22.4% | 3.2 | OECD, June 2006 |

US | 19.2% | 4.7 | OECD, June 2006 |

Japan | 19.0% | 2.6 | OECD, June 2006 |

Australia | 17.4% | 6.6 | OECD, June 2006 |

New Zealand | 11.7% | 4.7 | OECD, June 2006 |

DSL continues to be the leading platform in the EU (at 81.7% of all broadband lines)[15], while broadband over cable is well developed in the USA, South Korea, and Canada. Japan leads in terms of fibre-to-the-home (FTTH) with 6.3 million fibre broadband subscribers in June 2006. In Japan, there are more subscribers using fibre than other access modes. Despite the incumbent having an obligation to offer unbundled access to its fibre, the main driver for this investment in Japan seems to be the intense local competition (in particular with electricity utilities) and strong evidence of demand for more bandwidth among consumers. In South Korea, the total number of DSL connections continues to decline as more users upgrade to fibre. In the USA, investment in fibre is continuing, while China is reputed to have at least 5 million FTTH connections.

Bridging the broadband gap

Auctions for designations for WiMAX, CDMA, UMTS, HSDPA, LMDS licences were held in a number of Member States in 2006. Once these wireless networks are rolled out (some as early as 2007), options for end-users, particularly those in remote or sparsely populated areas, will increase. This will reinforce broadband take-up and accelerate the catching up process between urban and rural areas as well as between Member States, even more so when suitable frequencies become available.

BROADBAND TECHNOLOGY TRENDS

In the EU, DSL continues to consolidate its position as the main broadband technology (81.8%). In contrast, broadband over cable, which stands at 15.5%, has decreased by 1.3 percentage points since October 2005. Other technologies (FTTH, wireless local loop (WLL), satellite, leased lines, LAN using Ethernet protocol, etc) account for 2.7%. Broadband over mobile networks (UMTS, HSDPA, CDMA, Flarion, EDGE) is gradually increasing, in particular in the new Member States.

The EU broadband market is becoming ever more sophisticated, with ADSL2+ and VDSL services and increasing transmission speeds facilitating the introduction of new services. Cable is responding with the Euro-DOCSIS technology, which is expected to increase data transmission speeds significantly.

DSL technology

From October 2004 to the present DSL lines grew by 127% compared to a 77.2% increase in cable modem subscriptions. Several incumbents have announced plans to invest further in DSL, in particular in sub-loops, in order to increase the efficiency of their networks. These developments could push up the investment costs of alternative operators and increase the number of interconnection points, as well as limiting the possibilities for co-location.

Other technologies

Cable is losing ground to DSL in all Member States with the strongest cable presence in Malta, Austria, Belgium, the Netherlands and Portugal (from 40.78% to 38.06%, on average). Nevertheless, some cable network operators (e.g. in Germany and Ireland) recently announced investments to upgrade their networks, which will place them in a position to offer competitive broadband (and triple play) products to a large number of end-users in the future.

Operators generally increased their investment in FTTH and WLL technologies. Take-up in FTTH-based lines is evident in Estonia, Sweden, Slovakia and Lithuania. WLL has seen significant growth in the Czech Republic and Ireland. Ethernet has developed into an important alternative platform in all three Baltic States. Municipal broadband projects are expanding in Northern European countries such as France and the Netherlands. These deployments are acting as an incentive for incumbent operators, some of which have announced large fibre roll-outs (France, Germany, Italy, Spain, the Netherlands, Belgium and Slovenia), although mainly not to the home, but only to the street cabinet.

COMPETITION AND REGULATION

Of the many factors that contribute to broadband rollout, competition is key. Competition in broadband can be measured both at the infrastructure level (LLU + other technologies, mainly cable modem) and at the service level (bitstream and resale of DSL lines). The best performing countries in terms of broadband take-up have traditionally been characterised by competition between alternative platforms, which allows consumers to choose between different modes of access.

Take-up has been particularly strong in those countries where competition between DSL and cable has been effective. Thus, all five leading Member States in terms of penetration (the Netherlands, Denmark, Finland, Sweden and Belgium) also have a high roll-out of cable and have arrangements in place which allow alternative operators to gain access to the existing telecoms networks.

However, as the broadband market relies heavily on the DSL networks of incumbent operators (over 80% of broadband lines), access to these networks has been crucial to the development of competition. Sector regulation has brought about significant shifts in countries where DSL is the predominant access technology, in particular in countries where the unbundling of the local loop has made significant advances, e.g. the UK, Ireland and Portugal.

Other factors contribute to the development of consumer demand for broadband. Market growth has recently become more and more content-driven, as customers move away from traditional stand-alone products towards bundles of services, most often individually tailored, e.g. pay-per-view (PPV) and video on demand (VoD). At present however, the availability of greater download speeds appears to be stimulating more demand for online gaming and music download services. Broadband internet tools for real-time communication (e.g. VoIP tools) also drive overall competition and choice for end-users.

Additionally, foreign investments and attractive financial and tax environments can play a key role in the growth of broadband. In Estonia, for example, in the absence of effective DSL regulation, market take-up remains strong due to the presence of alternative networks co-financed by foreign investors.

In some new Member States, broadband penetration is hindered by social and economic conditions.

There is a general consensus that competition is one of the main drivers of broadband take-up. The best performers appear to be those Member States, such as the Netherlands and Denmark, where the presence of competing infrastructures is key to broadband take-up. Effective market regulation, permitting access to the incumbent’s infrastructure, also stimulates the growth of broadband and intra-platform competition. For example, decisive regulatory action in France and functional separation in the United Kingdom have clearly been important factors.

