99/287/EC: Commission Decision of 8 July 1998 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case IV/M.1069 - WorldCom/MCI) (notified under document number C(1998) 1887) (Only the English text is authentic) (Text with EEA relevance)
Date: 1998-07-08
Institutions: European Commission
Subjects: European Economic Area, economic concentration, restriction on competition, single market, telecommunications industry, transmission network

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 8 July 1998

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

(Case IV/M.1069 — WorldCom/MCI)

(notified under document number C(1998) 1887)

(Only the English text is authentic)

(Text with EEA relevance)

(1999/287/EC)

THE COMMISSION OF THE EUROPEAN
COMMUNITIES,

whereas:

Having regard to the Treaty establishing the European
Community,

Having regard to the Agreement on the European
Economic Area and in particular Article 57(2)(a)
thereof,

regard

to Council Regulation

(EEC)
Having
No 4064/89 of 21 December 1989 on the control of
last
concentrations
amended by Regulation (EC) No 1310/97 (2), and in
particular Article 8(2) thereof,

undertakings (1),

between

as

Having regard to the Commission Decision of 3 March
1998 to initiate proceedings in this case,

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

the Advisory

(1) OJ L 395, 30.12.1989, p. 1; corrigendum OJ L 257,

21.9.1990, p. 13.

(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 122, 4.5.1999.

(1) On 20 November 1997 WorldCom,

jointly

((cid:28)MCI’)

notified

Inc.
and MCI Communications
((cid:28)WorldCom’)
Corporation
an
operation by which the two companies would
merge within the meaning of Article 3(1)(a) of
Regulation (EEC) No 4064/89 ((cid:28)the Merger
Regulation’). As the agreement in question was
entered into before 1 March 1998, the Merger
Regulation was applied as it stood prior to the
amendment made
(EC)
by
No 1310/97.

Regulation

(2) On 18 December 1997,

the Commission
informed the parties that further information
was required to complete the notification, and
that
suspended
pending receipt of the required information. On
3 February 1998, the parties responded, and the
notification was declared complete.

limits would be

time

the

(3) By decisions of 11 December 1997 and
24 February 1998, the Commission ordered the
continuation of the suspension of the notified
concentration pursuant
to Article 7(2) and
Article 18(2) of the Merger Regulation until a
final decision was reached in this case.

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(4) On 3 March 1998, after examination of the
notification, the Commission concluded that the
operation fell within the scope of the Merger
Regulation and raised serious doubts as to its
compatibility with the common market, and
decided to initiate proceedings pursuant
to
Article 6(1)(c) of the Merger Regulation.

I. THE PARTIES

offered

primarily

(including

communications

(5) WorldCom and MCI are both publicly traded
US-based
companies.
telecommunications
WorldCom provides services to businesses and
private consumers such as switch and dedicated
international, long distance and local voice and
Internet
data
services
its
subsidiaries such as UUNet, ANS, CNS, and
GridNet), (cid:28)800’ services, calling cards and debit
cards. It has a number of subsidiaries in various
European countries and is constructing fibre
links in a number of European capitals. MCI
customers a
offers businesses and private
portfolio of integrated services including long
distance, wireless,
local paging, messaging,
information services, outsourcing and advanced
global communications including Internet.

through

II. THE OPERATION

a

(6) Under the terms of an agreement of 9 November
((cid:28)the
1997 between WorldCom and MCI
Merger Agreement’), MCI will be merged into
TC Investments Corp., a Delaware corporation
and a direct wholly-owned subsidiary of
WorldCom. Each share of MCI ordinary
common stock will be converted into a right to
receive
of
WorldCom common stock, and each share of
MCI Class A common stock owned by British
Telecommunications plc ((cid:28)BT’) will be converted
into a right to receive an agreed cash sum in US
dollars. TC Investment Corp. will continue as
the surviving corporation under the name (cid:28)MCI
Communications
and
WorldCom’s name will be changed to (cid:28)MCI
WorldCom’.

Corporation’,

number

certain

shares

of

(7) MCI will also lose its voting rights in the
Concert joint venture with BT, (including its
shareholder voting rights) from the moment the
WorldCom/MCI merger is put into effect. MCI
will dispose entirely of its interest in Concert

within a period thereafter of no longer than 127
days. Its relationship with Concert from then on
will
non-exclusive
to
distributorship arrangement.

limited

be

a

III. THE CONCENTRATION

(8) The operation described in paragraph 6
constitutes a merger, and hence a concentration,
within the meaning of Article 3(1)(a) of the
Merger Regulation.

IV. COMMUNITY DIMENSION

to

undertakings

(9) After making adjustments to reflect turnover
attributable
or
disposed of since their last respective sets of
audited
accounts, WorldCom’s worldwide
turnover for 1996 is in excess of ECU 4 000
million, and MCI’s worldwide turnover for the
same period is in excess of ECU 14 000 million.

acquired

(10) The

of

by

earned

revenue

determination

Community-wide
turnover under the Merger Regulation involves
the allocation of turnover on a geographical
basis. There are various possible methods of
telephone
allocating
companies providing services which generate
revenue outside the country in which they are
based. On all the variants proposed, WorldCom
and MCI each have Community-wide turnover
exceeding ECU 250 million. WorldCom and
MCI do not both achieve more than two thirds
of their Community-wide turnover within one
and the same Member State. Accordingly, the
concentration has a Community dimension
within the meaning of Article 1 of the Merger
Regulation.

V. COOPERATION WITH OTHER
COMPETITION AUTHORITIES

(11) The WorldCom MCI merger proposal was also
notified inter alia, to the Antitrust Division of
the United States Department of Justice ((cid:28)DoJ’).
in
The parties granted appropriate waivers
order to enable the DoJ and the Commission to
exchange information supplied by the parties to
the two agencies. Many firms who responded to
parallel enquiries from both the DoJ and the

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Commission were prepared to let
the two
agencies exchange information, or supplied the
same submission to both.

1. Carrier services

(12)

of

between

cooperation

In the course of the investigation and analysis
of the merger proposal there was a considerable
degree
two
involving preliminary exchanges of
agencies,
views on the analytical framework, coordinated
requests for information, the attendance of DoJ
observers at
the Oral Hearing, and joint
meetings and negotiations with the notifying
parties.

the

(15)

to

related

transit,

services

relevant

In the Unisource decision, the market for carrier
services was described as comprising the lease
transmission capacity and the provision
of
of
third-party
telecommunications traffic carriers and service
services are
providers. The most
traffic
switched
services
hubbing offerings and reseller
for
international
service
providers
telecommunications
their own.
since the parties’ combined share
However,
would not have been high enough to raise
competition concerns (as discussed below), the
question of precise market definition may be
left open.

without
facilities of

dedicated

transit,

VI. COMPATIBILITY WITH THE COMMON
MARKET

2. Internet-related services

A. CARRIER AND INTERNET SERVICES

Atlas (5),

(13) The parties argued that the relevant product
markets for the assessment of the case should
be based on those used in previous telecoms
notifications considered by the Commission,
BT/MCI(I) (4),
and
including
Phoenix/Global One (6), Uniworld (7)
and
Unisource (8). The parties contended that, using
such definitions, there were overlaps in only
corporate
three
telecommunications
(which included
voice and data packages, using, for example,
X25, frame relay and Internet protocols, VPN
(global virtual private networks),
free,
selected card and simple resale services, and
dedicated
services
(which included calling card, prepaid services
and value added services); and carrier services.

relevant product markets:

transmission);

traveller

services

toll

traveller

(14) On the basis of the data supplied by the parties,
it appeared that,
services and
for
corporate communications services, the parties’
combined market shares would have been no
higher than a few percentage points, no matter
how the geographic markets were defined.
Enquiries made of
third parties appeared to
confirm this picture, namely that any overlaps
thought to arise on these two markets were not
seen as a source of competition concern.

(4) Case IV/34.857, OJ L 223, 27.8.1994, p. 36.
(5) Case IV/35.337, OJ L 239, 19.9.1996, p. 23.
(6) Case IV/35.617, OJ L 239, 19.9.1996, p. 57.
(7) Case IV/35.738, OJ L 318, 20.11.1997, p. 24.
(8) Case IV/35.830, OJ L 318, 20.11.1997, p. 1.

(16) A significant number of

to

the

services

Commission’s

series of markets,

third parties who
responded
initial
consultations argued for the definition of a
for
separate market, or
Internet-related
from
markets for more general data communication
services. The
evidence gathered tended to
support the view that the Internet as a whole
might not be a single market but a series of
markets. Before turning to questions of market
definition,
some
is necessary to set out
explanation of how the Internet operates.

distinct

as

it

(i) The Internet

facility.

research

(17) The (cid:28)Internet’ evolved initially in the United
States of America as a means of interconnecting
discrete local area computer networks, such as
those which might be found in an academic or
government
The
interconnecting structure, which was run along
telephone cable networks, was developed with
US Government assistance, notably from the
National Science Foundation ((cid:28)NSF’). The aim
of interconnection was to enable the various
networks, or perhaps more accurately the
individual computer terminals or (cid:28)hosts’ within
each network,
to communicate with one
another. (The term (cid:28)network’ does not connote
any particular size of operation.
It can be
applied to systems varying in size from small
local area networks installed in, say, a single
office building with a few tens of final user
terminals
system of
international or global
interconnections with
thousands of subscribers.)

extensive

an

to

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(18) Networks can be run according to varying
standards. The ability to send and receive data
in an intelligible form between the networks
comprising the Internet is only possible because
all the data is exchanged according to a set of
common protocols, of which the TCP/IP
protocol/Internet
protocol
protocol)
important. Data sent
within a network could of course be transmitted
according to a local protocol but all Internet
communications with external networks would
have to be via the TCP/IP format.

(transfer
is the most

control

their

(19) The traffic thus exchanged consists of electronic
messages broken down into a series of discrete
data packets, each of which is sent separately
through the system. Each data packet bears
routing information enabling the
switching
equipment through which it passes to know to
where it should be sent. The packets will be
reassembled upon arrival at
intended
destination, that is, another computer terminal
somewhere else on the Internet, so that the
message can be read by the computer user. Such
packets can travel direct from the originating
network to the network of final destination if
there is a direct connection between the two
networks
intermediate
networks if there is not. The particular types of
switching equipment ((cid:28)routers’) through which
the packets must pass are equipped with the
ability to recognise the address on the packet,
and to guide them on to the next switching
point in their journey.

concerned,

via

or

(20) The data sent via Internet can take several
different forms, for example it could be mail
transfers (electronic mail messages between two
end-users of
file transfers
the Internet), or
(transfers of data files either between two
end-users or from a publicly available site to an
end-user). A more recent development than the
Internet itself has been the development of the
world wide web. This is an agreed format
(Hyper-Text Markup Language, or HTML) for
displaying and establishing links between data
on the
(cid:28)Web sites’ are publicly
Internet
advertised address
displaying data using HTML which other users
can access. They contain displayed information
or
services, or
communicate with other visitors to the same
site. New ways of using the Internet are
constantly being developed, and efforts are
currently underway to provide voice and fax
telephony using the Internet protocol.

spaces on the

to purchase

allow users

Internet.

(22)

(or

the

consists

fast packet

essentially of

telecommunications
fibre). The
cable
underlying physical structure of most Internet
networks
same
networks used for conventional switched voice
telephony, as the traffic can be carried on the
same cables. However, Internet data packets are
not normally sent over public switched circuits
and will either travel on private leased lines, or
on (cid:28)virtual network’
switching
services provided by telephone operators such
as frame relay, X25 or ATM (asynchronous
transfer mode). The points of interconnection
switches
specialised
require
routing
and
to be able to identify
(routers)
equipment
them to the
Internet packets and to point
appropriate path out
to the next point of
Internet messages can also be
intersection.
routed over
the traditional public switched
telephone network (PSTN), via modems placed
at the points of entry and exit to the PSTN.
However, the need to hold a switched telephone
circuit open for the duration of the connection,
particularly for
transmission,
removes most of the economic advantages of
using packet switched data transmission. As
Internet
traffic and capacity demands have
grown, the industry has tended to rely less on
facilities originally installed for voice telephony.
Newer networks, and upgrades to networks, are
increasingly having to be completed with large
capacity cable facilities conceived specifically
with Internet use in mind.

long distance

to

the

similar

connected

the way

In its early pre-commercial days the Internet
had a clear hierarchical structure, with local
networks such as internal university networks
connected to regional networks which in turn
long-distance
were
to
transmission capacity (or the (cid:28)backbone’
link)
operated by the NSF. Data could be sent in a
in which
manner
conventional switched voice telephone traffic is
handled. Traffic originating on individual local
networks which could not be delivered on that
network would be sent up to regional network
level, and if not capable of being delivered there
or to another connected local network, would
be passed on up to the backbone. Once it had
travelled
of
it would
interconnection on the backbone,
make its journey down through regional and
local networks to the ultimate addressee.

relevant

point

the

to

(ii) Commercial operation of the Internet

(21) The connections within networks and between
networks are usually made over conventional

(23) As the NSF withdrew in the mid-1990s from
supporting the Internet, private companies took

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over the role of supplying the underlying long
distance connections which made the Internet
possible. Some of the initial regional networks
began to operate on a commercial basis, and
became Internet Service Providers ((cid:28)ISPs’), that
is, they offered Internet access services on a
commercial basis to paying subscribers. Other
commercial firms entered this market as ISPs
and brought new business
and domestic
subscribers. With each new connection the
Internet grew a little more. From the time of
withdrawal of the NSF, the Internet could no
longer be regarded as a hierarchy of networks
joined by a single unifying backbone, but as a
number of networks connected to different
requiring
backbones, all of
mutual
dependent
networks (or ISPs) were to be able to continue
sending traffic to one another.

the backbones
if

interconnection

the

initially

at NAPs

(24) The interconnections between backbones were
(National Access
made
Points), which were public
interconnection
points originally designated by the NSF. A NAP
consists of a building or space within a building
containing switching and routing equipment to
which operators can connect their networks,
and thereby interconnect with other networks
also present at the NAP. Physical connection
from the network to the NAP is usually made
by a cable connection (usually referred to as
(cid:28)backhaul’) between the NAP and the nearest
convenient node at a point on the network
concerned. These original NAPs were quickly
supplemented by other interconnection points
backbone
conceived
providers.
of
technically
interconnection points were not
NAPs in the strict sense of the term, and are
labelled by a variety of acronyms, such as
(MAE meaning
MAE-East
CIX
Metropolitan Area
or
fulfil
Internet Exchange), but
(Commercial
essentially the same function as a NAP. As the
reach of the Internet has grown, interconnection
points have also been set up outside the United
States of America. The great majority of
existing public interconnection points provide a
interconnect
facility
ISPs
bilaterally with other users, but
there is no
obligation on them to interconnect with any
particular ISPs at the NAP.

initiative
second

or MAE-West

Exchange),

at which

generation

This

can

the

of

at

the

such as
internal network of a large
commercial organisation or an academic or
public institution. Whatever the configuration
of the final user’s system, access to the Internet
is usually obtained by subscribing for access
services provided by an ISP.

the

over

public

(26) A physical connection is required between a
point of access, or node, on the ISP’s network,
terminals or point of
and the terminal or
connection of
the final user’s network. The
services provided by the ISP do not normally
extend to the provision of this connection. It is
switched
usually made
telephone network (known as (cid:28)dial up access’)
as and when required or, for larger user clients
with a need for more
continuous access,
through a permanent dedicated connection over
a private line (or its virtual equivalent), known
as (cid:28)dedicated access’. Use of the public switched
network requires modems on each end of the
portion of the line passed over the switched
network. A private line for dedicated access
could be provided by the ISP or the subscriber,
but it could also be rented off a local telephone
company, or
indeed anyone else with the
necessary installed fibre.

