2003/790/EC: Commission Decision of 28 June 2000 declaring a concentration incompatible with the common market and the EEA Agreement (Case COMP/M.1741 — MCI WorldCom/Sprint) (Text with EEA relevance.) (notified under document number C(2000) 1693)
Date: 2000-06-28
Institutions: European Commission
Subjects: Internet, economic concentration, merger control, telecommunications

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 28 June 2000

declaring a concentration incompatible with the common market and the EEA Agreement
(Case COMP/M.1741 — MCI WorldCom/Sprint)
(notified under document number C(2000) 1693)

(Only the English text is authentic)

(Text with EEA relevance)

(2003/790/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

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

Having regard to the Treaty establishing the European Commu-
nity,

Whereas:

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

(1)

a proposed concentration pursuant

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

Inc.

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

I. THE PARTIES

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

(2)

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

(1) OJ L 395, 30.12.1989, p. 1; corrigendum OJ L 257, 21.9.1990,

p. 13.

including facilities-based local,

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

in the USA,

(2) OJ L 180, 9.7.1997, p. 1; corrigendum OJ L 40, 13.2.1998, p. 17.

(3) OJ C 277, 18.11.2003.

(3)

(4)

(5)

(6)

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II. THE OPERATION AND CONCENTRATION

dispose of those activities or if such activities have been
divested between the closing of the accounts and the
signature of the final merger agreement.

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

separate

its

(7)

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

III. COMMUNITY DIMENSION

IV. PROCEDURE

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

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

turnover

the Merger Regulation,

Applying Article 4(1) of
the
transaction in this case was to have been notified within
seven days of the signature of a binding merger agree-
the
ment. Calculation of
Community dimension has therefore to be made at the
time and under the factual circumstances of the signing
of the merger agreement or at the latest at the time the
duty to notify arose (6). Turnover attached to certain
activities may only be excluded when the notified agree-
ment commits irrevocably as a condition precedent to

to determine

turnovers

(*) 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.

(4) Turnover calculated in accordance with Article 5(1) of the Merger
Regulation and the Commission Notice on the calculation of turn-
over (OJ C 66, 2.3.1998, p. 25). To the extent that figures include
turnover for the period before 1 January 1999, they are calculated
on the basis of average ECU exchange rates and translated into EUR
on a one-for-one basis.

(5) Sprint's turnover includes one third of Global One's turnover as it
was one of the three controlling shareholders in this joint venture.
(6) Commission Notice on calculation of turnover (OJ C 66, 2.3.1998,

p. 25, paragraph 27).

A. PROCEDURAL ISSUES

(8)

(9)

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

the Commission concluded that

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

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

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(11)

(12)

(13)

the Commission
By decision of 20 March 2000,
required MCI WorldCom and Sprint
to supply the
outstanding information necessary to complete its inves-
tigation no later than 24 March 2000 at 08.00 CET. On
24 and 27 March 2000,
the parties provided the
outstanding information. This had the effect, in applica-
tion of Article 9 of the Implementing Regulation (7), of
setting back the final deadline by which the Commis-
sion has to adopt an Article 8 decision from 4 July to
12 July. In their response to the statement of objections,
the parties contested the date of 27 March 2000,
arguing that they had provided the requested informa-
tion through electronic mail on Friday 24 March.
However they represented in a letter dated 26 May that
the electronic copy of
the reply to the Article 11
decision was not complete until the Article 11 response
was filed in multiple hard copies on 27 March. Given
the date of adoption of the present Decision,
it is not
necessary to conclude on the correct filing date.

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

B. COOPERATION WITH THE UNITED STATES DEPART-

MENT OF JUSTICE

inter alia,

to the Antitrust Division of

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

(14)

In the course of the investigation and analysis of the
there was a considerable degree of
merger proposal

involving preli-
cooperation between the two agencies,
minary exchanges of views on the analytical framework,
coordinated requests for information, attendance of DoJ
observers at the oral hearing and Commission officials
at a ‘pitch meeting’ at the DoJ and joint meetings with
the notifying parties.

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

V. COMPETITIVE ASSESSMENT

A. THE INTERNET

BACKGROUND

(16)

(17)

through thousands of

The Internet is an interconnected ‘networks of networks’
that carries bits of data between two or more compu-
interconnected networks.
ters
Approximately 300 networks providing Internet connec-
tivity operate long-distance transmission networks that,
‘back-
together, form the global Internet's international
bone’. A handful of these operate networks that connect
to multiple countries in more than one region.
is
estimated that the 10 largest Internet connectivity provi-
ders control 70 per cent of international Internet band-
width (8). Below the top tier providers are a number of
Internet connectivity providers that operate at regional
(Europe, USA and Asia). There are also an
level
increasing number of national providers.
In addition,
academic and research networks operate as international
connectivity providers on regional basis (9).