Effective regulation improves market conditions and enables alternative operators to move gradually from service-based to infrastructure-based competition. In contrast to the above, in Member States where poor regulatory policy is combined with the absence of effective infrastructure-based competition, gaps in performance can be observed.

Regulation and implementation of remedies

In the absence of competition between different platforms, national regulatory policies are critical in setting the right conditions for competition to develop by means of access to the incumbent’s infrastructure, in particular through unbundling and bitstream access products.

However, the toolbox of pro-competition remedies provided by the regulatory framework can only be used when the framework is in place and the market reviews have been completed. Late transposition has undoubtedly had a detrimental impact in this regard, in particular in Member States without effective infrastructure competition. This is exacerbated where market reviews themselves have been late in starting. Belgium has not yet analysed either of the two recommended markets, i.e. LLU market (market 11) and wholesale broadband access (market 12), Malta was late with market 12, and Estonia with market 11, whereas Germany has not notified all the remedies on market 12. Latvia did not notify both markets until late November 2006.

NRAs have generally determined that the relevant markets are not effectively competitive and have generally imposed access obligations. Furthermore, almost all NRAs that have notified market 11 have imposed some sort of price control and cost accounting obligation; on the other hand the majority of regulators that have notified market 12 have imposed price control and cost accounting obligations, albeit mainly using retail-minus formulas.

There is evidence of some regulators focusing more closely on the potential for different conditions of competition to apply in different geographic areas within their territory, thereby offering the prospect of differentiated remedies.

Partly as a result of generally effective market regulation in the EU25, competition has grown, with the incumbents’ broadband market share falling to 48.1% from last year’s 50.2% on average. The situation regarding market shares differs from one Member State to another, ranging from 24.8% (incumbent’s market share) in the UK to 98.3% in Cyprus. Growth of alternative operators’ market share between October 2005 and October 2006 has been significant in some countries, such as Germany (17 percentage points), Slovakia (16 percentage points), Latvia (14 percentage points), Ireland (10 percentage points) and Greece (10 percentage points).

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The results of regulation appear to be very positive in Denmark, where the NRA has imposed very strict remedies. Bitstream has become available in Germany, while the number of LLU lines is growing in Slovenia as a consequence of broadband regulation. Owing to the existence of several alternative operators (both cable operators and LLU operators), the Netherlands is the only Member State where the wholesale broadband bitstream is not regulated.

Some Member States have achieved competition based on full or shared LLU access. In these countries (e.g. France, Germany, Sweden, Finland, and the Netherlands) alternative operators hold significant shares of the DSL market. France has one of the highest broadband penetration rates measured by access-based competition.

On the other hand, weak regulation, difficulties with enforcement of remedies and appeals against the imposition of remedies are capable of seriously hindering the effectiveness of wholesale broadband regulation, with a resultant negative impact on the development of competition. In certain Member States (e.g. Hungary, Latvia, Slovakia, Lithuania and Cyprus), alternative operators have a very low share of the DSL market. Resale appears to be the only service-based type of DSL wholesale offer in Slovakia and Malta. In Lithuania, bitstream appears to be viable only for non-residential users. The situation is particularly serious in Cyprus, where - apart from a small number of unbundled lines – there are no alternative infrastructures.

Furthermore, the degree of precision of remedies imposed by the regulators has been an issue with regard to the wholesale broadband market (market 12) in Poland and the LLU market (market 11) in Slovakia. Finnish legislation leaves it up to the operators themselves to decide which kind of cost accounting model is applied in LLU and bitstream markets.

The UK has, as an example of good practice, stepped up the oversight of the LLU process by creating new enforcement structures, aimed at assisting the NRA in tackling practical problems in the implementation of regulated processes.

In Belgium, Hungary, the Netherlands and Sweden, systematic or frequent legal challenges also tend to delay implementation of remedies.

LLU Pricing

General

LLU pricing remains an important component in the strategy mix that influences the behaviour of alternative operators in infrastructure based competition. In principle, lower LLU fees create greater demand for access to the local loop (although provisioning and technical conditions remain important). For instance, partly thanks to a reduced monthly rental fee for full unbundling, France has added some 1.22m new fully unbundled lines since October 2005. Portugal, the Netherlands, Luxembourg, Denmark, Belgium and Austria have seen significant growth in the number of fully unbundled lines (on average between two and four times the number in October 2005), partly due to reductions in monthly rental costs.

Decreasing monthly rental fees for LLU have, for example, contributed to the emergence of fully unbundled lines in Slovenia, which, together with shared access lines represent nearly 10% of all DSL lines and make Slovenia, despite its small size, the top performer in absolute terms (with 16 814 lines) amongst the new Member States.

Significant decreases in monthly average total costs (connection fees over three years plus monthly rental fee combined) have fuelled the growth of shared access lines in the Czech Republic and Slovenia, whereas Italy and, in particular, the UK have drastically increased the number of subscribers using alternative DSL lines via shared access.

Full unbundling

The EU monthly average total cost for full unbundling has decreased by € 1.2 since October 2005, which is more than in the period 2004-2005. Ireland and the Netherlands respectively remain the Member States with the highest and the lowest monthly average total cost for full unbundling. EU average connection fees for full unbundling decreased from € 77.9 in October 2005 to € 65.9 in October 2006. During the same period, monthly rental charges dropped on average from € 10.6 in October 2005 to € 9.7 in October 2006. The highest connection fees can be seen in Slovakia while the Netherlands remains the cheapest. Spain, Italy, Sweden, Malta and, in particular, Poland (due to the charging of an additional fee for technical information on the connection) have raised their connection fees since 2005. Monthly rental charges are highest in Ireland (€ 15.1), which has raised the price of rental compared to 2005, while Lithuania (€ 7.8) and Italy (€8.1) are the cheapest countries.