(27) The points of access to the ISP, whether modem
ports or dedicated access ports, are known as
POPs ((cid:28)points of presence’). In the case of dial
up access,
the POPs usually consist of a
telephone number on a PSTN exchange. It is
for an ISP offering dial up access to
usual
provide
subscribers with the possibility of
making their connection to the POP at local call
rates. Thus the ISP would normally have POPs
in all local exchange areas over which service is
to be offered, or, conceivably, provide toll-free
or long-distance call services at local call prices
(the latter sometimes being referred to as virtual
points of presence). In the case of dedicated
access, the POP is simply the point to which the
subscriber must bring a cable connection in
order to access its ISP network.

(25) As the Internet operates today,

the ultimate
consumer (or end user) of Internet services is
either an individual computer user, whether
business or residential, or a local area network

(28) The primary function of the ISP is to provide its
customers with access to the Internet at large
(Internet
(cid:28)connectivity’). Hence it must deal
with traffic generated either by the customer or
destined for him. Traffic sent by the customer

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to its ISP can either be terminated on the same
network, assuming it is intended for another
subscriber connected to the same network
(so-called (cid:28)internal’
traffic), or passed on to
another network ((cid:28)external traffic’). For most
networks the vast bulk of traffic is likely to
have to be passed on to another network for
delivery. If the originating network has a direct
connection with the network on which the
intended customer is to be found then the
traffic can be exchanged directly between the
two networks. But
two networks
if
concerned have no direct interconnection, then
some means must be found of passing the
traffic
intermediate
networks through which access to the desired
network can ultimately be reached. Traffic
which passes through intermediate networks in
this way is known as (cid:28)transit’ traffic. Every
successive network through which traffic is
passed introduces the risk of further delay, and
packet
is
therefore a premium on limiting the number of
(cid:28)hops’ through which messages have to pass.

through congestion. There

through one or more

loss

the

is

(29) The parties argued that the number of hops
through which a message has to pass bore no
relation to the number of networks through
which it
sent, but depended on the
architecture of the networks concerned. Thus a
message routed entirely within one network
might pass through more hops than a message
sent through a number of successive networks.
The essential point is, however, that an ISP is
able to control the number of internal hops
within its own network by appropriate design
of network architecture, but has no control over
the number of hops in external networks with
which it must deal. A network which is losing
its competitive edge because of an unduly large
number of internal connections or insufficient
capacity has
the possibility to remedy the
problem. A network depending on others for its
Internet
on
purchasing transit, has far less ability to rectify
the problem.

connectivity,

reliant

that

is

(iii) Interconnection

(30)

interconnection are
either
can

In physical terms the options available to any
relatively
network for
to
agree
limited. Two
interconnect directly with each other, or a
ISPs may agree on multilateral
group of
interconnection
point.
Multilateral interconnection has been tried on

common

ISPs

at

a

some occasions (notably at
Internet Exchange (CIX)) but
model which has been generally followed.

the Commercial
this is not a

the option of

(31) Broadly speaking there are four different ways
in which ISPs might agree to allocate the costs
and risks of interconnection. Such agreements
can provide for either restricted or unrestricted
transmission of traffic across the interface. For
each choice there is
traffic
exchange on a
settlement-free, or on a
payments basis. In practice the vast majority of
interconnections in use today use one of two
models, either they are peering arrangements in
which there are no settlements but there are
restrictions on the type of traffic which can be
exchanged, or they are transit arrangements, in
which there are no restrictions on the type of
traffic which can be exchanged, but payments
are made.

(a) Peering

(32) The precise terms of any peering arrangement
are essentially a matter to be settled between
the two parties concerned, but the usual form
of peering arrangement
is one under which
Network Operator A (or ISP A) agrees to accept
from Network Operator B (or ISP B) all traffic
originating from B’s customers which is to be
terminated on A’s network. In return, B accepts
a reciprocal obligation to terminate all traffic
originating from A’s customers and destined for
B’s network. Each party generally pays the cost
of (cid:28)backhaul’, that is, the connection from the
nearest node on his network to the point of
interconnection with the peer, and his own costs
associated with the interconnection itself.

In order

traffic which passes across

(33) Such peering arrangements are usually on a (cid:28)bill
and keep’ basis, that is to say that there are no
settlement payments levied by one side on the
other
the
for
to prevent either party
interface.
exploiting this arrangement, it is usual to find
that the peering agreement is limited so as to
prevent either party using it to hand off to the
other traffic destined for or coming from a third
party (that is, transit traffic). Thus, if A has a
peering agreement with B but not with C, and B
has a peering agreement with C, A cannot use
his peering agreement with B as a way of
getting B to pass his traffic to C. Similarly, A is

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not obliged to accept
from B any traffic
addressed to him but which he knows to have
originated from C.

(34) Until recently most peering took place at NAPs
or equivalent public interconnection points. The
precise rules on the form of interconnection
vary from one NAP to another. In most cases
(of which CIX or the Commercial
Internet
Exchange is a notable exception) there is no
automatic right or obligation on any user of the
NAP to interconnect with any other user of the
NAP. At most NAPs therefore, each user must
reach an individual bilateral peering agreement
with any and every other user at the NAP with
whom he wishes to exchange traffic. It is usual
for any ISP with claims to be a provider of
backbone services to need to interconnect with
other backbone providers at more than one,
and usually at several NAPs. The need for
connections at multiple NAPs has become more
acute as the traffic demands on individual NAPs
have increased, and congestion and delay at
NAPs has become a fact of life.

(37)

points

(known

interconnection

(35) Largely in order to avoid such problems, larger
players in the industry have begun to establish
private
as
(cid:28)private’ or (cid:28)direct’ peering) at which they make
direct bilateral connections with only one other
ISP. This arrangement avoids
the
problems associated with multi-occupancy at
the NAPs but also tends to create a separate
class of ISPs who are independent of the NAPs,
somewhat different
and who operate under
conditions to their NAP-bound competitors.

some of

flow, and technical support before peering will
even be considered. Some of the larger ISPs
have published (cid:28)peering policies’ which purport
to make their conditions for peering overt,
although ultimately the decision by an ISP as to
whether to peer with any other is a commercial
one, and any peering policy can only be a guide
to what they may or may not be prepared to
accept.

a

a

to

as

for

give

been

transit

formal

regarded

to enter
they enter

the Internet, peering has
In the culture of
always
cost-sharing,
no-settlement arrangement, and the rules of
many NAPs would prohibit
(cid:28)paid
peering’ arrangements. In line with this general
into
approach,
either agree
ISPs
settlement-free peering, or
into
(cid:28)customer/provider’ or
relationships.
Where
is approximately equality of
there
bargaining power between networks, there is
little incentive on either side to demand or to
agree
peering
payment
interconnection. This distinction shows signs of
breaking down, in that the largest networks are
beginning either to offer paid peering to those
to whom they refuse settlement-free peering as
an alternative to transit, or to impose very strict
conditions which in cost terms amount to the
same thing for the smaller network. Indeed,
where there is a clear imbalance in bargaining
power, there is nothing to prevent the larger ISP
from either demanding outright payment for
peering, or imposing conditions which amount
to the same thing. In such relationships the term
(cid:28)peer’ can be misleading, because the ISP who is
obliged to pay has his cost structure dictated to
ISP, and the
some extent by the superior
relationship
of
purchase
a
is
interconnection.

akin

to

(36) There

is

in

any
against

peering
likelihood
a
arrangement,
the
particularly
background of continuing growth in Internet
usage, that at least one of the two peers will
want to see continuing capacity and technical
upgrades of
the connection as the price of
maintaining the arrangement. The continuation
of the peering arrangement may depend to a
great extent on the willingness of each party to
accommodate the desires of the other in terms
of how the connection should be managed. This
might include, for example, readiness to meet
technical
the
upgrades.
increasingly
It has also become
common for the larger or technically superior of
the two networks involved to demand certain
minimum standards of network quality, traffic

costs of mutual

capacity or

(b) Transit services

(38) The definition of customer

traffic for

the normal

the
purposes of
form of peering
agreement includes traffic originating not only
from the final user customers of a peer, but also
traffic from any customers which are themselves
ISPs (hereinafter referred to where appropriate
as (cid:28)dependent ISPs’ or (cid:28)dependent networks’).
The fact that traffic from dependent networks
can be exchanged across a peering interface

L 116/8

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4.5.1999

(39)

(40)

a

(cid:28)transit’

allows a peering ISP to offer on a commercial
basis
to customer or
service
dependent networks. The peering ISP can pass
his own and his customers’
traffic across a
peering interface and it can be delivered not
only to direct final users on the network on the
other side of the peering interface, but also to
customers of dependent networks of that peer.

in this

It should be noted that the use of the term
(cid:28)transit’
implies a slightly
context
different usage than is normally encountered. In
many industries the term transit is used where
goods are entrusted to an intermediary carrier
for delivery to a third-party addressee. So-called
transit traffic on the Internet spends much of its
time ascending or descending through successive
hierarchies which are linked to one another by
vertical customer/provider
relationships. The
only time in which there is a horizontal
a
movement
dependency relationship to one another is when
the traffic crosses a peering interface, which it
will usually do only once in its journey. The
purchase of a transit service could therefore be
more accurately described as a right on the part
of an ISP to have his traffic treated as the traffic
of
the
purpose of exchange across a peering interface.

transit provider’s network for

networks

between

not

the

in

such

connectivity therefore

Internet
represents a
service which can be sold and resold on a
the ISP
commercial basis at any level of
hierarchy. There is nothing to prevent an ISP
setting up in business to provide connectivity
from obtaining
purely
through a customer relationship with a superior
network (although their main profit-making
activity may be the provision of value added or
on-line services on top of the basic connectivity
offering). All trafic to and from his customers
will have to pass through the transit-providing
network. ISPs who function in this way are
described as resellers.

connectivity

(iv) The structure of the Internet

(a) The top-level networks

there is a logical
limitation to the process.
Traffic which is progressively defaulted to
higher level networks will finally end up in the
hands of an ISP who has no one else to whom
to turn, and must either assume responsibility
on its own account for delivering the traffic
it
across
interfaces,
undelivered. These networks
ISPs
concerned) are referred to hereon as (cid:28)top-level
networks’ or (cid:28)top level ISPs’.

return
the

peering

(or

or

a

if

is

top-level

(42) The possession of peering agreements with all
other
necessary
networks
condition on the part of any ISP wishing to be a
top level network. Thus
there are four
top-level networks in the Internet — A, B, C
and D — A can deliver traffic to B, C or D
because he has separate peering agreements
with each of them. Any customer of A can also
obtain the delivery of his traffic to B, C or D,
as well as, of course, to A. All the ISPs at any
level who do not have peering agreements with
A, B, C and D cannot offer full connectivity
services, whether
unless
through an
directly or
intermediate ISP) from at least one of the four.

they obtain transit

indirectly (that

is,

(43) Without

such

top-level

networks

taking
ultimate responsibility for the delivery of all
defaulted traffic from subordinate networks, no
single ISP would have such responsibility, and
packets could be trapped in endless loops. The
top level ISPs therefore occupy a position which
is different from that of all subordinate ISPs.
They benefit by being in a position where they
do not have to rely on any paid interconnection
such as transit in order to be able to offer
complete connectivity. (Nonetheless, there are
instances of some of the very largest networks
buying transit on a very marginal basis, such as
where they have inherited a transit arrangement
as part of the acquisition of an ISP). The top
level ISPs can only maintain their position by
ensuring that
they continue to have peering
agreements with all other top-level networks. If
they
such
agreements, they will be unable to provide full
coverage,
the
second-tier status of limited peering ISPs.

or maintain

and will

relegated

cannot

secure

be

to

(41) Although ISPs may turn successively to yet
larger ISPs for the provision of transit services,

(44) The obligation to provide full connectivity
solely through peering agreements might appear
to impose
a heavy burden on top-level
networks, as it suggests they need to seek out
all new networks as they are set up, and peer

4.5.1999

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Official Journal of the European Communities

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to the

the
rights

customers of

to the larger network is

with them in order to continue to assure their
customers full Internet connectivity. However,
the bargaining power is in the hands of the
top-level networks. This is because the right of
far more
access
smaller
valuable
network than the equivalent
in the
reverse direction.
Interconnection to a large
network may give a small ISP the opportunity
to offer its customers connections to thousands
of sites, whereas the existing customers of the
larger network gain only a relatively small
marginal benefit in terms of access to perhaps
no more than a few tens or hundreds of new
sites. Consequently the larger network is in a
position to determine the terms on which it will
interconnect. In the ordinary course of events, a
small new entrant ISP would be unlikely to
obtain peering from a top level network, and
would therefore have no choice but to become a
transit
customer of an existing top level
network. In order to preserve their position,
top-level networks need only peer with other
similarly placed networks, and by doing so they
can be reasonably confident
they will
obtain access to all new entrant networks.

that

(46)

It should be noted that although the top-level
networks perform a crucial carrier function,
they are also all vertically integrated to a
significant extent. Their customers include final
users as well as resellers. Thus obtaining access
to these top-level networks is important
for
dependent ISPs, not merely as a way of getting
access to the relevant dependent networks, but
also to get access to the direct customer base of
the top level network.