It

service providers

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

underlying

(7) Commission Regulation (EC) No 447/98 of 1 March 1998 on the
notifications, time limits and hearings OJ L 61, 2.3.1998, p. 1.

(8) TeleGeography 2000, p. 106.
(9)

[…]*.

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Interconnection

(18)

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

two means
access

(a)

(a) Transit

(19)

Transit is a commercial service granting access to the
Internet for a fee. Transit can take three forms: dedicated
access (a dedicated line to another network provider or
large customers), retail dial-up access (to consumers and
residential and business customers) or wholesale dial-up
access to Internet service providers (10).

(b) Peering

(20)

Peering involves an agreement between two networks to
accept traffic from each other's customers for termina-
tion on their respective networks.

(23)

(24)

(also referred to as

in turn categorised as either

‘public’ or
Peering is
‘private’
‘direct’ peering). Public
peering occurs at established public interconnection
points where a number of Internet connectivity provi-
ders may agree to exchange traffic at a single location,
often referred to as a network access point, or ‘NAP’.
Private peering occurs between large Internet connec-
tivity providers at designated points suitable for the two
networks.

(21)

(22)

direct peering agreements, and established interconnec-
tion at points convenient to the two networks. This has
continued to be the preferred practice of
the larger
networks. Typically larger networks will use private
peering points (with some legacy public peering) while
smaller networks will use public peering.

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

are

similar

free with carriers
in size,

Top-level connectivity providers have an incentive to
that have
peer privately and for
networks
traffic volume,
that
geographic reach and quality. This allows the top-level
networks to retain all revenues from their subscribers
without having to make payments with other network
providers. If the traffic is symmetrical this arrangement
benefits both parties equally. Geographical balance also
brings more parity in terms of costs of the network (the
Internet network providers have an economic incentive
the shortest
to deliver their traffic to their peers at
possible point of
interconnection to limit network
costs). This means that top-level connectivity providers
have an incentive not to peer with others than those
with more or less the same traffic volumes and equiva-
lent geographic coverage. As soon as the traffic becomes
it would be more beneficial for the
too asymmetrical,
larger providers
interconnection
the
to charge
[…]* (11)[…]* (12)[…]*.

for

The historical basis for peering developed as networks
of roughly equivalent size agreed to exchange traffic.
that were
The first peering points were the NAPs
created after privatisation of
the Internet by the US
Government. These NAPs are owned and operated by
commercial entities such as MCI WorldCom and Sprint.
The commercialisation of
in the 1990s
meant that many of the NAPs became congested during
the transition to a fully commercial market. NAPs
continue to be congested and are used mainly by tier-
two providers that do not have the same need of high-
capacity interconnections. In response to the congestions
in the NAPs, larger networks that had exchanged signif-
icant traffic with one another at the NAPs shifted to

the Internet

(c) Differences between peering and transit

(25)

Transit differs from peering in three respects:

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

(10) The connection goes through a modem port and ISPs are billed on
usage basis. Major ISPs such as AOL, Earthlink, Mindspring, MNS
and Prodigy buy wholesale dial-up.

(11)
(12)

[…]*.
[…]*.

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

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

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

Peering is more economical than transit as long as not
too many peering agreements have to be entered into,
hence the hierarchical nature of the Internet. This is also
implicit in the parties' own business strategies. Had it
been more economical
them to purchase transit
than to rely on peering they would do so. The Commis-
sion's
investigation shows that neither party to the
transaction pays for connectivity. On the other hand
they are paid for providing connectivity. […]* (13).

for

In addition, without a direct connection the traffic has
to pass through additional hops (i.e. intermediate stages
leading
in transit) and the quality of service decreases,
notably to increased latency (i.e.
to
transport the traffic) and increased likelihood of packet
loss. Direct peering relationships allow the peers to
minimise these quality of service issues. MCI World-
Com's Internet division UUNet is required by its own
service
average
monthly latency of no more than 85 milliseconds

takes longer

to provide

agreement

(SLA)

level

it

(26)

(27)

(28)

(13) Cf. footnotes 11 and 12.
(14)

[…]*.

roundtrip within UUNet's network in North America
and of no more than 120 milliseconds between New
York and UUNet's international gateway hub in London.
[…]* (14). The importance of hops for the quality of
service was contested by the notifying parties in their
reply to the statement of objections but this position
was contradicted by third parties statement during the
oral hearing (see further below at recital 63).