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Shared access

The EU monthly average total cost for shared access has fallen by € 0.6 since October 2005, in particular because of the 15% decrease in monthly rental charges. Average monthly rental charges have thus dropped from € 3.4 in October 2005 to € 2.9 in October 2006. Slovakia and the Netherlands remain the most and the least expensive countries respectively. On the other hand, connection fees for shared access (€ 59.7) have not changed on average compared to last year. Denmark, Spain, Malta and Poland have increased connection fees for shared access.

Wholesale access to the incumbents ’ NETWORKS

New entrants, spurred on by adequate access price regulation, are climbing the ladder of investment by moving away from bitstream access (5.13 million lines) towards local loop unbundling (13.89 million lines) in the provision of broadband services.

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LLU, which now represents 7.53% of the PSTN lines in the EU, provides 46% of DSL new entrants with access to broadband network. Fully unbundled lines increased by 79.3% over the year. Germany and France have been the principal contributors to the growth of full unbundling, while Italy, the Netherlands and Portugal have also played an important role.

Many operators seem to have chosen full unbundling over shared access, since this allows them to provide a full set of services (voice, data and video) independently of the incumbents. In addition, it allows alternative operators to provide single billing to their customers and permits market operators to modify the characteristics of the service in a competitive way. In shared access, France remains the country with the highest number of lines, while the United Kingdom in particular, Italy, Spain and Sweden all considerably increased the number of shared access lines in the space of one year.

Bitstream has been stable and accounts for only 17% of alternative operators access lines in DSL. The United Kingdom, Belgium, Hungary, Ireland and the Czech Republic are the countries with the highest number of new bitstream lines in the course of one year, while France and Italy - despite a decrease in the number of bitstream lines – are still the countries with the highest absolute bitstream penetration.

Strikingly, new entrants have been particularly active in reselling the incumbents’ DSL products (6.17 million new lines added compared to October 2005, which is equivalent to an increase of 123.6%) and account for some 37% of all new entrants’ DSL lines. Resale continues to grow mainly as a result of the increase in Germany, where the incumbent reduced the prices of unregulated resale products; 1.8 million lines have been added to give a current total of 2.9 million DSL lines. In the United Kingdom, 4.3 million new lines - a development due mainly to falling prices[16] - pushed up the resale figures to 7.4 million lines.

However, resale - which in the main is still unregulated - is unlikely to provide a basis for sustainable competition. Moreover, it is perceived as a means by which incumbents exercise continued control over the end-users. This is becoming critically important in some Member States. There are considerable differences in the incumbents’ market share depending on whether DSL resale lines are included or not. For example, in the UK the incumbent’s market share excluding resale lines is 24.8%, as compared with 68.4% including resale lines (a difference of 43.6 percentage points). In Malta the difference is 22.6 percentage points, in Germany 21.5 percentage points and in Luxembourg 10.2 percentage points.

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The introduction of functional separation, as in the UK, could create more transparency, open up the infrastructure bottlenecks and ultimately generate a new wave of competition in the highly converged markets with strong incumbent control.

TECHNOLOGY TRENDS

The electronic communications sector is characterised by rapid technological advances, which often present new challenges for the market and regulatory approaches. Many new technologies have significant potential and may well have strong economic and social impacts in the near future.

WIRED TECHNOLOGIES

In most Member States, operators have started upgrading the existing infrastructure in order to be able to carry higher data rates and to supply converged products. Incumbent operators with legacy copper access infrastructure, and some alternative operators using wholesale access products, have started to adopt new DSL technologies.

Although over the past years DSL has grown in importance as the predominant broadband technology, there has been some investment - mainly led by alternative operators - in the other two main wired access platforms currently used, namely cable and, to a lesser extent, FTTH. Some analysts predict that the basis for competition will shift from the data rates and prices offered through the different platforms towards converged services and content.

Cable operators were the pioneers in providing entertainment services in conjunction with pure telecommunication services. Last year, cable market share fell very slightly, and the cable operators' main focus appears to be boosting revenues from new content-related services taking advantage of a platform fitted for media provision. In relation to fibre, following the initial investments made mainly by a number of alternative operators, public authorities and utility companies, some incumbent operators are also planning to deploy FTTH in the future, which would allow the provision of very high data rates with symmetric bandwidth.

VoIP

ALONGSIDE the increased availability of broadband, VoIP services, whether provided through managed networks by operators or through unmanaged networks by using computer application programmes, are experiencing significant growth, mostly in enterprise but also in the residential segment. Alternative operators began offering this service to compete with traditional voice services, and incumbent operators have responded with their own offers. In an effort to overcome some of the disadvantages of VoIP versus traditional voice services, some companies are implementing a technology called "power over Ethernet", which would enable the provision of electrical power as well as data over existing Ethernet cables for powering IP telephone devices.

In February 2005, the Commission urged national regulatory authorities to take a “light touch” approach in order to allow innovative services and market structures to emerge. National regulatory authorities have adopted different approaches towards VoIP services in relation to a number of issues, such as consideration as traditional voice services, numbering, number portability, interconnection, quality of service, or provision of caller location information to emergency authorities.

There are different types of VoIP services: VoIP managed by the broadband access provider (called Voice over broadband or managed VoIP), VoIP managed by an independent voice service provider and VoIP as a usually free “personal voice application”. Currently, usage of VoIP is still limited but growing in several Member States. For instance, in a 2006 household survey, 10% of all German broadband customers stated they were using their broadband connection for telephony services. The figure was 14% for Finland and 10% for Luxembourg[17].