(b) Secondary peering ISPs

to

not

give

have

these

sufficiently

agreements
by

(47) Between the extremes of the peering-only top
level ISPs and the transit-only resellers, there is
an intermediate category of
ISPs who have
some of their own peering agreements, but who
comprehensive
may
adequate
peering
connectivity
and who
supplement it by buying transit from at least
one other top level network. These ISPs are
referred to here as (cid:28)secondary peering’
ISPs,
and offer customers a mixture of resold transit
and their own peering-based connectivity.
transit,
Because of
secondary
only
reached
duplicate
anyway through the use of
services
offered by a top level network.

routes which could be
transit

the necessity

agreements

to buy

peering

alone,

can

sensible

for
to exchange

(48) An ISP may have secondary peering agreements
for a variety of reasons. Some connections may
be for convenience or cost-saving. For example,
two adjacent or
it may be
overlapping ISPs
traffic
their
directly, rather than sending it as transit over
hundreds or
thousands of extra kilometres
through several intervening networks. However,
there may be reasons why a direct
local
interconnection is a poor second best to the use
of transit. This might be, for example, if one of
the two parties
to the link is unable or
unwilling to provide the necessary financial
to maintain the link in an
investment or
reliable condition, or where
appropriate or

(45) Although in the early days of

ISPs

ones,

larger

smaller

the Internet
peering agreements were entered into fairly
freely, larger networks are increasingly cautious
about allowing smaller networks access on a
settlement-free peering basis, as it allows the
customers of the smaller network to (cid:28)free ride’.
seeking
Consequently
interconnection with
and
particularly those who seek direct connection
with the top-level networks, may well be asked
to meet a series of conditions before peering
will be considered. Peering applications may be
refused, in which case the ISPs concerned will
usually be invited to become customers rather
than peers. They may well decide not
to
become direct customers of a top level network,
but
to buy services through a reseller. The
difficulty for the smaller networks of obtaining
peering with the top-level networks means that
the number of ISPs who enjoy the status of
top-level networks is kept relatively small. Thus
the industry is structured with a hierarchy of
and
progressively
ISPs
geographically more wide-ranging networks
providing transit for smaller and more localised
ISPs unable to deliver traffic on their own
account.

larger

with

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Official Journal of the European Communities

4.5.1999

regulatory or other obstacles make it difficult to
obtain physical
facilities or permission for
interconnection at reasonable cost, or indeed at
any cost. Despite its apparent illogicality, it may
be simpler and cheaper in such cases to send
locally-destined traffic through a distant transit
provider, notwithstanding the extra journey
which the traffic has to make. This currently
happens with much intra-European Internet
traffic, a significant volume of which is actually
transited through US-networks.

one

have

connections with

(49) Other secondary peering agreements may reflect
historical
circumstances which
now
for example where two networks
changed,
previously comparable in size now show a
strong imbalance, but they nonetheless maintain
peering
another.
Inspection of data gathered during the course of
enquiries suggests that there are a number of
secondary peering ISPs who continue to peer
with top-level networks but who do not appear
to meet the technical network criteria currently
demanded by those networks of new applicants
for peering. The hostile public reaction which
UUNet met in its 1997 attempt to end peering
with a number of its secondary peering ISPs
suggests that these issues are not determined
[…] (*).
entirely by economic considerations.
Secondary peering ISPs may find the possession
of public peering agreements with some of the
top-level networks useful as a marketing tool,
even if, for technical and economic reasons,
they find they have to rely largely on transit to
deliver a service at the required speed, quality
and reliability levels.

(50)

that

in form,

Internet was

to avoid the

In their Reply to the Statement of Objections
the notifying parties took issue with this view of
the Internet as a hierarchical structure. They
originally
argued
the
conceived to be non-hierarchical
in
strategic vulnerabilities
order
associated with network architectures based on
centralised and hierarchical switching and tiered
structures. However,
it was noted that these
objectives pre-dated the Internet in its current
commercial structure, and furthermore neither
the present operation of the Internet, nor its
future development, necessarily reflects
the
philosophy behind the original research project.

(*) Parts of

this

text have been edited to ensure that
confidential information is not disclosed; those parts are
enclosed in square brackets and marked with an asterisk

(v) The

economics

of

transit

versus

settlement-free peering

a

as

option

cost-free

(51) Although settlement-free peering is sometimes
(by
represented
comparison with paying for transit), this is not
strictly correct. Each party to a peering
agreement will
costs of
installing the connection and then the service
and maintenance costs of keeping the link in
working order. Whether this is cheaper or more
expensive than buying transit will depend on
the circumstances of the ISP in question, and
the price at which transit can be obtained.

capital

incur

the

traditional

(52) Once peered, each party to a settlement-free
peering agreement will want to ensure that it is
not disadvantaged by an imbalance in traffic
flow across the peering interface. Unlike in the
case of
settlement-based public
switched telephony, where an imbalance in
traffic is financially advantageous for the party
receiving the net inflow, traffic received over a
peering interface represents a cost to be set
against subscriber income. In the short term,
there is no financial incentive to accept a net
imbalance of traffic. The rationale for a peering
agreement is that each ISP assists each other in
disposing of each other’s traffic burden. The
fact that network traffic is a cost- rather than a
revenue-generating item is evidenced by various
traffic management strategies practised by the
larger networks, all of which attempt
to
minimise the amount of time which traffic from
smaller peers (or responses to it) spends on their
network. Larger networks
it a
condition of peering that the smaller network
interconnect at not just one, but at multiple
points so as to permit the larger to practice (cid:28)hot
potato’ or shortest-exit routing, under which
the traffic is handed off to the smaller network
in the shortest possible distance.

can make

(53) Peering however also has benefits. In so far as
imbalanced traffic flows may exist, neither side
the
earns a margin from the other
termination of any surplus one-way flows, but
each side also avoids accounting, billing and
collection costs. And although the costs of
interconnection have to be borne, having even a

for

4.5.1999

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Official Journal of the European Communities

L 116/11

large number of peering agreements could be
much cheaper than purchasing transit.

B. MARKET DEFINITION

larger

the extent

(54) Because an unbalanced peering arrangement is
of considerably more benefit to the smaller of
the two networks, larger ISPs have tended to
to
become more cautious about
which they permit small ISPs to (cid:28)free ride’ by
using the networks of
ISPs without
charge. The establishment of peering policies by
larger ISPs has also been characterised as a way
as
transit-paying
of
customers, by erecting obstacles in order to
prevent them converting into fully-fledged top
level ISPs in their own right. It should be noted
that the declaration of a peering policy does not
prevent an ISP from dealing with any requests
as he thinks
fit, notwithstanding whatever
policy on peering might be announced.

customers

keeping

(55) Buying transit also has benefits, however.

capital

costs of

It
avoids up-front
facilities
construction, and the risks associated with
negotiating interconnection agreements. It may
also make more sense to buy transit directly
from a top-level network, with the attendant
guarantees of quality, speed and reliability of
than to rely on antiquated
service,
secondary peering connections.

rather

(56) Quantifying the

because

depends

example,

costs has proved
relative
difficult
the
it
circumstances of the individual party concerned.
For
telephone operators with a
relatively large installed base of fibre may well
find the cost of buying transit disproportionate
to what it would cost to hook up with top level
ISPs through peering agreements.

on

(57)

It might appear that, for an ISP which had to
buy transit,
the most efficient arrangement
would be to use whatever secondary peering
agreements it may have as much as possible,
and to pass to the transit provider only that
traffic which he is incapable of sending on his
own peering interfaces. In theory this should
allow him to purchase the minimum amount of
transit.
the ISP has to incur
relatively high (and unavoidable) costs for the
transit arrangement based on the theoretical
data-carrying of the installed connection rather
peering
than
the
agreements may offer
the transit
connection did not already provide, and may
have a symbolic rather than actual value.

In practice,

little that

secondary

actual

use,

if

1. Product markets

(i) Host to point of presence access services

(58) The first and last link in the chain is the line
between the host computers (or point of access
in the case of a private network) and the
nearest point of presence of his ISP. As was
mentioned earlier, this connection is either made
over the public switched network or by means
of a private dedicated line. This connection is
not normally supplied by the ISP, although it
can be, if so requested by the client. In the case
of dial-up access, the customer will usually rely
on the services of a local public telephone
there are a
operator. With dedicated access,
range of options,
self-provision,
from a telephone
obtaining a leased line
company or other utility prepared to offer such
a service, or perhaps from the ISP itself.

including

for any other

further upstream. There

(59) The conditions of competition at this level are
different from those operating at the ISP level
or
is nothing to
distinguish the local telephone services which
might be bought for the purposes of Internet
from the telephone services which might be
local
bought
loop
simply the
telephony. Dedicated access
provision of a cable connection, and those in
the market for the supply of this service might
be telephone companies but equally any other
undertaking who can lease out or develop the
to the
necessary capacity. No respondents
Commission’s
suggested that any
enquiries
relevant markets at this level would be affected
by the merger and the issue was not pursued
further.

form of
is

(ii) Internet access services

(60)

It was argued initially by the parties that other
forms of data transmission service are equally
substitutable for Internet services. This view
does not appear to be well founded. Customers
purchasing an Internet access service do so in
the expectation that it will permit them to reach
other users connected to the Internet. The
provision of specific end-user to end-user data
transmission facilities using other data protocols

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4.5.1999

it would not provide

might well enable customers to reach a limited
number of other customers using the same
protocol, but
the
permanent, unfettered access to the community
of Internet users which is the main purpose of
buying the service. Accordingly other forms of
data
be
transmission
significantly substitutable.

service would

not

(61) The ISP provides basic access in the form of
network
such
support and billing
configuration, customer
services as are required to enable the customer
to make use of his Internet access.

hardware,

software,

(iii) Top level or universal Internet connectivity

(62) The providers of such Internet access services
could be vertically integrated to a greater or
lesser extent, and might be top-level networks
in their own right, secondary peering ISPs or
resellers. The issue for the purposes of market
definition is whether ISPs all compete against
one another to provide the same connectivity
services, or whether there are any distinct and
narrower markets within the sector.

(63)

offering

In practice no ISP can afford to build up his
connectivity
incrementally. His
customers will immediately expect the ISP to be
able to send and receive messages to and from
anywhere and everywhere on the Internet. The
limitations on attempting to do this through
bilateral peering arrangements have already
been outlined, and are formidable (capital
negotiation
backhaul,
investment
of
thousands
interconnection
individual
agreements and risks of failure of negotiations,
etc.). Connectivity therefore has to be obtained
from someone who has complete reach directly
or indirectly over all the Internet, at appropriate
standards of quality, speed and reliability.

in
of

and the precise nature of

networks. Interconnections may involve transit
or peering. In general terms, the smaller the ISP
the more likely it is to rely substantially or
entirely on transit, and the larger it is, the more
likely it is to rely on internal connections or
peering. Hence the content and price of the
product on offer
from any given ISP will
depend on factors such as the size of the ISP’s
network,
the
relationships it has with other networks. The
offerings might also be differentiated to some
extent in terms of quality, as a network which
routes messages in a way which requires many
the same
hops will not be able to offer
standards as a network able to deliver messages
with very few hops. In principle therefore, the
offerings of one network can represent a
substitute for the service offering of another,
provided the two networks can offer equivalent
service standards, but two networks which are
widely differentiated
service
in terms of
standards may well not be substitutes.

Internet

complete

(65) The only organisations which are capable of
connectivity
delivering
entirely on their own account are the top level
ISPs. This connectivity is referred to hereinafter
as (cid:28)top level’ or (cid:28)universal’ Internet connectivity.
Secondary peering ISPs may be able to deliver
some of their own peering-based connectivity
(or
(cid:28)second-tier’ connectivity), but have to
supplement it through bought transit. Resellers
can only supply resold connectivity, although
depending on who it is bought from, it might
first and second tier
be a combination of
connectivity.

(66) The products offered by the top-level networks
are differentiated in that
the connectivity is
supplied entirely by peering agreements between
those top-level networks or internally. If the
top-level networks are in a market of their own,
it must be demonstrated that neither
the
secondary peering ISPs nor the resellers are
the
capable
and
behaviour of
preventing them from acting independently.

constraining
top-level networks

significantly

the

of

(64) The connectivity service offered by each ISP is
unique, in the sense that no other ISP offers a
product which is identical. Each one offers a
blend of, on the one hand, direct access to their
own
and
connected
customers of subordinate networks, and on the
other,
ISPs’
customers and subordinate
networks,

interconnection with

customers

directly

other

their

(67)

If the top-level networks increased the price of
their Internet connectivity services by, say, 5 %,
then in principle the cost base of resellers would
be increased by the same amount, and that
increase would have to be passed on to the
customer. Therefore the pure resellers cannot
provide a competitive constraint on the prices
charged by the top level network.