Intranets and extranets

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

looks like a private version of

(30)

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

(31) When part of an intranet

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

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Web hosting and data centres

(32) A web-hosting provider offers web-hosting centres (or
data centres) featuring access-controlled buildings with
servers that are monitored from a central, web-hosting
operations centre. The data centres are specially built to
house Internet servers and equipment. Customers of the
data centres connect to the data centre and the web-
Internet
host
through its own servers that are directly connected to
the Internet backbones (15).

connection to the

then ensures

the

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

DEVELOPMENTS SINCE 1998

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

to more

Multihoming

(38)

(35)

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

(15) According to UUNet the following are the most important elements
to consider when selecting a web-hosting provider: (a) the speed of
access of the server, (b) redundant Internet connections (more than
one connection that is high speed), (c) the website owner's control
over its website, (d) server security, (e) bandwidth and connections
to meet increased demand, (f) backup, (g) 24-hour server availability
(h) the performance of the web servers used, (i) choice of encryp-
tion, (j) Internet experience of the provider, (k) knowledgeable sales
and support staff, (l) monthly traffic report to provide feedback on
the number of visitors to the website and (m) affordability —
hosting the server in a data centre is cost-effective (according to
UUNet up to one fourth the cost ‘of doing it yourself’. UUNet's
monthly hosting fee starts at USD 750 per month (see http://
www.us.uu.net/products/hosting/keystrengths/selecting.html).

investigation has

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

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

Caching, mirroring and content delivery networks
(CDNs)

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

Caching

(39)

Caching is the oldest of the techniques. Caching creates
information such as web pages,
temporary copies of
image files or multimedia files (collectively referred to

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the website but

as objects), that reside on computers (caches) other than
the host
from which the information originated (the
origin server). Caches do not copy the entire content
of
the website that
contain dynamic content, in order to reduce the band-
width load on these centralised servers. Caches are
installed by the network owner/administrator at selected
locations in a given network.

those parts of

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

(41)

(42)

‘transparent’

to have configured its browser

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

improving the performance of

in that

further

i.e.

it is a network enhancement

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

to all cache purchasers, but

to the site) which is necessary to calculate and generate
advertising revenues. […]*

Mirroring

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

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

installs a computer

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

For

(47) More commonly, however, mirroring is offered as part
of the package of web hosting (see above at recitals 32
and 33) or collocation services companies. These main-
tain data centres that are located throughout the world
and connect to multiple Internet backbones. All major
Internet connectivity providers provide web-hosting and
collocation services.
example, MCI WorldCom
announced on 31 May 2000 that it will build 13 large
data centres in Europe to target ISPs, ASPs (application
service providers) and large multinationals. The new
centres will be added to WorldCom's 28 existing smaller
centres in Europe (16). The mirroring provided by these
data centre operators involves the placement of multiple
servers housed in geographically dispersed locations,
each of which is capable of processing the same
requests and providing the
information. The
geographic dispersion allows web-hosting providers to
use the domain name system (DNS) either to direct
requests to the closest server or to distribute requests
among different servers to balance the load on different
servers.

same

(43)

Caching is especially attractive to corporate customers
but not to content providers since it does not enable
the content providers to count the number of hits (visits

(16)

‘WorldCom plans European data center roll-out’, Emily Bourne,
Total Telecom, 31 May 2000.

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Content delivery networks (CDNs)

networks that present no risks of failures or ‘packet loss’
(otherwise the quality of say the video or the voice
conversation would be severely affected).

(48)

(49)

(50)

locations. A CDN provides

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

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

(52)

(53)

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

the bulk of

serves

B. RELEVANT PRODUCT MARKETS

TOP-LEVEL OR UNIVERSAL INTERNET CONNECTIVITY

(ii) provision of

In the WorldCom/MCI decision of 8 July 1998 (17)
the Commission identified
(WorldCom/MCI),
three
(i) provision of host-to-point-of-
distinct markets:
Internet access
presence connectivity,
services and (iii) provision of
top-level or universal
connectivity. The Commission concluded that there was
substantial competition on the Internet access market
and the analysis therefore focused on the market for the
provision of
top-level or universal connectivity where
both parties to that transaction were active. The market
investigation conducted in the current case confirms
that
the focus
should again be the market for top-level or universal
connectivity assessed in the WorldCom/MCI decision.

the purpose of

transaction,

this

for

those

top-level

capable of delivering complete

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

and second-tier

ISPs

or

(51)

In addition to the above techniques, the Internet is now
witnessing the development of new services such as
e-commerce, video online, voice over
that
necessitate much more capacity than required up until
today and also are provided in real time. To be able to
be performed, these services need to be transported over

IP, etc.