WIRELESS LOCAL LOOP (WLL)

Although DSL and cable technologies account for most of the broadband market share, wireless technologies may provide competition to the existing wired platforms, with the advantage in certain cases of offering mobility. For alternative operators this provides another way of access in addition to wholesale access to the incumbents’ networks. However, in a number of cases it is the incumbent or cable operators who have shown interest in WLL technologies in order to complement their existing offers from fixed networks. The deployment of wireless services will partly depend on the regulatory environment established by regulators, mainly the national spectrum policies.

Although the existing wireless technologies have not been extensively used to date, WiMAX technologies might have a larger impact in the market. WiMAX technologies might be used to provide voice and data services as fixed wireless access solutions, being especially attractive as a way of extending services to remote and sparsely populated areas, and to provide backhaul services as well as mobile wireless services, given that a new mobile standard has been developed.

As is the case with all wireless technologies, spectrum availability is essential for the development of WiMAX technologies. In July 2006, the French regulator auctioned spectrum on the 3.5GHz band, awarding 35 licences to different operators including some public authorities. Spectrum was auctioned in the same band in Germany in December 2006. Other Member States such as the UK are planning to assign additional spectrum during the coming year. In previous years, operators have conducted trial phases across the EU using “pre-WiMAX” equipment, and there are also currently some commercial services available, e.g. in Belgium, Denmark, Finland, Ireland, the Netherlands, Slovakia or the UK. In some Member States, such as the UK or Spain, operators have shown a renewed interest in existing licences previously awarded in those bands for other wireless services, which has prompted some merger and acquisition activity with companies holding such licences.

The role of radio spectrum in the electronic communications market has significantly increased and the Commission has been stressing the need to develop the European dimension and to coordinate the approaches for spectrum policy[18]. In November 2005, the Radio Spectrum Policy Group issued the Opinion on Wireless Access Policy for Electronic Communications Services (WAPECS) calling for action across Europe to allow more flexible use of radio spectrum for different electronic communications services.

In the context of spectrum liberalisation, the Commission services are working closely with the Member States in the Radio Spectrum Committee to develop a Commission decision that would effectively replace Directive 87/372/EC (GSM Directive) and achieve a consistent approach across the EU for a more flexible use of the relevant frequency bands. In this connection, several Member States have announced plans to expand the usage of the radio frequency bands originally reserved for GSM technology by allowing 3G mobile technologies or even other technologies capable of providing electronic communications services in those bands.

MOBILE TV

Operators are looking for new sources of revenue in mature mobile markets, and a number of trials carried out in the EU seem to confirm that there is demand for mobile TV services. Most subscribers are currently offered unicast audiovisual services over the 2.5G and 3G network. Moreover, mobile broadcasting services have recently been commercialised using DVB-H standard in Italy and Finland. In the future, mobile TV would benefit from more efficient transmission as a result of the evolution of 3G networks and the development of separate broadcasting networks, for which business models still need to be defined.

In some Member States, frequencies have already been assigned temporarily for trials or permanently. However, the availability of spectrum for further development of commercial services remains a key issue which could be delayed, depending on the standard and frequency band, until the switch-off of analogue TV release the ‘digital dividend.’ Another major issue, which will affect the development of these services and the launching of pan-European services, is interoperability amongst different networks and standards. The Commission plans to publish a Communication on Mobile TV by mid-2007.

REGULATORY DEVELOPMENTS

MAIN REGULATORY DEVELOPMENTS

At the heart of the 2002 regulatory framework for electronic communications lies the principle that undertakings should not be subject to ex ante regulatory obligations unless they have been found to be dominant in a relevant market, on the basis of a thorough market review by their national regulatory authority (NRA).

This market review process has made significant advances since the last implementation report. Most NRAs have now substantially completed the first round of market analysis and review of obligations and notified their results to the Commission and other NRAs in accordance with Article 7 of the Framework Directive. This has created a genuine body of know-how and experience which can be shared by NRAs across the Community.

In general, it is still too early to make a definitive assessment of the effects on the market of the regulatory obligations imposed as a result of the market review process, given that the practical implementation of the resulting obligations is still work in progress.

Indeed, in a number of Member States there have been significant delays in the practical implementation of remedies, as well as divergence in the nature of the remedies chosen following completion of the market analyses and findings of significant market power (SMP). These are key factors that in practice have restrained the framework from exercising its full effect.

Delays can be caused by a variety of factors : legal challenges (including appeals); procedural delays on the part of NRAs in imposing definitive remedies (for example, by adopting a completely different timetable for decision making on this issue); or insufficient detail in the formal obligations imposed. In the latter case, legal certainty and the ensuing demand from market entrants for regulated offers may not materialise until the details of implementation have been determined by other means, such as dispute resolution or a further phase of regulatory action by the NRAs. In either case, this can take months or even years. The Commission services regret the legal uncertainty and lack of consistency in the application of remedies across the Community that may result.

At the same time regulators need to strike a balance between the level of detail to be included in legally binding regulatory obligations (with all the complexity and administrative burden that this may entail) and the simplicity and ease of access to regulated products that is needed in order to ensure market take-up. Some elements of the implementation process are arguably more effectively dealt with by other, more flexible and consensual, methods.

In a further development of this more flexible approach, some authorities consider that the economic objectives of ex ante regulation can be best achieved by organisational changes to the regulated undertaking’s business, in order to achieve genuine non-discriminatory access to its key infrastructure and to create clearer incentives for all parties. This approach has been seen in particular in the functional separation of the United Kingdom fixed incumbent’s local access network from its retail and other businesses, which resulted from a process of negotiation between the undertaking concerned and the United Kingdom’s NRA. Similar organisational remedies are under consideration in Italy and Portugal (in the latter case as a condition to a takeover bid for the fixed incumbent).