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agreements,

either with

(68) The position of secondary peering ISPs is rather
different. Unlike pure resellers they are not
entirely captive to the prices charged by the
top-level networks. They have a collection of
other
peering
similarly-placed ISPs or with some, but not all,
of the top-level networks. These may offer some
limited substitutability in terms of allowing
them to access some sites without having to
transit the networks of the top level ISPs, but
there will be gaps in their coverage. The better
the reach of the peering connections, the more
likely it is that a secondary ISP might be able to
if there were
provide coverage. For example,
five
a
networks,
secondary peer with peering agreements with
four of those networks is in a better position to
exercise a constraint than an ISP with peering
connections to only one of the five. In no case,
however,
connectivity
offered by a secondary peering ISP provide a
service which is a sufficient substitute for the
first tier connectivity provided by the top level
network to be considered as part of the same
market.

equally-sized

second tier

can the

top-level

(70)

In summary therefore, the relevant market on
which the merging parties are active is the
market
top level or
the provision of
(cid:28)universal’
Internet connectivity, as explained
above.

for

(iv) Evolution of market definition

(71) The concept of (cid:28)top level network’ might not
represent today’s economic reality, in so far as
some of
the players apparently capable of
functioning as top-level networks are in fact
paying for some or all of their peering. Others
may benefit
from peering agreements which
would no longer be entered into today, and
therefore their status as top-level networks may
be open to question. As a result, the numbers of
firms actually capable of offering competitive
constraints may be smaller than the concept of
(cid:28)top-level networks’ might imply.

if

not

that

test,

could

extent

transit

captive

connectivity

(69) Secondary peering ISPs who wanted to offer
avoid
complete
continuing to buy some
from the
top-level networks, and their cost base is
therefore
they
to the
continue to have to do so. There is no evidence
that customers would accept a limited-access
service as a substitute for a full service, and a
price increase of say 5 to 10 % is unlikely to be
sufficient to encourage switching. Applying the
the top-level
hypothetical monopolist
networks were to act as one unit, then there is
no one capable of providing an adequate
substitute service in response to price increases.
If all top level ISPs were to increase their transit
interconnection charges by say 5 %, the ISPs
outside
a
competitive constraint to the extent that they
were able to use their peering agreements with
some of the top-level networks to avoid the
impact of
charges.
However, if faced with such a challenge to their
price increase strategy, the top-level networks
could react by charging for any interconnection,
If
whether described as peering or
this were to happen the unequal bargaining
power of the secondary peering ISPs would not
permit them to offer an effective competitive
response.

group could still provide

in transit

increase

transit.

this

the

(72)

few years

so much in order

there has been a
In the past
substantial growth in traffic levels on the
Internet. Large capacity upgrades have been
required not
to obtain
competitive advantage, but simply in order to
maintain an acceptable quality of service in
terms of speed and reliability in the face of
increasing usage and hence congestion. The
problem is not only one of new users, but of
new applications, such as for example video
transmission, which are very demanding in
terms of bandwidth usage. The capacities of the
largest cables on the largest networks have
increased substantially over a very short space
of time. The top level connections which were
once made over T1 cables with capacities, or
speeds, of 1,544 Mbps (1 544 000 bits per
second) are now made over DS3 or T3 (45
large
Mbps
backbones will soon feature connections with
speeds of OC-3 (155 Mbps) and even OC-12
(622 Mbps). Networks which have remained
static
technical and capacity
development have fallen behind. Even if such
non-developing networks were once capable of
offering
Internet
or
connectivity according to the standards of the
time, they may not be able to do so today.

equivalent) and most of

in terms of

universal

level

top

the

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Official Journal of the European Communities

4.5.1999

the

increased,

(73) Until a relatively short time ago, the possession
of, for example, peering agreements at public
NAPs with all other ISPs with a reasonable
presence at
such NAPs might well have
guaranteed the ISP concerned the status of a top
level network. However, as congestion at NAPs
has
largest providers have
increasingly begun to form their own private
peering arrangements at points away from the
NAPs. While the largest providers continue to
peer at NAPs,
they also
then the fact
choose to peer privately between themselves
would
the market
not
if the smaller ISPs who
definition. However,
currently peer only at the NAPs were refused
settlement-free private peering by the largest
networks, they would no longer be capable of
acting as top-level networks, and would drop
the market definition. Because this
out of
process
the market
in its early stages,
is
definition adopted here will not be narrowed to
anticipate such future developments, but
the
fact that this is likely to happen should be
factor when
borne in mind as a relevant
considering the market power of the parties.

necessarily

affect

that

(v) The parties’ response

(74)

the

In their Reply to the Statement of Objections
and at the oral hearing, the parties challenged
the proposition that
Internet had a
hierarchical structure. They contended that any
ISP could render ineffective a price increase by
the hypothetical monopolist consisting of all
top-level networks by diverting traffic through
secondary peering agreements, and extending
the reach of
those agreements if necessary.
Hence, according to the parties, any ISP could
interconnect with any other ISP, and thus avoid
the need to use the top-level networks
to
complete their connectivity.

(76)

(75) As third-party interveners pointed out,

is
highly unlikely that such a move would make

it

of

of

the

top

that

level

impact

Section

Indeed,

Internet:

(cid:28)universal’

to any of

against
3.1

peering
at

the price increase unprofitable. An ISP customer
Internet
seeking
or
connectivity through the purchase of
transit
from the top-level networks could not avoid the
price increase of a hypothetical monopolist by
buying this transit from another source, as no
other sources would be available. Attempting to
avoid the price increase by developing networks
of second peering connections (which in itself
the
would be a pre-requisite
second-tier
ISPs offering transit) would be
practically impossible and involve substantial
transaction costs, because of the need to install
circuit capacity either to private peering points
or to public exchange facilities.
the
report of the parties’ own experts: (cid:28)Competition
on
the
The
in discussing the
MCI/WorldCom merger’,
transit,
as
option
acknowledges
(cid:28)…
maintaining large numbers of direct peering
interconnections may be too costly. A small
network may wish to have only a limited
interconnections, and
number of such direct
achieve universal Internet connectivity through
the purchase of
from some other
transit
network.’ Even for larger ISPs who are not
top-level providers, such connections would not
be cost-effective for the traffic levels involved,
because a large number of links would have to
be made, probably more than it was possible
for any ISP to manage effectively. Moreover,
ISPs with whom
each of
connections would have to be made, that is,
other ISPs who were not top-level networks,
would each handle only very small proportions
of total Internet traffic, (a third party estimated
ISP outside the top level
that no individual
group would control more than 2 % of traffic)
and the costs for any ISP of
installing the
necessary capacity links would exceed the cost
of the 5 to 10 % increase in transit from the
hypothetical monopolist. It was also pointed
out that the establishment of such links would
involve the coordination of large numbers of
players, lead to technological inefficiencies, and
take a very long time.

individual

the

of

customers

In addition, however successful an ISP might be
in establishing a network of secondary peering
it could not reach the directly
connections,
connected
hypothetical
the
monopolist. Access to those customers is an
essential
in establishing universal
Internet connectivity. Any attempt to establish
an alternative connectivity based on a network
secondary peering links which did not
of
include
the hypothetical
monopolist could not provide universal Internet
an
could
connectivity,

the networks of

element

provide

and

not

4.5.1999

EN

Official Journal of the European Communities

L 116/15

economic
provided by existing top-level networks.

substitute

the

for

connectivity

(77) The parties themselves appear to recognise this,
because they also argue that even if secondary
peering were only a partial substitute, the use of
secondary peering connections would diminish
an ISP’s dependence on the transit provided by
the hypothetical monopolist and allow him to
avoid the effects of a 5 to 10 % price increase.
However,
the
hypothetical monopolist could set transit prices
that were not usage sensitive (in so far as they
do not do so already), and thus reduce the
incentive for ISPs to shift traffic away from the
top level providers,
the
effectiveness of secondary peering even as a
partial and very limited substitute.

thereby negating

it was

pointed

that

out

2. Relevant geographic markets

(i) Corporate and traveller services

and

services

(corporate

(78) On two of the markets initially identified by the
parties
traveller
services), the combined market shares of the
parties would not have been sufficient to give
rise
the
to competition concerns, whether
markets were defined at the national level, or at
any wider level. Accordingly, it is not necessary
to discuss geographic market definition with
respect to those markets.

(ii) Carrier services

(79)

In the Unisource decision,
the Commission
stated that by their very nature, both supply of
and demand for carrier services are at least
cross-border
regional. Geographic proximity
between purchaser and supplier of switched
transit capacity is hardly relevant for switched
transit which carriers use either as a substitute
for operating own international lines or to deal
with peak traffic on such lines. Likewise,
cable- or
dedicated transit
satellite-based routing capacity across
third
countries. Finally, using hubbing services is an

services offer

alternative to entering into an undetermined
number of bilateral agreements with individual
carriers. For carrier services the markets of
the purposes of assessing the
relevance for
and
current
transatlantically to the United States.

operation

Europe

are

in

(iii) Internet services

(80) The geographic extent of the different markets
for Internet services depends on which level is
being looked at. Physical connection from the
final user to the ISP, whether by dial-up or
dedicated access, can only be provided locally,
by a supplier active at the local level, and in
any event is not usually part of the ISP’s service
offering. Such a connection could be provided
by a local telephone company, or indeed by any
other supplier of such cabling facilities. The
thus
geographic markets at
regional or national, depending on the scope of
the supplier’s cable network. However, since in
strong in the
Europe the parties are not
provision of
the
definition of these precise geographic markets
can be left open.

loop services,

such local

level are

this

(81) The ISPs competing to provide Internet access
services to final users may be operating on what
are essentially regional, that is, sub-national, or
national markets. Some ISPs may be small
locally-based organisations. But larger corporate
final users may look internationally for their
choice of ISP, and ISPs who tend to deal with
those types of clients may market their services
internationally.

(82) The

of

the

international

Internet
nature
becomes more marked with larger ISPs, who
often operate on a national or international
level. Although the top-level networks which
have emerged so far have their centres of
operations in the United States of America, they
are the only providers who can provide transit
to all parts of
the Internet. This can be
contrasted with conventional voice telephony,
where traditionally operators have tended to
focus their activities in a particular territory,
and to relay traffic which has to pass across
that
territory. The terms on which any ISP
anywhere in the world can operate depend

L 116/16

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Official Journal of the European Communities

4.5.1999

upon the terms on which it can obtain transit
directly or indirectly from these providers. They
are in the event highly vertically integrated. For
example, UUNet has retail level subsidiaries in
many European countries. A rise in prices for
access to the top-level networks would affect
consumers everywhere in the world. There is
thus effectively one global market.

(83)

In their Reply to the Statement of Objections
the parties argued that the geographic market
definition was flawed, because ISPs did not
necessarily have to obtain their connectivity
from one of the group of top-level networks.
However,
the parties’ geographical definition
was closely linked to their views on product
market definition, and is not consistent with the
product market as defined for the purposes of
this Decision.

C. COMPETITIVE ASSESSMENT

1. Carrier services

notional increase in the proportion of available
capacity held by WorldCom. However, plans
are being drawn up for yet more cables, and as
these come on stream, any advantage which
by
WorldCom might
possession of capacity on its new cable is likely
to be quickly eroded.

temporarily

hold

2. Internet access services

(87) The

that

parties

contended

there was
substantial competition at the retail ISP level
and that barriers to entry were low. This was
not challenged by third parties who responded
it was
to requests for information. However,
noted that those ISPs who competed against the
integrated
downstream arm of
providers
of
connectivity provided by those suppliers further
up the supply chain. The analysis therefore
focused on those markets in which the parties
were both active and in particular the market
for top level or universal Internet connectivity.

essentially

vertically

resellers

were

(84) The position regarding carrier services can be
and
terms

European

of

at
looked
transatlantic capacity.

in

(85)

(86)

telephone

In Europe much of the capacity, some 95 %
according to the parties’ estimates, is held by
incumbent
operators. Although
WorldCom has been building city to city
networks, MCI does not have a substantial
presence as a capacity holder on this side of the
Atlantic. No competition concerns
therefore
arise
from the proposed
transaction.

in this

respect

In relation to transatlantic capacity, information
provided by the parties suggests they would
have a combined share of notional capacity
holdings on the United States end of 23 %,
making them the second biggest capacity holder
behind AT&T (29 %). The position regarding
capacity
altered when
transatlantic cables such as Gemini (in which
WorldCom is
comes on stream
(expected in mid-1998), when there will be a

control will

involved)

be

3. Top level or universal Internet connectivity

(88) When asked to provide information on their
activities in the Internet sector,
the parties’
initial estimates of market share were based on
their contention that any ISP in possession of its
own cable facilities constituted a backbone
provider, and that since most ISPs possessed
facilities of some description,
they could be
regarded as backbone providers. They estimated
in 1997, based on
the market
that
extrapolation of
the
United States market in 1996 provided in a
Frost & Sullivan report, would have been about
USD 4 700 million, and that on this basis their
revenues
from basic Internet access services
(stripping out value added services) would not
have exceeded some 20 % of the total market.

size
estimated figures

for

(89) The Commission has difficulty in accepting this
market definition or method of calculation of

4.5.1999

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Official Journal of the European Communities

L 116/17

the distinction between a

market share. A definition which equates ISP
with backbone provider seems unduly wide, as
it blurs
small
locally-based reseller dealing with local clients,
and the large multi-national top-level networks.
The parties
to
claimed it was
provide market shares on any basis other than
the one which they had provided, because of
the absence of published data, as well as the
with
definitional
identifying a backbone provider.

impossible

associated

problems

a

of

number

It was noted however that, despite the claimed
difficulties
of
definition,
commentators had sought to undertake market
studies using such information or best estimates
as
the
they could procure. On that basis,
market position of the notifying parties was
considerably stronger than would have been
implied by the parties’ own estimates, and
suggested they might be able to control a
considerable proportion of the Internet. These
different
estimates,
methodologies,
the
conclusion that the combination of the merging
parties’ networks would create a single entity
with a very large market share.

on
towards

based
pointed

although

all

example, one

a number of

In the course of enquiries of customers and
concerns were
competitors,
firm which
expressed. For
purchased connectivity from one of the merging
parties stated that:
(cid:28)… The proposed merger
would reduce this number (that is of credible
alternative service providers) to three. Without
reliable alternative sources of supply, customers
such as (name of firm concerned) might become
overly dependent on fewer suppliers, leading to
loss of quality of service … and an upward
pressure on prices.’ Another firm active in the
supply of
the
undesirable
merger
environment
Internet
service in the common market in which the
dominant
combined
position.’ A third firm said (cid:28)the combination of
two of the world’s Internet backbone leaders
creates
could
significantly affect competition on the Internet
the companies
backbone structure. Together
would control up to 55 % of
the backbone
Internet traffic’.

creating
the provision of

stated that
an

carrier which

entities will

dominant

Internet

services

(cid:28)risks

have

for

a

a

In
its
Communications

submission

Commission

to

the

Federal
of

(FCC)

(90)

(91)

(92)

the

magazine,

13 March 1998, Sprint Corporation estimated
that, based on survey data compiled by
Boardwatch
combined
WorldCom/MCI would have about 55 % of all
connections after the merger. The Maloff Group
report of October 1997 estimated that
the
combined entity would have 68 % of Internet
revenue connecting over the WorldCom MCI
backbones. Bell Atlantic’s submission to the
the
FCC summarised the market
merging parties based on reports in the press at
60 %, and estimated combined shares at 58 %
based on share of customer routes using routing
tables. A submission to the FCC from the GTE
group estimated a combined market share for
the merging parties of 47 %, based on total
bandwidth,
Boardwatch
provided
magazine. All these estimates contrasted sharply
with the parties’ own estimates, based on
revenue, of a market share of around 20 %.

shares of

as

in

(93)

the

In their Reply to the Statement of Objections,
the parties explained that
[between 30 and
40 %](*) of
top 400 web sites were
connected to MCI and another [between 40 and
50 %](*) to WorldCom. Out of the [between 30
and 40 %](*) connected to MCI, [between 5
and 15 %](*) are connected exclusively to MCI
and another [between 0 and 10 %](*) use both
WorldCom and MCI but no one else. Similarly,
out of the [between 40 and 50 %](*) connected
to WorldCom,
[between 5 and 15 %](*) are
exclusive to WorldCom and [between 0 and
10 %](*) use only MCI and WorldCom. This
implies that [between 15 and 25 %](*) of the
top 400 web sites would be
connected
exclusively to the merger entity. Assuming that
all the remaining web sites were connected to at
ISPs, WorldCom/MCI
least
would have a share of this business of [between
35 and 45 %](*).

three top level

(94) Finally,

the Chief Operating Officer

of
WorldCom, was quoted as saying that (cid:28)having a
big network is a huge barrier to entry for
competitors’ (9).