(54) At

the

time, MCI

and WorldCom challenged the
Commission's proposition that the Internet has a hier-
archical structure. However, Sprint asserted at the time

(17) Case M.1069 (OJ L 116, 4.5.1999, p. 1).

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that the Internet has hierarchical characteristics, and it
has not disclaimed those assertations (18). In the current
transaction the parties allege that the Internet is non-
hierarchical. […]* (19)[…]* The Commission's investiga-
tion has however confirmed the Commission's finding
in the WorldCom/MCI decision that the Internet is a
hierarchical structure and that there is a tier of top-level
network providers that achieve their connectivity entirely
by peering agreements between the top-level networks
or internally. The investigation also shows that top-level
network providers continue to rely among themselves
on settlement-free peering at private peering points. On
the other hand, smaller (second-level) network providers
continue to rely on national or regional peering agree-
ments (including MCI WorldCom's European subsidi-
and, perhaps,
to obtain national,
aries)
European connectivity. Nevertheless,
in order to obtain
global connectivity even large European network provi-
ders purchase transit from one or more of the top-level
segments
connectivity providers. The next
Internet
consists of regional network providers and the Internet
access providers that purchase connectivity for
their
retail customers. Other customers of
large Internet
connectivity providers include websites and dedicated
corporate access customers […]*. In summary, all under-
takings involved in the provision of
Internet services
purchase transit and are direct or indirect customers of
the top-tier connectivity providers. None can achieve
global connectivity without having access to the top-
level connectivity providers networks.

regional

(57)

(58)

(55)

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

Internet

services

communications markets have lead to successful and
ongoing entry of significant new Internet network provi-
ders and has increased the role played by European
network providers. The emergence of controlled content
distribution (CCD), regional peering arrangements and
greater use of mirroring, caching and multi-homing
have also played a critical role in the last two years by
reducing ISPs' and Internet content providers' reliance
on the US-based backbone providers.

The investigation conducted by the Commission shows
that despite significant entry of new ISPs at the retail
level,
in Europe and elsewhere, there is no significant
entry of new top-level Internet network providers. The
only two large top-level providers that have entered the
market are Cable & Wireless (20), which bought MCI's
Internet business, and AT & T, through its acquisition
of,
inter alia IBM Global Networks. These transactions
did not alter the level of concentration in the market as
the acquired networks already belonged to the top tier
of Internet connectivity providers.

the

Internet

The Commission's investigation has also shown that
even though there has been a change in traffic flows
and less traffic originating in Europe is sent to the USA,
European Internet network provider's reliance on US
connectivity providers is still significant. Even larger
European Internet network providers are sending 50 to
traffic originating on their
80 % of
networks to the USA. […]* (21). Third parties generally
agree that this ratio is likely to move down to some
degree in the next years due to increased national
content. However, despite this
trend they expect a
continued strong reliance on the large US network
providers for connectivity. This is because European
to the world's most
customers
require access
popular websites, which are
located in the USA.
Extended use of mirroring and caching is not likely to
change this to any significant degree given that there is
also a strong increase in websites and content in the
USA. Despite increased use of such techniques, there is a
continued strong dependence on top-level connectivity
providers to obtain universal (global) connectivity.

still

(56)

the relevant
The parties argue that any analysis of
product market must take account of the recent devel-
opments in the nature and scope of the Internet. They
argue that with increased demand for universal connec-
tivity has come increased supply both in the USA and
Europe. In particular the liberalisation of the EU tele-

(59)

In any event, while much of the traffic that was earlier
sent
to the USA is now directed elsewhere or to a
limited extent mirrored in Europe, much of the traffic
originating in Europe will continue to be sent to US-
based network providers' affiliates in Europe since many

(18) Application of Sprint Corporation and MCI WorldCom Inc., before
the US Federal Communications Commission of 20 March 2000,
p. 90, footnote 142.
[…]*.

(19)

(20) Comments of Cable & Wireless to the US Federal Communication

Commission (FCC) of 18 February 2000.
[…]*.