Nevertheless such organisational approaches should go hand in hand with the effective implementation of other clearly defined regulatory obligations (such as non-discrimination, access and cost-orientation).

In general the majority of relevant markets reviewed by the NRAs to date have resulted in a finding of significant market power and the need to impose on the dominant operator(s) a range of obligations sufficient to remedy the lack of effective competition.

However, a core of markets can be identified in which the removal of regulatory obligations has been possible or where the relevant market has remained unregulated following a finding that the market was effectively competitive. In particular, findings of effective competition have been made in a number of retail calls markets in different Member States. The market for mobile access and call origination is also an example of a market where most NRAs have found that competition is effective. De-regulation can also take place where an NRA considers that, although the market is still not effectively competitive, market conditions and/or the availability of regulated offers elsewhere in the value chain have allowed scope to lighten the regulatory burden on the SMP operator.

A tendency can also be seen in some Member States, where the formal implementation process is perhaps more established, whereby a process of negotiation between the SMP operator and the regulator results in the latter offering voluntary commitments (e.g. with regard to the availability or pricing of specified products) as an alternative to the full application of the regulatory procedure. For example, this has happened on a number of occasions in the United Kingdom. It is also worth noting that Italy has adopted legislation enabling the NRAs to enforce voluntary commitments.

Although this approach has significant advantages in terms of flexibility, certainty and speed of application, care needs to be taken to ensure that the safeguards in the framework relating to transparency and public consultation are not undermined and that third parties do not feel excluded from the decision making process.

In general, the NRAs have consolidated their position and authority as the implementation process has unfolded and they have gained experience in the process of regulating the sector. The independence of the NRA from the ownership interests in the sector is now established in most Member States. However, this can still be an issue in some Member States, for example where the head of a regulatory authority can be (or even has been) replaced by the Government without explanation or reference to any pre-defined criteria. The dissolution of an NRA and/or the transfer of its functions to another legal entity without due explanation or justification would, in the Commission services’ view, raise similar concerns in such circumstances. Finally, the view that a regulator must be free to carry out its tasks without undue political interference is gaining traction across the Community. This is an area where greater clarity in the regulatory framework could be beneficial.

An issue which arises from an overview of regulatory activity across the Community in the last year relates to the powers of the regulatory authorities to enforce the obligations imposed on operators under the framework, and their effective use. The Commission is considering whether in some countries the level of the penalties which regulators can impose is sufficient to act as a genuine deterrent for large operators. In others, the effective use by the regulator of its enforcement powers may be open to question, whether due to the administrative burden that enforcement entails or a lack of confidence in the legal outcome following likely legal challenges. This would in particular be a problem where the original obligations imposed are not clear and precise enough to make them easy to enforce.

Although action has been taken in some Member States to address the procedural issues that have contributed to the length of appeal processes , this still can constitute a significant factor in delaying the practical effect of the framework in a number of Member States.

While at one end of the scale some NRAs still have work to do in defining and enforcing obligations arising out of the first round of market analysis, a number of regulators are beginning to address the issue of how regulatory obligations will need to evolve in order to resolve competition problems arising from the development of new technologies and new services. An example of this is the planned roll-out of next generation networks, based on IP protocols. Timely action is needed in this regard in order to ensure that all market players (not just the fixed incumbent) have the confidence to invest in new infrastructure and services, and can develop their business cases accordingly. The regulatory environment should adapt in such a way that access to the infrastructure needed to service markets which are not effectively competitive remains available at the appropriate level and that competing operators are not prevented from evolving to take advantage of the new opportunities offered (for example by allowing for migration paths to the new products). Initiatives to address these issues have been launched, for example, in France, Ireland, Italy, the Netherlands and the United Kingdom.

Over the reference period an increased focus by some NRAs on consumer issues has been apparent, particularly where the initial market review process has been substantially completed. Many of these consumer issues are perennial issues that nevertheless require renewed regulatory oversight and enforcement to ensure that competition is allowed to develop in an orderly environment. NRAs have taken initiatives, for example, to address the mis-selling of retail products, unlawful action to save or win-back consumers from rival service providers, issues of pricing and transparency in relation to calls to value-added or premium rate services, the publication of quality-of-service parameters and compensation mechanisms for failure to meet specified quality levels.

As competition intensifies in the retail broadband markets, operators have been seeking to gain competitive advantage and respond to demand by offering a full range of communications services to their customers, combining internet access and audio-visual (IPTV) services as well as fixed telephony and even mobile services in a single package. This bundling of services can raise concerns both for consumers and competitors where dominance persists in a given market, and is likely to be an increasing focus of attention for regulators and competition authorities in the future. The leveraging of dominance from one market into another associated market may extend to the exclusive acquisition of premium content for inclusion in audio-visual broadband or mobile services.

In general, regulators have not sought to impose obligations on operators without using the processes and safeguards provided by the regulatory framework, in particular the market reviews conducted in accordance with Article 16 of the Framework Directive. However, the Commission is keen to ensure that this remains the case. For example, the Commission services are looking into a proposal from the Polish regulator to impose MVNO access on one mobile network operator as part of a dispute resolution procedure, without any corresponding finding of significant market power in the relevant market, as well as an obligation to meet reasonable network access requests attached to the right of use for radio frequencies of a 3G operator in Ireland.