(95) The absence of specific reporting obligations on
ISPs in relation to Internet revenues, and the
absence of consistent reporting standards for
data which is produced, means that there is no
reliable publicly available estimate of the size of

(9) The Washington Post, 29 September 1997.

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Official Journal of the European Communities

4.5.1999

the measurement of market

either the Internet sector as a whole or of any
relevant sub-sector. There was also a divergence
of views as to what should be the correct units
for
share and
market power. The observations made by third
parties suggested that there was no industry
consensus on a preferred unit of measurement,
but
that a reasonable
picture might be produced by using more than
one index, and a number of commentators
thought
that a combination of revenue and
traffic flow might offer the best picture.

there was agreement

(96) Accordingly, the Commission undertook its own
enquiries with the aim of collecting data that
might enable a more accurate determination of
market size and share, and in particular the
share of the merging parties.

(i) Possible methods of market share

(97) Apart from revenue and traffic flow, discussed
in more detail below, data was also collected on
other possible measurement
indices, such as
aggregate
capacity in interconnecting links,
numbers of addresses reachable, numbers of
points of presence, actual bandwidth used for
traffic exchange, and considered whether any
reasonable conclusions might be drawn on that
basis.

(98) The size of

that

capacity would

installed capacity links

(from
customers to ISP,
from ISPs to public and
private peering points) might well provide an
indication of
the potential of a network in
terms of performance, and also of size, on the
assumption
be
purchased and installed unless there were some
it. The
reasonable
obtainable
sufficiently
were
comprehensive to enable any firm conclusions
to be reached on the basis of using capacity
figures alone. However, the figures available on
total aggregate capacity connections, that is the
connections between the network and its

expectation
data

using

not

not

of

customers, and with peers, whether public or
private and transit
supported a
picture whereby the merging parties would have
[…](*) of
the top-level
networks.

the market share of

suppliers,

(99) As regards address spaces,

it appeared that
newer networks or customers might make
greater use of mechanisms to limit the number
of advertised route entries and addresses, and
that higher numbers of advertised addresses
might
signify nothing more than a relative
unmodernised network. Moreover it was not
clear to what extent companies responding were
presenting address numbers and route entries on
the basis of what they could reach as a result of
their overall connectivity (that
including
what they could reach by transit). In general it
considered
appeared
themselves
100 %
of
connectivity by one means or another, and the
number of announced addresses was not a
significant measure of network size or strength.

that most
capable

delivering

networks

is,

but

subscribers,

(100) As regards numbers of subscribers, one problem
appeared to be the difficulty of identifying how
many real users there were. For example, a
network with a large proportion of corporate
subscribers might register a low number of
individual
each company
customer might have their own private internal
network with many connected users. As a
result, subscriber numbers were unlikely to give
a highly accurate reflection of the strength of a
network. There were
definitional
problems in attempting to use data based on
numbers of web sites. Different web sites could
importance,
have widely varying degrees of
which would not be reflected in a simple tally
count. Accordingly no attempt was made to use
these data in order to draw conclusions.

similar

(101) On POPs (points of presence), it was suggested
that,
in principle at least, there might be a
correlation between network size and the
number of POPs, because a backbone provider
would deploy a POP when it had a critical mass
of
for
example estimated that the merged entity would
have some 48 % of the total points of presence
in the United States of America. However the

to reach. A competitor

customers

4.5.1999

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Official Journal of the European Communities

L 116/19

the

rather

regarded by some
number of POPs was
commentators as one of
reliable
less
methods of establishing network size. The
to depend to some
numbers would appear
than
extent on system architecture
network size. Moreover, although the number
of POPs may equate
to the number of
subscribers in a given region, the number of
subscribers may not
itself be an accurate
indication of network size (for example, one
network might have large volumes of low-usage
subscribers and many POPs, whilst another
might have
few high-usage
subscribers and a small number of POPs).

comparatively

(ii) Identification of top-level networks

looked for was

(102) Many of those consulted during the course of
enquiries mentioned the same four ISPs (the
Sprint,
WorldCom group, MCI,
and the
GTE/BBN group,
(cid:28)the big four’) as having a
position stronger than all the others. However,
analysis of data showing revenues from Internet
access, as well as of traffic flows (which is
considered in more detail below) did not
suggest a very clear dividing line between the
smaller members of
the four and the next
largest ISPs said to be in the next category.
Accordingly peering agreements among the key
players were examined to determine who might
be regarded as top level providers. What was
being
set of peering
agreements which might equip the holder with
100 % settlement-free connectivity across the
Internet. The analysis was complicated by the
fact that there was no single list of NAPs at
which any given ISP had to peer in order to
obtain comprehensive coverage. Thus each ISP
might possess its own unique set of peering
arrangements and yet be capable of establishing
complete connectivity over the entire Internet.
An additional difficulty was that many of the
ISPs whose collection of peering agreements
suggested they were capable of operating as
top-level networks were found to be buyers of
transit, and it was not clear whether the transit
was essential (because, for example, the peering
connections, although comprehensive on paper,
were inadequate in practice) or for convenience.

a

(103) As a point of departure therefore, the analytical
approach started from the proposition that any

top level network would necessarily have to
peer, at the minimum, with at least the big four,
which were capable of
supplying universal
interconnectivity without recourse to transit.
Failure on the part of an ISP to peer with at
least these four as a minimum would imply a
the
substantial absence in their coverage of
Internet as a whole.
the
is possible that
It
number of participants who are true top-level
networks is actually smaller than the field of
those who peer with all four, as each additional
peer, while of course peering with the original
four, may not peer with each and every other
peer who also peers with the big four. To that
extent, they may not have complete ability to
cover the entire Internet on a settlement-free
basis. However, for the purposes of assessment
it was assumed that anyone with peering
connections to all four of the big four would be
considered a desirable peer by anyone else who
had the same connections. It should be noted
that the available data did not confirm whether
such ISPs were directly connected with one
another. Arguably, failure to have that complete
range of interconnections with one another as
well as with the big four would rule out such
players as
It was assumed
however for the purposes of the analysis that
such peering inter-connections already existed,
or could be very quickly made if for any reason
they did not already exist. This assumption runs
in the parties’ favour by widening the field of
market participants.

top level

ISPs.

(iii) Estimates of market size and share based

on revenue figures

(104) On the basis of the above, a total of 16 ISPs
would have fallen within the definition of a top
level network. (A further three very small ISPs,
which do not peer with WorldCom’s principal
Internet
subsidiary UUNet, but with some
smaller subsidiaries, might be included, but the
effect of this is marginal.) As to the total size of
the market, the information available was not
comprehensive, and estimates had to be made
in respect of the turnover of three firms for
which accurate figures were not available. The
revenue for each of the three firms concerned
was estimated at USD 30 million each, which
was believed to be a considerable over-estimate
of their actual revenues. On this basis the total
market size for 1997 would have been in the
order of USD 2 300 million. WorldCom’s share

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Official Journal of the European Communities

4.5.1999

would have been [between 35 and 45 %](*),
and MCI would have added some [between 5
and 15 %](*), giving the combined group some
[between 45 and 55 %](*) of the market. Its
two nearest competitors would have enjoyed a
combined market share of
[between 15 and
25 %](*).

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

standards

regards

or

(106) Firms which are peered with up to three of the
main providers have little claim to be regarded
as top-level networks, as a failure to peer with
one of the four indicates a substantial shortfall
in their ability to provide Internet connectivity.
for the purpose of undertaking a
However,
sensitivity analysis, market share estimates were
made to see whether the addition of
these
players would cause any significant alteration to
the figures. On such a basis (which it must be
stressed is extremely conservative) combined
market shares of over 40 % in revenue terms
were still recorded for the notifying parties.
Consideration was
the
definition of a top level network might be
further to include firms which
widened still
peered with only two of
largest
networks. However, it was felt that at this level
the gaps in coverage were so large that the ISP
concerned could not realistically be regarded as
a
reasonable
assumption.

top level network on any

given to whether

the four

(iv) Traffic flow

(107) A number of commentators suggested traffic
flow was an inherently better measure than
revenue, although some said the figures might

be affected by sudden surges, such as short-term
interest in a particular web site.

(108) There are no statistics directly available on the
overall traffic volumes sent or received by ISPs.
Accordingly a (cid:28)bottom-up’ approach had to be
adopted in order to calculate market shares
based on traffic. This requires the identification
of market participants, and to add their
respective measurements of
flowing
through their networks in order to obtain the
size of the market. However it could not be
established with certainty that all measurements
of
traffic flow were made on an entirely
consistent basis by the market participants
concerned. An alternative way to calculate the
traffic-based market shares had therefore to be
devised.

traffic

internal

customers

traffic (that

is,
exchanged

(109) The total traffic flow of any given ISP includes
the traffic exchanged with other identified ISPs
the traffic
and its
between
its
over
network). The market shares can be calculated
using traffic ratios without necessarily having to
have as an input the total Internet traffic flow,
according to the following methodology. The
ratio of the market share of network A to the
market share of network B is equal to the ratio
of total traffic flowing through network A to
total traffic flowing through network B If both
this ratio are divided by the total
terms of
traffic exchanged between networks A and B, it
follows
share of
network A to the market share of network B is
the relative share of
equal
network A in the total traffic flowing through
network B to the relative share of network B in
the total traffic flowing through backbone A.
Therefore the market shares can be calculated
the relative shares of each
on the basis of
network in the total traffic going through each
network. This prevents
share
calculation being biased by possible differences
in measurement methodologies. On this basis,
the respective market shares for the WorldCom
group and MCI are in the ratio […](*).

the ratio of market

to the ratio of

the market

that

(110) When

to

applying

this methodology

the WorldCom group,

a
hypothetical market comprising GTE, MCI,
their
Sprint
and
the
respective market
WorldCom group with [between 50 and
60 %](*) of such a market, with MCI bringing
an additional
[between 15 and 25 %](*), or
[between 75 and 85 %](*) in total.

shares would leave

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Official Journal of the European Communities

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(111)

(112)

It was possible to gather comprehensive traffic
flow data only from a limited number of the
larger networks. It was not possible to calculate
market shares definitively because a breakdown
of traffic split out according to individual peers
was only available from the WorldCom group
for private peers. However, the total traffic sent
and received by the big four to other ISPs
peering with them is known. For the purposes
of this calculation, the universe of ISPs was
drawn to cover all ISPs who peer with at least
the four largest networks. This is a
one of
generous
relevant
market analysis suggests that the market cannot
be wider than the 16 top-level networks who
peer with all
four largest networks, and is
almost certainly narrower.

assumption because

the

such an assumption for

In order to calculate the market share of the
other 12 networks,
it was necessary to make
certain assumptions. The general assumption
was that the traffic flowing through a given
network was a reflection of the sizes of the
networks to which it was exchanged. Thus if
Network A sends 10 % to Network B and 20 %
to Network C, Network B is assumed to be half
the size of Network C. It seems reasonable to
largest
make
networks, because
such a high
proportion of total Internet traffic flowing on
taken as being
can be
them that
representative of Internet traffic as a whole.
Applying this to the WorldCom group and
traffic was
MCI,
[…](*) was
exchanged with MCI,
networks.
exchanged with
Therefore,
the size of MCI’s
network to the size of the other 12 networks in
total should be […](*).

[…](*) of WorldCom’s

the ratio of

they have

other

they

and

the

the

12

(113) Under these assumptions,
give

the WorldCom group

the market shares
would
some
[between 30 and 40 %](*), with MCI bringing
an additional [between 10 and 20 %](*) and no
competitor having more than [between 5 and
15 %](*). The combined market shares of MCI
and the WorldCom group would then be
[between 42 and 52 %](*).

(116)

(v) Conclusions on calculation of market share

(114) The calculation methodology discussed above
for market
share based on
sizing and for
revenue and traffic flow has been designed on a
conservative basis, to be as generous as possible
to the parties within reasonable limits, and thus

(115) The

to

likely

understate market

is
share.
Nonetheless, even on this basis, there is little
doubt that the combined entity would hold over
50 % of the market, however widely defined.
The combined network would be [significantly
larger than](*) the size of its nearest competitor
(Sprint) on either
traffic flow,
bearing in mind that the next competitor, the
GTE group, is about half the size of Sprint.

revenue or

(vi) The parties’ response

the

that

imposed

analytical

commercial
objected
parties
confidentiality
by
constraints
competitors on the information supplied by
them to the Commission made it impossible for
them to determine who were the other 12 who
were active in the market, and thus whether
market
share figures might be significantly
affected if other players were added. As has
been noted,
approach was
essentially a conservative one, and designed to
give the parties the benefit of the doubt, if there
were any doubt, as to who might be considered
to have the status of a top level network. On
this point, one of the interveners at the oral
hearing, Sprint, took a more restrictive view on
the definition of
the market and questioned
whether some among the 12 networks might
not have
large number of
to a
geographically dispersed locations or own or
lease high speed facilities, and thus might not
be accepted by competitors as capable of
fulfilling Sprint’s definition of a top level
backbone provider. Another competitor, GTE,
pointed out
traffic
would not change the size relationship between
its
the
estimation, classifying 50 companies as falling
within the relevant market definition would
lower the MCI WorldCom share by only 5
percentage points. These assessments supported
the view that the identity of the 16 was not
critical.

including additional

backbones

largest

access

that,

that

and

in

by

used

In addition, the parties objected to the traffic
the
calculation methodology
Commission. In particular, they questioned two
assumptions which they saw as underlying the
Commission’s methodology, namely that traffic
was uniformly distributed among […](*), and
that there is no significant diversion of traffic
caused by the interconnection among networks
below the
networks.
of
Furthermore, the parties asserted that the traffic
inputs provided to the Commission might not
have been on a comparable basis and that, as a
result,
share
the parties’ combined market
might have been overstated. The Commission
for its part does not necessarily accept that the

top-level

layer

L 116/22

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Official Journal of the European Communities

4.5.1999

that

that:

they were present.

suggested by the parties were
assumptions
implicit
in the calculation methodology, nor
what level of significance they would have to
It also
the extent
the
the parties,
observes
proceedings, had argued that revenue was the
only appropriate method of measurement; all
interested parties had been consulted about the
form of the relevant data requests in order so
far as possible to make the figures supplied
comparable;
the
Commission’s methodology, the parties did not
have any alternative to propose.

and while

questioning

throughout

4. Impact of merger and competition

a

to

the

transit

suitably

requests

disappointed

connectivity with all

to achieve
top-level
networks would obviously need the consent of
MCI WorldCom. But at present, even with the
presence in the market of a group with the size
of WorldCom, an incumbent’s ability to deny
peering
qualified
candidate is constrained by competitive forces.
Any incumbent who denies peering to such a
candidate cannot assume that the prospective
from him instead.
peer will buy
Alternatively
ISP might
become a customer of a competing network; in
which
have
refusing
contributed to the enhancement of the market
power of one of its competitors. If the merger
goes ahead however, because of the strength of
its bargaining position,
the possible adverse
consequences to MCI WorldCom of declining a
peering request would be substantially reduced,
if
eliminated. Disappointed
applicants would be obliged to purchase transit
in order to reach the MCI WorldCom network,
thereby putting them at a cost and quality
disadvantage.

ISP will

entirely

case

not

the

(117) The combination of

of

size

extent

independently

principal
has

the Internet backbone
networks of WorldCom and MCI would create
a network of such absolute and relative size
that the combined entity could behave to an
appreciable
its
competitors and customers. This will impact on
consumers in Europe as much as on any other
Internet
consumers. WorldCom’s
very
a
subsidiary, UUNet,
its
by
substantial
competitors. The
to
fact
achieving dominance may be inferred by its
decision in early 1997 to attempt (an attempt
which ultimately failed) unilaterally to cease
peering with a number of its existing peers.
Since that time WorldCom has already gained
additional market power by the acquisition of
ANS and CNS. As a result of the union with
MCI, there can be little doubt that the critical
mass would
acting
independently of competitors.

already
comparison with
close
it

achieved

that

for

be

is

(118) The strength and size of MCI WorldCom’s
to pursue various
networks would enable it
to reinforce its market position.
stratagems
These could follow two broad approaches as
outlined below. One would be to raise rivals’
costs, and the other would be
to price
selectively to attract customers away from
competing networks.

(120) MCI WorldCom would

If

be

able

to change

to act
independently of competitors by raising their
costs and decreasing the quality of their service
offerings. Competitors with existing peering
relations with MCI WorldCom would know
that their ability to continue to operate in the
marketplace depended on their being able to
continue offering their customers connectivity
for any
to the MCI WorldCom network.
reason the quality or the cost basis of
the
connection to the MCI WorldCom network
were
the
customers on those competitors’ networks could
well migrate to MCI WorldCom, and new
customers might be deterred from going to
anyone
than MCI WorldCom.
Competitors would have to live with this threat
and
avoided
disconnection or degrading of connection by
MCI WorldCom. This might
for
example, to allowing MCI WorldCom to have a
say on to whom its competitors should grant
transit or peering, and on what terms. In this
way MCI WorldCom would be in effective
control of the market.

in an adverse way,

a way which

extend,

behave

other

in

(119) MCI WorldCom would control market entry by
denial of new peering requests, foreclosure or
the threat of foreclosure of peering agreements,
and/or
paid
replacement
interconnection. A prospective ISP who sought

their

with

(121)

If a competitor wished to peer (or to continue
peering), MCI WorldCom could control
the
quality of his service offering by its decisions on
the management of the link. MCI WorldCom
could degrade the offering of competitors, for
example, by deciding not
the
capacity at private peering points. Although this

to upgrade

4.5.1999

EN

Official Journal of the European Communities

L 116/23

would degrade the quality of service for both
MCI WorldCom and the competitor concerned,
the competitor would be hurt
to a greater
extent, as his customers would lose connectivity
to a larger portion of the Internet than MCI
WorldCom’s customers. In proportional terms,
traffic affected by such a
the percentage of
strategy would be higher
smaller
the
network.
added that MCI
WorldCom’s chances of implementing such a
strategy might well be improved by picking off
customers and competitors one by one, rather
than attempting to take on the rest of
the
market in one step.

should be

for

It

or

selling

business

connectivity

Internet
and

to final
ISPs
consumers,
residential
customers buying dedicated or dial up access to
the Internet. These customers depend ultimately
on the provision of the connectivity offered by
top-level networks. They will have no choice
but
to connect directly or indirectly to the
dominant provider of these services, as it is only
such a provider that can guarantee reliable
access to all parts of the Internet. To the extent
that MCI WorldCom is already active in this
market, it could attempt to leverage its position
there to gain a dominant position downstream.
It could do this because of the inability of other
genuine
top-level
to
competitive constraint, and because of
the
influence and control it has over the cost base
of resellers active downstream.

networks

offer

a

(122) The growth in Internet traffic has been such
that MCI WorldCom could implement
this
degradation strategy without needing to make
it would suffice for it
any conscious effort:
simply to focus on the development of its own
network rather than upgrading the links with
competitors. By opening up such a quality
differential between itself and its competitors, it
any
would be well placed to persuade
prospective new customers for Internet service
to ignore the offerings of its rivals. As the size
of
its
the MCI WorldCom network grows,
power to disadvantage competitors in this way
will become correspondingly greater.

(125)

incumbent

(123) As MCI WorldCom grew larger, it would be in
a position to take action to reduce
the
competitors by
independence of
changing the nature of
the interconnection
arrangements with them (or merely threatening
to do so), to oblige them to pay for access to its
network (either paid peering or transit) whilst
offering no such payment in reverse. And in so
far as competitors had no choice but to accept
such a change in terms, MCI WorldCom would
gain control over an important part of its rivals’
costs and be in a position to influence the
quality of
could
influence their cost position by charging prices
for paid peering or transit that were designed to
prevent its (cid:28)customers’ (formerly competitors)
from being able to offer prices competitive with
those on offer from MCI WorldCom itself.

service offering.

their

It

(124) MCI WorldCom

behave
independently of its customers, that is those

could

also

(i) Multi-homing as an alternative

if one of

In response to these arguments
the parties
argued that the ability to leverage a dominant
position downstream was limited by the fact
that many ISP as well as the more powerful
customers — such as owners of web sites —
were (cid:28)multi-homed’, that is, they bought transit
from more than one provider, and could easily
switch traffic to the other
the
providers attempted to abuse a strong market
position. This was challenged by interveners at
the oral hearing. It ignored the fact that many
of the currently multi-homed customers were
multi-homed to MCI and WorldCom, rather
than, for example, to one of the merging parties
and a third party; for this group the merger
would remove their current freedom of choice.
It was also said that multi-homing was not
simple, because it required the operation of a
particular
the BGP4
protocol, nor cheap, because it involved the
expense of
connections where
competitors might be paying for only one. In
any event, a dominant network could impede
multi-homing by a variety of tactics, including:
a refusal to deal with multi-homing customers;
degradation of connection to such customers or
simply offering
refusal

to offer BGP4; or

two transit

protocol

known

as

L 116/24

EN

Official Journal of the European Communities

4.5.1999

volume discounts which would favour higher
usage single-homed customers.

(126) Because of

it

valuable

the specific features of network
existence of network
competition and the
externalities which make
for
customers to have access to the largest network,
MCI WorldCom’s position can hardly be
challenged once it has obtained a dominant
position. The more its network grows, the less
need it has to interconnect with competitors
and the more need they have to interconnect
with the merged entity. Furthermore, the larger
its network becomes, the greater is its ability to
control a significant element of the costs of any
new entrant. It can achieve this by denying such
entrants the opportunity to peer and insisting
that they remain as customers and pay a margin
accordingly for all the services they want to
offer. The merger could thus have the effect of
raising entry barriers still higher.
it
could be argued that, as a result of the merger,
the MCI WorldCom network would constitute,
either immediately or in a relatively short time
to which all
thereafter, an essential
other
to
interconnect (directly or indirectly) in order to
offer a credible Internet access service.

ISPs would have no choice but

Indeed,

facility,

(ii) Absence of competitive constraints

(127) The first reaction of competitors, both actual
and potential, to the enhanced market power of
the largest network also needs to be considered.
The first reaction of current competitors might
be to try to attract more traffic. They could do
this either by trying to poach existing customers
away from the merged entity, or by enhancing
their
capacity in the hope of offering a
technically superior service. The difficulty in
persuading MCI WorldCom’s
to
move is
those customers are already
attached to the largest network, where they
enjoy very direct access to that network’s direct
to another
customer base.
network,
access MCI
they
WorldCom direct customers through indirect

If
could

they move

customers

only

that

the

and

number

such as

agreements,

their new transit provider’s
means
peering
of
customers that they could directly access on
their new network would be smaller. Moreover,
their service offering
the general quality of
would be lower because messages must pass
largest
through more hops
network. And any such efforts
to poach
customers would not, of course, pass unnoticed
by MCI WorldCom, who could make any such
move unattractive to its existing customers by
threatening to degrade (or not to upgrade) the
peering connections with its ex-customer’s new
transit provider(s), or by relegating competing
networks to the status of paid peer, or customer
of MCI/WorldCom.

to reach the

(128)

a

sufficient

to prevent

concerted response

It might be argued that MCI WorldCom might
from
faced by
be
competing networks
it
from exercising its market power. However,
MCI WorldCom can react by implementing a
predatory strategy on an incremental basis, by
which it challenges other competing networks
in succession, starting with the smallest and
weakest. For each of the competing networks,
an attack on another competitor may benefit
them in the short term to the extent that they
can hope to pick up some (but probably not all)
of that network’s departing transit customers.
They may calculate that their interests are best
served by not behaving in a way which is likely
to bring retaliatory action upon themselves.

(iii) Potential competitors

(129)

In terms of potential competitors, the barriers
faced by anyone attempting to enter as a top
level network would be raised still
further.
Apart from the costs of network construction
faced by anyone wishing to enter directly as a
top level ISP, the aspiring entrant would almost
certainly be refused peering by the incumbents
because of
inadequate customer, and hence
traffic, base. As for an ISP who wishes to move
from transit buyer to top level ISP, while there
is competition among the top-level networks

4.5.1999

EN

Official Journal of the European Communities

L 116/25

there are certain limitations on how far any
single network can go in refusing peering to
large enough to
another network which is
constitute a potential competitor.
It cannot
assume that it will earn transit revenue from an
applicant to whom it has refused peering. In
turning down a request for peering from such
an applicant, it risks enhancing the power of a
competing network from whom the applicant
buys transit, or of finding that it is the only one
of the top-level networks which is not prepared
to grant peering, and it may find the new
network can exercise a disconnection strategy in
reverse. But once one network becomes overly
powerful, it can prevent potential competitors
from assuming the status of top-level networks
by making sure that
the prices at which it
supplies transit are kept high enough to prevent
the new entrant from building sufficient market
share. It can also prevent its competitors from
granting peering rights by exercising the threat
of disconnection or degradation against them.

(iv) Customers’ reaction

by

(132) As to the customers’ reaction, customers could
try to counteract such a strategy by moving to
the other networks to counterbalance the power
of MCI WorldCom. In principle they might see
this as the logical response to the market power
now exercised
dominant MCI
WorldCom entity. But unless the customers can
act as a unit (and there is no evidence that the
customer base is sufficiently concentrated to
permit this) no individual customer may want
to take the risk of moving to obtain a possibly
inferior service without having any assurance
that a sufficient number of other customers
would take the same step. They are unlikely to
feel that it is worth taking the risk.

the

(130)

It has been suggested that new competitors at
the top level might emerge, for example, by the
collective joining of forces of ISPs in Europe.
However, such ISPs would be no different from
any other potential entrant, because they could
not afford to do without connectivity obtained
from the existing top level ISPs. And the top
level
ISPs are likely to be equally active in
In this sense the
attracting new customers.
existing incumbents benefit from a substantial
(cid:28)first mover’ advantage. The obstacles faced by
a European ISP attempting to enter as a top
to be
level network are
substantially the same as those faced by any
other ISP, no matter where they are located in
the world.

therefore

likely

(131) The merger might well create a (cid:28)snowball
effect’, in that MCI WorldCom would be better
placed than any of its competitors to capture
future growth through new customers, because
of
the attractions for any new customer of
direct connection with the largest network, and
the relative unattractiveness of competitors’
offerings owing to the threat of disconnection
peering which MCI
or
WorldCom’s competitors must constantly live
under. As a result, the merger might provide
MCI WorldCom with the opportunity to
enlarge its market share still further.

degradation

of

(133)

the oral hearing,

In their reply to the Statement of Objections
and subsequently at
the
notifying parties laid considerable stress on the
the Internet as a factor in
rapid growth of
to
limiting the ability of
for
exercise dominance. However,
example, of
ISPs
large numbers of
operating at the retail level, but who still need
to rely on an existing top level network for top
level or universal Internet connectivity, will not
be able to constrain the competitive behaviour
of the parties any better than can any of the
existing resellers.

existing players
the entry,
reseller

(134) At the oral hearing, an intervener stressed the
need to avoid the error of assuming that growth
could counter market dominance. Indeed, the
incumbents rather than newcomers could well
be the best placed to capture future growth. For
example, the parties pointed to the emergence
of new competitors who were engaged in laying
substantial fibre networks and could therefore
offer a competitive counter-force. However,
entry as a top level
ISP requires not only
physical facilities, but also a customer base and
hence traffic flow and thus access to peering
interconnection. A dominant network which
refused to provide peering could effectively
prevent a new entrant from operating as a top
level network. […](*).

L 116/26

EN

Official Journal of the European Communities

4.5.1999

(135)

follows from the above that

It
the notified
concentration, if not altered, would lead to the
creation of a dominant position in the market
for the provision of
top level or universal
Internet connectivity.

VII. UNDERTAKINGS SUBMITTED BY THE
PARTIES

(136)

about

In order to try to resolve the issues raised by the
on
the
Commission
competition of the proposed merger, the parties
have offered to enter
following
commitments ((cid:28)the undertakings’):

into the

impact

likely

(cid:28)In order to achieve clearance of the merger, the
notifying parties have agreed to divest the entire
Internet business of MCI and, accordingly,
make the following undertakings:

I. Divestment of MCI’s Internet business

1. MCI will divest MCI’s Internet businesses
and services relating to access to the public
interconnected network of networks known
the “Internet” and certain related
as
services (collectively, the “iMCI business”)
as an operating entity. The iMCI business,
the entirety of which will be transferred to
a
(“the purchaser”),
includes:

single purchaser

(a)

iMCI’s wholesale worldwide dedicated
Internet access business (i.e. dedicated
access to the Internet sold to Internet
Service Providers (ISPs) who are in the
business of providing Internet access to
others);

(b)

iMCI’s retail dedicated Internet access
business (i.e. dedicated access to the
Internet sold to end users);

(c)

iMCI’s (i) consumer dial-up Internet
(ii) business
access business and/or

businesses

dial-up Internet access business and (if
either or both of the dial-up Internet
access
transferred)
electronic mail servers for electronic
iMCI’s dial access
mail used for
customers (unless the purchaser elects
not to acquire either such business);

are

(d)

iMCI’s web hosting services;

(e)

iMCI’s
services; and

real

broadcast

network

(f)

iMCI’s managed firewall services.