REGULATORY ENVIRONMENT

Transposition issues

Transposition of the requirements of the EU regulatory framework into the national laws of the Member States was substantially completed with the adoption by Greece of the relevant primary legislation in February and June 2006.

However, it would appear to be the case that in a number of Member States the adoption of further secondary legislation or amendment of existing laws to refine and perfect the legal framework is still awaited. For example in Belgium part of the applicable secondary legislation is still based on the previous Telecommunications Act and needs to be updated (e.g. regarding the regulator’s internal rules). In the Czech Republic the authorities are preparing secondary legislation for the further implementation of rules relating to 112 caller location information, numbering and the national frequency plan. In Greece, most of the necessary secondary legislation is still lacking (such as revised procedures for the grant of mast permits). In Hungary, repeal is still awaited of the secondary legislation which permits the fixing, without any prior market analysis, of maximum retail prices for access to internet services via the telephone network and for broadcasting services still has to be repealed.

On the other hand some Member States have already updated their legislation. For instance in Denmark the legislation governing appeal procedures has been amended, in line with Article 4 of the Framework Directive, to ensure that no automatic suspension of the regulator’s decisions takes place on appeal. In the Netherlands, legislation concerning rights of way has recently been updated and improved, by providing for a structural separation between ownership and decision-making powers within municipalities providing electronic communications networks, coupled with restrictions on local authorities providing electronic communications networks without specific safeguards. In France, new legislation on consumer issues and broadcasting (digital switchover) is proposed.

In Germany the recently adopted amendment to the German Telecommunications Act would exempt new markets from regulation unless criteria more restrictive than those allowed by the Community framework are met. The Commission has expressed serious concern at this development.

New Member States

In accordance with the Treaty of Accession of Bulgaria and Romania signed in Luxembourg on 25 April 2005, those two countries became Member States of the European Union on 1 January 2007.

Bulgaria

In December 2006, Bulgaria notified its law on telecommunications of 10 October 2003, as last amended in June 2006. The Bulgarian authorities themselves consider this to be a partial transposition of the EU regulatory framework. The Commission is in the process of examining this measure.

During the accession negotiations, the chapter on electronic communications and information technology had been earmarked as an area where further progress was needed. Issues include, for instance, whether the national regulatory authority, a corner stone of the regulatory framework, had been given full capacity and independence to carry out its regulatory tasks; whether secondary legislation enabling market reviews is in place; and whether effective cost-accounting mechanisms, an important prerequisite for accurate and fair obligations, are in place. Bulgaria has not yet adopted a national broadband strategy.

To bring Bulgarian law into compliance with the EU regulatory framework, draft legislation is being debated in Parliament. In that context, regular exchanges have taken place between the Bulgarian authorities and the Commission. The Commission services will continue to monitor closely the progress made by Bulgaria.

Romania

Romania had already adopted its primary and secondary legislation in the field of electronic communications on the basis of the 2002 regulatory framework. Law no. 304/2003 on the universal service and users` rights relating to electronic communications networks and services, Law no. 239/2005 on the amendment and completion of several normative acts in the field of communications, the Government Emergency Ordinance no. 79/2002 on the general regulatory framework for communications and the Government Ordinance no. 34/2002 on access to the public electronic communications networks and to the associated infrastructure as well as their interconnection, together constitute the core body of Romanian legislation for the electronic communications sector. So far the Romanian authorities have notified to the Commission national laws which they consider as constituting full transposition of the Framework, Access, Authorisation and e-Privacy Directives, whilst in respect of the Universal Service Directive only partial transposition has been notified.

Romania has not yet adopted its national broadband strategy.

As a result of the early transposition of the 2002 regulatory framework by Romania, market analysis of several markets was carried out before accession. As Romania was not a Member State at the time, the Romanian authorities could not notify the draft measures resulting from the market analysis to the Commission for comments as provided for by the 2002 regulatory framework. Consequently, in accordance with the 2002 regulatory framework Romania is required to ensure that, as soon as possible after its accession and periodically thereafter, the NRA notifies draft measures to the Commission under Article 7 of the Framework Directive.

The Commission will closely follow Romania’s implementation of the entire 2002 regulatory framework. Nevertheless special attention will be given to such issues as the independence of the national regulatory authority, implementation of the provisions on universal service and the completion of the market analysis process.

Organisation of the NRA

In broad terms the NRAs across the Community are increasingly establishing a status and an authority consistent with the tasks assigned to them by the regulatory framework. However, there are a number of individual cases in which issues relating to their powers and objectives still have to be clarified. For example in Greece no NRA has yet been designated with competence to conduct the review of the broadcasting transmission market. In Spain, the CMT has appealed against certain legislative acts on the basis that these acts unduly limit its powers.

Powers and resources

One of the key powers which NRAs need to have available in order to ensure that the national framework for which they are responsible is implemented effectively, and produces the intended results for competition and consumers, is the power to enforce their own decisions and the wider sectoral obligations. Yet this is an area in which issues are still apparent in many Member States. Unless consumers and market players are confident that obligations will be actively followed up and enforced by regulators, the safeguards for competition and consumer protection put in place by the framework will be deprived of much of their effectiveness.