(i)
(ii)

The following services, which are not a
the iMCI business will not be
part of
research
included:
network,
II network
research and construction project for the
United States Government, and (iii) virtual
including
private network data services,
Extranets and Intranets.

vBNS
the

Internet

private

2. The iMCI business will be transferred to a
separate wholly-owned subsidiary of MCI
(NewCo) prior
to the
to its
purchaser. NewCo will be an independent
business with 100 % of the Internet traffic
and 100 % of the Internet revenues of the
iMCI business:

transfer

and

related

(a) all relevant MCI routers, servers, ATM
switches, modems, ports and other
equipment
Internet
network infrastructure necessary to
operate the iMCI business will be
transferred
including
to NewCo,
without limitation, associated Internet
(IP) addresses, autonomous
Protocol
numbering
system numbers
operations.
schemes
related
Additional
connectivity
including
racks to support the equipment sold
and cables between such elements,
customer lists and historical data for
all customers.

assets
components,

and
network

include

for

All domain name and authentication
servers
for dedicated and dial-up
Internet access, network news servers,
ISICS performance
Mbone

servers,

4.5.1999

EN

Official Journal of the European Communities

L 116/27

servers, web

monitoring
hosting
servers and servers for the operation of
the real broadcast network, servers for
the iMCI dial network and related
engineering test equipment will be
transferred to the purchaser;

(c)

records of MCI and WorldCom
relating to compliance with the
terms of this paragraph 2(b);

(with

the purchaser will benefit from the use
of intellectual property rights necessary
the transferred
for the operation of
business
of
exception
the
security software) and will also benefit
from
assignable
permits/authorisations held by MCI
necessary for the iMCI business. MCI
will provide security services to the
purchaser for a period agreed upon
between MCI and the purchaser.

other

all

3. MCI will

to the purchaser all
transfer
including
existing peering arrangements,
the peering agreement with WorldCom.
WorldCom agrees not to terminate such
peering arrangement for a period of five
years
from the closing date (save for
material unremedied default). The peering
agreement between MCI/WorldCom and
the purchaser will provide for ongoing
mutual obligations
to maintain efficient
and high quality interconnection between
the networks, including, but not limited to,
reasonably required bandwidth upgrades,
added
added
connections
interconnection locations. […](*).

and

4. Except

for

Internet

of
date,
WorldCom as
MCI/WorldCom will not solicit or contract
to
access
services:

customers
closing

dedicated

Internet

provide

the

at

(a)

to wholesale dedicated Internet access
customers (i.e. ISPs) for a period of at
least 24 months post closing;

(b)

to retail dedicated Internet access
are
customers
assigned to the purchaser for a period
of at least 18 months post closing;

contracts

whose

(c)

to retail dedicated Internet access
customers whose contracts are not
assigned to the purchaser for a period

(b)

to the following, all MCI’s
subject
contracts with wholesale and retail
customers for the provision of Internet
access and all MCI’s
Internet web
hosting and managed firewall service
contracts will be assigned to NewCo
as follows: 1. MCI will assign […](*)
of the Internet dial-up and assignable
web hosting and managed firewall
contracts at closing; and 2. all other
assigned
contracts which
without the customer’s consent will be
assigned at closing. For those contracts
which cannot be assigned without the
customer’s consent:

can

be

to

efforts

(i) MCI and WorldCom will use their
obtain
the
[…](*) and
to be
purchaser

such contracts

best
customer’s
cause all
transferred
[…](*);

consent

the

to

that

(ii) MCI and WorldCom will, in any
steps are
take whatever
event,
required to ensure
iMCI
contracts representing […](*) of
iMCI combined retail dedicated
access and web hosting revenues
and […](*) of the remaining iMCI
business revenues at closing are
transferred
purchaser
[…](*); and

the

to

(iii) for

of

any

contract where
customer

the
consent
to
the
assignment cannot be obtained
despite the best efforts of MCI
and WorldCom, MCI/WorldCom
will remain the contracting party,
but […](*) of the Internet traffic
will
remain on the transferred
iMCI network for the duration of
that contract, and MCI will pass
through to the purchaser […](*)
of the Internet revenues received
under that contract;

the

(iv) MCI and WorldCom will agree
the
purchaser
with
purchaser shall have the right to
appoint an independent auditor, at
MCI WorldCom’s
to
review relevant documents and

expense,

that

L 116/28

EN

Official Journal of the European Communities

4.5.1999

of at least 18 months post closing, or
until after
such
contract, whichever is later.

the termination of

MCI will negotiate in good faith with the
purchaser
an appropriate non-compete
agreement with respect to the web hosting
and managed firewall services. MCI and
WorldCom will agree not to take any steps
to cause the transfer of Internet services
business from iMCI to WorldCom, or to
multi-home such business on WorldCom
networks beyond the ordinary course of
business, prior to closing.

5. As part of the transaction:

(a) MCI will

to NewCo all
transfer
necessary employees
the
to support
iMCI business being transferred. MCI
and the purchaser will mutually agree
upon the
employees who will be
transferred with the iMCI business and
MCI will provide the purchaser with a
list of employees classified by function
relating to such business. Employee
engineers,
transfers will
operations
and
sales and marketing as well as support
staff;

include
support personnel,

(b) MCI and WorldCom agree not to hire
employees transferred to the purchaser
for a period of […](*) post closing and
not to solicit the employees transferred
to the purchaser for a period of […](*)
post closing;

support

arrangements

(c) MCI will make available all other
necessary
to
fulfil existing contractual obligations
iMCI business — and to
of
accommodate growth of that business
— together with, where possible, the
benefit of existing MCI maintenance
agreements and warranties;

the

(d) MCI agrees that until the closing date
the iMCI business shall be operated in
the ordinary course consistent with
including without
past
limitation,
commercially
reasonable solicitation and retention of
Internet service customers and network
backbone development;

practice,

the

(e) MCI will

license the purchaser

to
identify the acquired backbone assets
as
acquired
and/or

business

the

“formerly the InternetMCI backbone
network” and/or “formerly the iMCI
business” (the specifics of which shall
be negotiated with the purchaser) for a
period of […](*); and

(f) MCI will

into

enter

contractual
arrangements
to provide 1. basic
transmission service for the Internet
transferred and 2.
business being
international private
the
contracts being transferred.

lines

for

II. Timing

6. The sale is subject to and is intended to
close prior to, or contemporaneously with,
the closing of the merger between MCI and
WorldCom. The terms of
the sale are
regulatory
subject
approvals and the identity of the purchaser
is subject to the approval of the United
States Department of
Justice and the
Commission of the European Communities.

necessary

all

to

III. The sale of the iMCI business by the

purchaser

7. […](*).

IV. Supporting agreements

8. At the option of the purchaser, MCI and
into the following
purchaser will enter
to give
supporting agreements
these
to the transaction. Each of
effect
contracts will be for a transitional period
([…])(*) and a follow-up period ([…])(*).
[and will be
favourable
rates](*).

in order

generally

at

(a) a Master Services Agreement, setting
out
the prices at which MCI will
provide services to the purchaser to
iMCI business being
support
transferred.
Services
The Master
Agreement will include:

the

(i)

a Collocation Agreement, having
a term of up to […](*), under
which MCI will provide sufficient
locations for the
space at MCI
operation of
those assets being
transferred to the purchaser;

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Official Journal of the European Communities

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(ii) a Network Service Agreement,
having a term of up to […](*),
pursuant to which the purchaser
may obtain from MCI sufficient
in
for use
capacity
transport
providing Internet services; and

(iii) Local Access Agreements, of up to
[…](*), whereby the purchaser
will obtain local access to the
Internet backbone;

(b) other contracts, having a maximum
term of up to […](*), supporting the
and
maintenance,
provisioning
and
management of the network for the
iMCI business customers.

operation,

services

of

Further details of these agreements will
be negotiated between the parties.

9. The provisions of

these undertakings
contain the minimum protection that will
be afforded by MCI/WorldCom to the
purchaser.

of

of

being

informed

two further

least
such institutions
(“the further names”) within seven
days
the
rejection. If only one further name is
the
approved by the Commission,
parties
the institution
concerned as trustee. If more than one
further name is approved, the parties
shall be free to choose the trustee to be
appointed from among the names
approved.

shall appoint

(d)

If all further names are rejected by the
the Commission shall
Commission,
nominate a trustee to be appointed by
the parties.

12. As

soon as

the Commission has given
approval to one or more names submitted,
or nominated a trustee, the parties shall
appoint the trustee concerned within seven
days thereafter.

13. The trustee’s mandate shall

include the

following functions:

V. Implementation

(a)

10. At any time after a period of […](*) has
elapsed since the adoption of this Decision,
the Commission shall have power
to
require the notifying parties to appoint a
trustee in accordance with the provisions of
paragraph 11 to exercise the functions set
out in paragraphs 13 and 14.

11. (a)

If the Commission decides to exercise
the powers referred to in paragraph 10,
it shall request the parties to propose
to the Commission, within seven days
of the parties receiving notification of
such request, the names of at least two
institutions, independent from either of
the parties, and either of whom the
parties
to be
consider appropriate
appointed as Trustee.

(b) The Commission

have

shall

the
discretion to approve or reject one or
both of the names submitted. If only
one name is approved, the parties shall
the institution concerned as
appoint
trustee.
If more than one name is
approved, the parties shall be free to
choose the trustee to be appointed
from among the names approved.

(c)

If all the names submitted are rejected,
the parties will submit the names of at

in

to monitor the parties’ maintenance of
the viability and market value of the
to be
assets and business activities
divested
the
undertakings, and that the assets and
activities concerned are operated on an
independent
basis
consistent with their status, until their
divestment to the purchaser;

accordance with

length

arms’

(b)

to monitor the satisfactory discharge
the obligations
by the parties of
entered into by the parties in these
undertakings. In particular the trustee
shall

(i) monitor

and

advise

the
Commission as to the adequacy of
the procedure for
selecting the
purchaser and as to the conduct
of the negotiations;

(ii) monitor

advise
to whether

the
and
Commission as
the
agreements with the purchaser
the
will properly provide
divestiture of the relevant assets
and business activities as provided
for in the undertakings;

for

(c)

to provide written reports (“the trustee
on
reports”)
the Commission
the
progress with the discharge of
any
trustee’s mandate,

identifying

to

L 116/30

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4.5.1999

respects in which he has been unable
to discharge his mandate. Such reports
shall be provided at regular monthly
intervals commencing one month after
the date of his appointment, or at such
other time(s) or time periods as the
Commission may specify.

if

the Commission may,

14. At any time during the term of the trustee’s
appointment,
it
believes that the undertakings are not being
properly complied with, request the trustee
following additional
to carry out
functions (“the request”), and the trustee’s
mandate shall be deemed to be extended
accordingly. In the event of conflict with
the initial functions, the trustee shall give
priority to the discharge of these additional
functions:

the

(a)

to ensure that all assets and business
activities to be divested in accordance
with the undertakings are operated on
an independent arms’
length basis
consistent with their status;

(b)

to ensure the proper divestment of all
relevant business assets and activities;

(c)

(d)

(e)

in the trustee’s reports, or in any event
within no later than one month of
being notified of the request, to submit
to the Commission a proposal for the
method and timescale proposed by the
in
trustee
accordance with the undertakings of
the
business
assets
activities. The Commission will, as
practicable,
reasonably
soon
approve the proposal or indicate any
changes that it may require;

divestiture

relevant

and

the

for

as

in the trustee’s reports, or as soon as
negotiations are
entered into with
prospective purchasers, to provide to
the Commission sufficient information
to enable it to decide on the suitability
of the purchasers in question;

to break off negotiations with any
prospective purchasers, or to instruct
such
parties
the
negotiations,
to the
Commission
negotiations
concerned are being conducted with an
unsuitable purchaser;

break
it appears
the

to
if
that

off

approval

the Commission for
an
agreement for sale of the whole of the
iMCI business to a suitable purchaser;
such agreement to be unconditional on
and
both
seller
and
irrevocable except
for the approvals
required from the Commission, and
any
required from the
United States Department of Justice or
Federal Communications Commission.

approvals

purchaser

Nothing in this paragraph 14 may result in
the divestment of the assets and business
activities to be divested in accordance with
the undertakings until immediately prior to
or contemporaneously with the closing of
the merger between the notifying parties.

to provide
such assistance

the
15. The parties undertake
trustee with all
and
information, including copies of all relevant
documents, as he may require in carrying
out his mandate, and to pay reasonable
remuneration for his services.

16. If MCI and WorldCom should announce
their proposed merger has been
that
trustee’s
irrevocably
mandate(s)
be
to
be
discharged, and his appointment shall be
deemed to be terminated.

abandoned,
shall

the
deemed

17. The Commission will

its

the

use

any

soon as

prospective

Commission,

The
whether

best
endeavours to inform the notifying parties,
reasonably practicable, as
as
the suitability of any proposed
regards
in
purchaser(s).
determining
proposed
purchaser is suitable, will take into account
purchaser
whether
concerned (i) appears to it to possess the
status and resources necessary to own and
operate the iMCI business over the long
term as a viable and significant competitor
to the parties, (ii) is independent of the
to have
parties,
(iii) can be shown not
significant
commercial
connections with them and, (iv) has, or
necessary
reasonably
approvals
from the
relevant competition and other regulatory
authorities in the European Community
and elsewhere.’

all
the purchase

relevant

obtain,

and

can

for

VIII. ASSESSMENT OF UNDERTAKINGS

(f) within […](*) (or such other date as
the Commission may specify) of being
notified of the request, to submit to

(137)

In assessing the adequacy of the undertakings,
the Commission started from the premise that,
if a divestiture were to be offered as the remedy,

4.5.1999

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Official Journal of the European Communities

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activities of

then given WorldCom’s strength in the market
place, it was necessary to secure the divestiture
of all or substantially all of the overlapping
Internet
the merging parties.
Furthermore, given the level of concentration in
this market,
the divested
business should be preserved so far as possible
as a single unit, and hence as a potential
competitive force, and should be divested to an
acquirer who was capable of replacing the
departing player in the market.

it was

that

felt

(138) The parties’

initial proposal

for divestiture,
which involved the selection of an identified
buyer prior to the Commission taking a final
decision on the notification, was market tested,
and the results were used in further discussions
with the parties about an improved remedy,
which is reflected in the undertakings.

2. Technical issues

to

both

technical

(141) The objections to the unbundling of MCI’s
Internet activities from its telecoms activities
related
and
commercial/marketing issues.
In the case of
MCI the same physical cable infrastructure is
used to carry both telecoms and Internet traffic,
and the bulk of traffic over that network is not
Internet traffic. The Commission was advised
that, in view of the relatively small proportion
of total capacity which was dedicated to the
carriage of
it would not be
possible to split out a separate physical cable
network for Internet traffic alone. Under the
parties’ proposed remedy, therefore, an acquirer
facilities,
would be given leases of
together with appropriate rights of access and
co-location,
to enable him to run a virtual
network over MCI’s physical network.

Internet

traffic,

cable

A. RESULTS OF MARKET TESTING

(142)

(139)

two

into

views

In general, respondents to the market
tests
broad
falling
expressed
categories. One group of respondents felt that
no divestment, no matter what its scale, would
be sufficient to address the problems of the
Internet, which could only be remedied by the
regulation of interconnection. The other group
believed a divestiture remedy was possible, but
tended to favour
involving
WorldCom’s UUNet subsidiary, and were in
general sceptical about the scope for separating
out MCI’s Internet activities from its general
telecoms activities. Some believed however that
a full divestiture of MCI’s Internet networks, if
achievable, would be capable of remedying the
competition concerns.

a divestment

1. Regulation

(140) The Commission did not

take a view on
whether such regulation might be required in
the longer term, but noted that the competition
concerns arising from the notified concentration
could only be resolved by a modification
proposed by the parties, and that regulation of
the Internet was not therefore a solution in the
context of the current notification.

that

onto

existing

recognised, however,

It was
such a
dependency arrangement might not provide a
It was noted that other
long term solution.
successful top level ISPs tended to be (cid:28)facilities
based’, that is to own rather than to lease their
own physical networks. An ISP who had to
lease facilities permanently from a competitor
would be dependent on that competitor. An
acceptable buyer ought therefore to be in a
position either to migrate its traffic more or less
immediately
alternative
an
network, or to build its own network in a
time and then migrate
reasonable period of
traffic onto it. The most
suitable type of
acquirer might therefore be facilities based or
capable of becoming so, and could be,
for
example, either a telephone company with
existing physical
facilities but no Internet
customer base, or perhaps an existing Internet
player not currently operating as a top level ISP
but with the potential to do so if given the
appropriate customer base. The identity of the
buyer would therefore be important, but
it
should also be noted that the need to develop a
physical network appears to represent a lower
barrier to entry than the need to acquire a
customer base.

3. Commercial and marketing issues

(143) The second difficulty raised initially by the
parties,
party
by
respondents to the market tests, was that it

some

third

later

and

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EN

Official Journal of the European Communities

4.5.1999

to the market

would be difficult in commercial and marketing
terms for MCI to separate out the provision of
telecoms and Internet services, because both
were offered to their customers as a single
bundled package, whether or not in legal terms
they were achieved by separate contracts. Some
respondents
tests painted a
different picture, implying that, at least among
the customer group consulted, most would have
had no difficulty with buying their Internet
service and telephone service from separate
providers. Upon more detailed examination it
appeared that, even where customers bought
both telecoms and Internet services from the
same supplier, those services were frequently
dealt with by means of distinct, and separable,
contracts.

(144)

the above,
remedy
a

In the light of
the Commission
concluded
that
the
divestment of
the Internet business of MCI
if properly crafted, be acceptable as a
could,
means of remedying the competition concerns
in this case.

involving

B. THE BUSINESS TO BE SOLD

(145) The parties’ proposed remedy involves

the
incorporation of all the activities to be divested
(collectively known as (cid:28)the iMCI business’) into
a separate wholly owned subsidiary, NewCo, to
be sold as a single entity to one buyer. […](*).

(147) An important part of a top level ISP’s service
offering will be the ability to maintain peering
interconnection with other
similarly placed
providers. The undertaking would give the
acquirer the guarantee of peering for five years
[…](*). While
cannot
undertakings
guarantee that
the acquirer will be able to
maintain peering interconnection with other
top-level networks,
that peering is
remain the largest
secured with what will
network despite divestment, together with the
traffic the acquirer will generate, should provide
the acquirer with the means
to continue
providing universal connectivity.

the fact

the

(148) As

access

rights of

In view of

leases,
[…](*)

the desirability of

regards
and
terms would be offered
co-location,
[…](*), after which MCI WorldCom would
offer service […](*) terms for a further […](*) if
the
required.
in due
acquirer becoming (cid:28)facilities based’
course, consideration needs
to be given to
whether these arrangements provide adequate
time for the migration of the traffic onto a new
network. Third party estimates of the length of
time it would take to do this varied from
almost no time, for an acquirer who is already
facilities based,
for an
to periods of
acquirer who had to build a network from
scratch. The […](*) period […](*) should be
sufficient to permit the transfer of all relevant
activity to the alternative network and to
permit
fully
independently of MCI. In the light of these
considerations, the undertakings are considered
satisfactory on this point.

network

operate

[…](*)

that

to

1. Network and network-related assets

2. The employees

servers,

required for

(146) The assets and property rights which are to be
transferred are set out in the undertakings. The
buyer of NewCo would acquire outright
ownership of certain tangible and intangible
the construction of an
assets
Internet network,
switches,
(routers,
modems, ports, related network infrastructure,
address
etc.). The
purchaser would not, however, acquire the
underlying physical network of MCI (for the
reasons discussed above), but it would be given
to
leases and associated contractual
permit it to use the equipment concerned (rights
of access, co-location, and so forth) to run a
virtual
physical
infrastructure.

space, domain names,

over MCI’s

network

rights

to

parties

indicated

(149) The results of the market test suggested that an
Internet operation of the size of MCI’s Internet
activities could require several hundred staff to
run. The
the
have
Commission that around 800 staff would be
needed to run the MCI’s Internet activities, and
that they would make these available to the
subject
acquirer,
acquirer’s needs.
to the
However
the number of employees would
depend to a large extent on the identity of the
purchaser, and its level of involvement in the
same type of Internet activities as MCI. For that
reason,
the
number of employees to be transferred as a
matter for negotiation between the vendor and
the acquirer.

the undertakings would leave

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3. Non-solicit/non-compete provisions

(154)

(150) The undertakings include non-solicitation and

non-contract provisions […](*).

this

important

It might be expected that only the larger and
clients would have non-
more
assignability clauses. However,
is not
necessarily correct. Whether such a clause has
been written in depends in the first place on
whether the customer concerned requested it.
Customers with the bargaining power to obtain
such a clause are not necessarily large buyers of
Internet services and might, for example, be
large buyers of telecoms services from MCI, but
have only relatively small Internet purchases.
[…](*).

of

their

in terms of

consent. This would

(155) The undertakings anticipate the possibility that
some customers may not be persuadable. The
parties believe that a requirement to transfer all
customers, irrespective of the existence of such
clauses, might give the remaining few customers
undue negotiating power,
their
ability to make unreasonable demands as the
be
price
particularly so if the customers in question were
able to use their purchases of non-Internet
in the
services
accordingly
negotiations. The parties have
proposed that
they should be required to
transfer contracts [for in excess of 90 %](*) of
total dedicated access revenues and be given a
[…](*) of
leeway of
[…](*). This figure of
to
revenues
around […](*) of all MCI’s Internet revenues.
[…](*) The […](*) percentage of untransferred
customers represents the upper limit, and the
percentage remaining may well be lower.

for dedicated access

a bargaining

translates

counter

as

In

effect,

acquirer.

therefore,

(156) Where such contracts cannot be transferred, the
parties have undertaken in any event to put the
traffic on the network of the acquirer, and to
pay […](*) of the revenues thereby obtained to
the
the
upstream/transport element of the traffic would
be handled by the acquirer whilst the retail
interface with the client would remain with
MCI WorldCom. Once the contracts in question
expire,
non-compete
provisions would prevent the firms concerned
from going elsewhere than to the merging
parties for their ISP services. Thus the residual
market power conferred on MCI WorldCom by
this
the retention of
category of
and not
considered capable of bringing any significant
accretion of market power.

the retail elements of

non-solicit

contracts

small,

and

the

is

(157) The main concern must be to ensure that the
customers transferred do not migrate back to

4. The customer base

(151) The customer base can be considered in three
broad categories:
(resellers),
dedicated access customers (final users) and dial
up consumers. This latter category consists of
both residential and business clients.

ISP customers

(i) ISP customers

(152) The undertakings comprise the divestment of
[…](*) ISP customers. No particular issues arise
as to the assignment of this group of customers,
other than to note that they are likely to be the
most volatile, in the sense of their readiness to
move to alternative providers, if their needs are
not readily met. MCI WorldCom would be
prohibited from contracting with this category
of customers for a period of two years, hence
they cannot entice those customers back to
them even if they decide not to stay with the
new provider. This should prevent the merger
leading to an enhancement of market power in
respect of this group of customers.

(ii) Dedicated access customers

of

(153) The undertakings would involve the transfer of
[…](*) customers in this category to NewCo.
For the majority of such customers there is no
legal obstacle to their assignment, and they will
be assigned. There exists, however, a small
category
so-called
(cid:28)non-assignable’ contracts. These are contracts
which include a prohibition on assignment,
whether absolute, or conditional on the consent
the customer. Those contracts where the
of
prohibition is conditional may also include an
additional proviso stipulating that consent to
assignment must not be unreasonably withheld.
[…](*).

customers

with

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Official Journal of the European Communities

4.5.1999

MCI WorldCom and hence enhance its market
power. The non-compete provisions will have
their place in preventing this, in the sense that
even if the transferred customers prefer not to
remain with NewCo (a decision which will be
influenced by NewCo’s ability to maintain its
position in the market place), the non-compete
provisions would prevent MCI WorldCom from
soliciting or
contracting with them for a
minimum period of 18 months for dedicated
access (or two years for ISPs). Thus to the
extent that, within the relevant non-compete
period,
turn
elsewhere after their contracts came to an end,
the demand for the services concerned would
still accrue to competitors of MCI WorldCom,
rather than to MCI WorldCom itself.

customers of NewCo might

(iii) Retail dial-up

(158) The parties have offered to make retail dial up
customers available to the acquirer, but
the
undertakings do not require the acquirer to
accept those customers. The category of retail
customers
dial-up
without
private
individuals. According to the parties, this group
of consumers represents less than […](*) of
MCI’s business by revenue but only […](*) of
traffic […](*).

dedicated

business

includes

access,

both

and

such consumers

(159) As such customers represent only […](*) of
MCI’s traffic flow and are by their nature not
content providers, allowing MCI WorldCom to
retain them should not give rise to a risk of any
significant enhancement of market power. That
could become more
said,
important in the future, particularly if technical
developments mean Internet begins to carry, in
commercially significant volumes, traffic which
is today carried on traditional voice telephony
the profitability of
circuits.
supplying
such
domestic
expected to
increase, relative to the supply of traditional
telephone services.

this happens,
such
Internet
customers might be

services

to

If

(160) The undertakings therefore propose to offer this
customer base as part of the sale package to the
to the purchaser’s
purchaser but
discretion to decide whether or not
to take
them.

to leave it

(161)

In the worst-case scenario, 5 % in revenue terms
of the dedicated access customers might come
back to MCI WorldCom when permitted to do
so, and the dial-up customers would remain on
MCI WorldCom’s books. However, even this
would imply only a marginal enhancement to
MCI WorldCom’s market power, which would
still be consistent with effective eradication of
the competition concerns created by the merger.

5. Value added services

Intranet

firewalls,

(162) Some respondents to the market tests suggested
that an Internet access business could not
function as such effectively unless it had the
skills
to offer certain specific value added
services or that the supplier of such services
could influence the choice of the Internet access
provider and that such services should all be
divested. The services in questions were web
hosting, managed
and
Extranet. The parties agreed to include web
hosting and managed firewalls in the assets to
Intranets and
be divested but argued that
Extranets were not part of the public Internet
network, and their traffic did not contribute to
market power on the public
In
addition, although the value added services
commonly mentioned in this context can be
provided by the ISP who supplies the public
Internet
not
connection,
necessarily be the case. The different services
can be provided to the same customer by
different ISPs, and the value added services can
be supplied by companies who are not active as
ISPs.

Internet.

access

need

it

It was

(163) As to whether it was necessary to include
(cid:28)Intranets’ or (cid:28)Extranets’, the first difficulty was
suggested that
a definitional one.
Intranets might be distinguished from virtual
private networks in general by the fact that they
were run on the TCP/IP protocol. However, it
appeared that some virtual networks (VPNs)
using this protocol might be based on X25,
Frame Relay or ATM, and that TCP/IP might
not be the only protocol
the
underlying VPN, or indeed that the Internet
component of the VPN might be very small. It
also appeared that Intranets or Extranets were
in general less complex than a public Internet
network, and in principle easier to run, hence
skills which were
not

requiring the special

in use over

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Official Journal of the European Communities

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required for the Internet at large. It appeared
doubtful whether the offering of Intranet or
Extranet
could provide a gateway to the
offering of Internet services. This appears to be
less the case for web hosting and managed
firewall services, which are services required for
networks with a public Internet connection.

C. IMPLEMENTATION

in charge of

(164) There has been an exchange of letters between
the Director-General of the Directorate-General
for Competition, and the Assistant Attorney
General
the Antitrust Division,
United States Department of Justice (DoJ), in
accordance with Article IV of the Agreement
between the European Communities and the
Government of the United States of America
regarding the application of their competition
laws (10), whereby the Commission requested
the
the
undertakings which were mutually offered to
both the Commission and the DoJ. The DoJ
confirmed that it will take whatever steps are
necessary and appropriate to evaluate, and if it
finds them to be sufficient, to seek the effective
implementation of these undertakings.

cooperation

regarding

DoJ’s

IX. CONCLUSION

be

declared

(165) The notified merger of MCI and WorldCom
should
the
common market and the functioning of the EEA
Agreement, subject
full
compliance with the undertakings given by the
notifying parties to the Commission, as set out
in Section VII of this Decision,

to the condition of

compatible with

HAS ADOPTED THIS DECISION:

Article 1

The concentration notified by WorldCom, Inc. and
MCI Communications Corporation on 20 November
1997, relating to the full merger between the notifying
parties,
is declared compatible with the common
market and the functioning of the EEA Agreement,
subject to the condition of full compliance with the
undertakings given by the notifying parties to the
Commission, as set out in Section VII of this Decision.

Article 2

This Decision is addressed to:

WorldCom, Inc.
515 East Amite Street
Jackson
Mississippi 39201-2702
United States of America

MCI Communications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-3060
United States of America

Done at Brussels, 8 July 1998.

For the Commission

Karel VAN MIERT

Member of the Commission

(10) OJ L 95, 27.4.1995, p. 47.