In Belgium and Portugal questions have been raised concerning the NRA’s exercise of its enforcement and fining powers in the event of breach, while in Ireland it would appear that the regulator’s enforcement powers are limited and the absence of a credible threat of enforcement action, combined with the length of appeal proceedings, has delayed the practical effects of the regulatory decisions taken so far. In Malta the scope of the enforcement powers of the regulator with regard to access and interconnection disputes, and the low financial limits for fines are also open to question. In Italy the lack of deterrence in the level of financial penalties which the regulator can impose has been addressed by new legislation. Likewise in Estonia and Greece, where there are limitations on the powers of NRAs to impose financial penalties. The Commission services are looking into the question of whether the NRA in Slovakia has sufficient means to investigate whether reference offers are fully in line with the remedies imposed. In the United Kingdom the NRA’s lack of power to impose interim measures in dispute resolution procedures limits their effectiveness in the eyes of alternative operators. In Finland and France, however, legislative amendments should strengthen the powers of the NRA, including in the area of consumer contracts. In Hungary the increasing imposition of significant fines by the NRA on operators who breach their regulatory obligations has been noted.

The issue of ensuring sufficient resources for the NRAs to ensure that they can carry out the full range of tasks conferred on them by the Community framework is still a factor in some Member States. A lack of human resources is reported in several countries, such as Estonia, Greece and Italy. In Slovakia the NRA is seen to be suffering from a lack of resources in terms of both personnel and finances. In particular, it does not have its own dedicated financial resources, but is dependent on the Ministry’s budget. In Sweden the agency with responsibility for consumer issues reported severe staffing problems as a result of its relocation.

Independence

The effectiveness of a national regulator depends on both the perception and the reality of its independence from external influences that may affect the objectivity of its decision making and enforcement action. The notion of independence in this regard applies not only to the need for an arm’s length relationship with commercial interests in the sector, but also to the need for transparency and impartiality in the exercise of its functions. One of the key means to achieve these objectives is the separation of regulatory and ownership functions within the administrative structures of the Member States. The Commission services are still looking into this issue in Luxembourg, Slovakia and Lithuania, and also in Austria in relation to the functions of government in the broadcasting sector.

Undue influence from political forces on the exercise of the regulator’s responsibilities could also result in a breach of the impartiality and transparency requirements in circumstances where there is the potential of overlapping regulatory and ownership functions. In this regard, in Poland concerns have been raised with regard to independence and impartiality of the new NRA, particularly in the light of the abolition of its predecessor and the scope of the Government’s ongoing powers of dismissal. The Commission services will consider this issue carefully, also in relation to other Member States.

Co-operation with National Competition Authorities

Member States must ensure consultation and cooperation between the NRA and the national competition authority on matters of common interest. In several Member States, this cooperation follows a specific protocol signed between the different authorities. However, the division of tasks and responsibilities (e.g. ex ante versus ex post regulation, settlement of price squeeze issues and complaints) appears not to be clear in certain cases (Luxembourg, Malta, Slovenia). Close cooperation is also needed between the two authorities in the context of merger cases, where the NRA may be requested by the NCA to provide an opinion on the impact of a merger in the regulated electronic communications sector (e.g. France, Portugal).

Dispute Resolution

With respect to the resolution of disputes arising between operators, NRAs have to issue binding decisions within a maximum timeframe of four months in accordance with Article 20(1) of the Framework Directive. While in some countries (e.g. Sweden, United Kingdom) disputes are generally resolved within the four-month deadline set by the Directive, a number of Member States exhibit different trends. Where proceedings are lengthy and decisions do not really meet market and business needs, operators tend to abandon dispute resolution in favour of other mechanisms. Concerns in this regard have been expressed in Belgium, Italy, and Slovakia. In some cases, the NRA might not be inclined to intervene, given the resources it would need in order to do so. Dispute resolution also becomes effective when the NRA is able to enforce its decisions whenever necessary. The Commission is examining whether this is the case in Ireland. Examples of robust and effective decisions have been reported in Spain (NRA decision of November 2006 fining the incumbent for voluntary obstruction of new entrants’ services) and the Netherlands (NRA decision of November 2006 imposing administrative penalties on the incumbent and granting compensation to individual operators).

However, NRAs may decline to resolve disputes (for a certain time) when there are alternative dispute resolution mechanisms, e.g. mediation that would be more effective in helping to resolve the dispute (Article 20(2) of the Framework Directive). At this stage, much can depend on the NRA’s ability, de jure or de facto, to intervene as a mediator in order to prevent disputes arising between operators. Sometimes a swift decision on interim measures may also suffice. The clear determination of the NRA to encourage market parties to consult each other or to apply informal mediation procedures before moving to formal dispute resolution may also reduce the number of disputes to be dealt with (Netherlands, Hungary and Slovenia). It is also worth mentioning that operators can use more informal mechanisms to report their positions to the NRA (Portugal) and that associations of operators may provide internal mechanisms for dispute resolution before referring the case to the NRA (Czech Republic).

Appeals

The right to effective judicial protection - one of the fundamental principles of the Community legal order - is embodied as regards the field of electronic communications in Article 4 of the Framework Directive. Under this provision, effective mechanisms must exist at national level in order to ensure that any user or undertaking providing electronic communications networks and/or services, affected by a decision of a NRA, has the right to appeal against that decision.

The large number of appeals and the length of the proceedings are still seen as a major issue in many Member States. This is the case, for instance, in Italy and Portugal, where appeals may often take four to six years or more to complete. In Greece the highest administrative court has not issued a single decision, and some decisions are still pending since 2001. Such delays mean that operators can avoid complying with their regulatory obligations. A review of the appeals procedures (Ireland) or a reform of the judicial system (Portugal) or possibly granting judicial competence to another appeal court (Greece) could improve the situation, but the effects have still to be examined. Lengthy procedures may also produce a system, as in Italy, in which urgent provisional measures may be requested and are often granted as a remedy to alternative operators who are dissatisfied with the way the NRA is dealing with the incumbent’s practices. Limitation of the appeal proceedings to one instance (or two instances down from three, like in Sweden) would help by reducing the length of time involved.

In some Member States, market review decisions are systematically appealed, which reduces legal certainty and commercial predictability in the market (e.g. Belgium, Italy, Cyprus, Hungary, Netherlands, Poland, Slovakia and Sweden). Repeated and systematic recourse to appeal procedures, often used by operators against all types of decisions, may also lead to a regulatory environment that maintains the status quo and de facto favours the position of the incumbent or other designated SMP operators.

In principle, NRA decisions must stand pending the outcome of the appeal, unless the appeal body decides otherwise. However, in some Member States the NRA decision is suspended when the appeal is against the imposition of a fine or sanction (Belgium, Poland). In Portugal, the decision stands when the NRA submits a statement that non-implementation of the decision would affect the public interest. In two Member States (Czech Republic and Slovakia), decisions normally stand when they are challenged at the level of the court but suspension is automatic when the appeals are lodged internally (at the level of the board of the NRA) against a first instance decision adopted by an internal department or by the NRA chairman. The Commission will examine whether this provision is in line with the requirement of the regulatory framework. In several Member States, legal rules or court practices have been amended and automatic suspension of the NRA decision in the event of appeal is no longer applied (Denmark, Lithuania, Austria and Poland). In Poland however, it appears that decisions (other than those imposing fines) can no longer be suspended by the appeal body, since they are given immediate effect by law.

As part of the ongoing review of the regulatory framework the Commission is examining how to make appeal procedures run more smoothly, including how the option for suspension of decisions on appeal can be clarified, so that it occurs only when the proper administration of justice would otherwise be undermined.

When issuing a judgement, the appeal body must take into consideration not only formal elements but also the merits of the case. In several Member States, NRAs and operators point to the necessary expertise required from appeal judges to deal with complicated electronic communications matters. Solutions put in place by Member States might take one of several forms: designation of a specialised appeal body (United Kingdom), designation of more and specialised judges (Poland) and the training of judges (Poland). The Commission services also organise seminars for national judges on a regular basis, in order to promote best practice across the Member States.

Another issue in some Member States is the effective right of third parties affected by a decision of an NRA to appeal against that decision. The Commission considers that the concept of undertakings “affected” by a decision within the meaning of Article 4 of the Framework Directive goes beyond the addressee of the decision. Specific cases include Sweden, where a decision may only be appealed by the person whom it “concerns” (which in Swedish law appears to be a narrower concept than “affected”), unless there are specific regulations or statements setting out that interested parties should be given an opportunity to respond or that certain interests should be taken into account. A similar issue has been reported in Belgium, where in several cases parties other than the addressee in several cases have not been allowed to appeal against an NRA decision, or to intervene in an action brought by the incumbent (related to the incumbent’s reference offer). The appeal court considered that competing operators are not directly and individually concerned by the NRA decision as is required by general procedural law.

In three cases, the issue of the right of appeal for third parties has been referred to the European Court of Justice for a preliminary ruling.[19] The Commission considers that it is not possible to give a general answer to the question of who, other than the addressee, is affected by a decision of the NRA. Instead, each individual situation has to be closely examined with respect to the rights of the undertaking concerned, its specific relationship with the undertaking which is directly concerned by the NRA decision (e.g. by an SMP designation) and the content of the decision. Article 4 of the Framework Directive seems to cover a wide range of NRA decisions and should therefore apply at least to a competitor which has established, vis-à-vis the addressee of the decision, contractual rights which are directly based on SMP obligations previously imposed on the addressee.

Decision making

The first round of market analysis and review of obligations following the date of application of the regulatory framework for electronic communications has now been substantially completed across the Community, with most NRAs having notified the Commission and other NRAs of their proposals with regard to all but a few of the 18 relevant markets identified in the Commission Recommendation[20] on relevant markets. The second round of market reviews has already begun in some Member States (e.g. Slovenia, Hungary, Finland and the United Kingdom.

While the progress made in 2006 towards completing the first round of market reviews represents a major step towards the goal of ensuring a fully functioning regulatory framework which guarantees a common set of principles consistently applied across the Community, it is not sufficient in itself to achieve that goal. It is also essential that NRAs follow up with the rigorous implementation and enforcement of the remedies adopted as a result of the market review process. For example, in Portugal the publication of the leased lines reference offer took place a full year after the relevant markets were reviewed and the wholesale line rental offer did not become available until one and a half year after it was mandated. In a number of Member States the practical implementation of the remedies selected still remains to be addressed. For example in Cyprus all but one of the market reviews had been completed by 1 November 2006, but remedies had been imposed in only four markets.

In some cases the level of detail provided in the notified measures is not sufficient to ensure the legal certainty and transparency needed to implement remedies effectively and so create positive effects in the market. As an illustration, cost orientation obligations are of limited use unless they are backed up by a rigorous and transparent cost accounting system/methodology and certified by an independent entity. Similarly, where reliable and validated cost accounting information is lacking, allegations of the existence of a price squeeze are more likely to arise and to be more difficult to disprove. The absence of such cost orientation systems or delays in their certification continue to be an issue in the Czech Republic, Italy and Luxembourg.

There are nevertheless encouraging signs that where remedies are mandatory on a finding of significant market power, a consistent pattern of implementation is beginning to emerge across the Member States. Carrier selection and carrier pre-selection[21] are now available by law across the whole EU25, even if issues over the conditions for their provision persist in some Member States.

In some cases, delays in the NRAs’ decision-making can be attributed in part to the lack of a clear division of responsibilities. For example, in Belgium, the implementation of broadband and broadcasting related remedies (including with regard to LLU) has been delayed by the complex division of responsibilities bet