(21)

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the dependence on (US)

of these providers are implementing networks in Europe
and other regions with the result that traffic is targeted
at these networks. Thus, even with a change in traffic
flows,
top-level connectivity
providers would continue. Multi-homing does not
appear to have had any significant impact on the traffic
flows. The market
shown that
European ISPs purchase connectivity from second-tier
regional (European) connectivity providers, but also rely
on transit with at least one of the top-level connectivity
providers to obtain universal connectivity.

investigation has

(60)

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

top-level or universal

The parties' response

(61)

(62)

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

the hierarchical nature of

structure of

in order

It must first be noted that the parties acknowledge in
their joint reply to the statement of objections,
that
‘[s]econdary peers … are not part of the “default-free”
core of the Internet. That is, they cannot deliver traffic
Internet destinations without relying on transit
to all
purchased from another ISP’ (22). In addition the parties
view the relevant product market differently.
In the
reply, Sprint takes the view that four additional compa-
added to those
nies
identified by the
should be
top-level market players. However,
Commission as
the
Sprint does not dispute the hierarchical order of
Internet. MCI WorldCom continues to argue that
the
relevant market is much broader than the market iden-
tified by the Commission.

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

(64)

The parties alleged that secondary peering relationships
(peering among local and regional connectivity provi-

(65)

(66)

(67)

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

reply that

to consider that

transit customers of
The parties fail
top-level connectivity providers would have no other
sources available to them to obtain universal connec-
tivity. To provide a substitute to the connectivity offered
by top-level suppliers, second-tier providers would have
to enter into a very large number of peering and transit
agreements with those ISPs that they beforehand were
able to reach only through the top-level
layer. Given
that there are thousands of ISPs worldwide, such a task
would
effective when
compared to the relative increase in transit prices (23).

undoubtedly

cost

not

be

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

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

(22)

Joint response to statement of objections, paragraph 264 and
footnote 235.

(23) The parties acknowledge that there are thousands of ISPs world-
wide. See for instance page 119 of the reply to the statement of
objections.

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

(72)

(68)

(69)

top-level

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

These were

providers.

selected

GLOBAL TELECOMMUNICATIONS SERVICES

services

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

tions on the contract are then conducted with the
winner.

of

global

telecommunications

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

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

Other

(74) When asked about the main parameters applied to select
a supplier of global
telecommunication services, one
respondent quoted a Yankee Group study (25) which
suggested that price was only the fourth most important
criterion when assessing the product offering for a
supplier behind reliability, service/support and connec-
tivity/compatibility/infrastructure.
parameters
included culture/language/time zones, bandwidth/capa-
city, network management,
installation delays/time,
global reach, staffing/personnel issues, coordination and
competence. Customers responding to the Commission
market investigation confirmed that price was not the
only criterion they took into account when deciding on
suppliers. However, the price was normally not consid-
ered as the first and foremost criteria in the initial
process. Rather the issue of pricing would become of
key importance in the second stage of the procedure
shortlisted providers offering were
(when different
compared to one another).

Characteristics of demand

(75)

(71)

the market
The parties explained in the course of
investigation that
the supply of GTS is a two-stage
procedure (24). The first stage for customers who want
such services is normally to issue a request for proposal
(RFP)
their
(which includes a detailed description of
tailored needs) to a list of possible suppliers which are
invited to bid. The second stage follows the submission
of bids, when the customer conducts limited negotia-
tions with a small number of providers that have been
shortlisted before choosing the winner. Detailed negotia-

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

customers

services

require

(some

(24) Page 20 of the memorandum on the GCTS market submitted on

17 March 2000.

(25) Yankee Group report Executive Summary of ‘The Bell(e)s of the Ball
Give Their Hands: Qwest/US WEST and Global Crossing/Frontier’
taken from www.yankeegroup.com.

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Characteristics of supply

(76)

and providing maintenance

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

the integrated nature of

(77) Whatever

the customer's precise needs,

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

The bidding process

(78)

(79)

typically issue

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

requests

The response to the RFP can be similarly long, and aims
requirements.
to

customer's

technical

satisfy

the

to MCI WorldCom,

initially
According
proposed in reply to an RFP is set
from previous
experience that relates to the services to be supplied
and the geographic reach of the service. […]*.

the price

(80)

(81)

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

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

(82) Once

the

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

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

The provision of packages of global telecommunica-
tions services

(84)

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

(85)

In their notification, the parties note the market defini-
tions used by the Commission in a number of decisions
covering the area of global telecommunications services
to MNCs. The most recent decisions which they quote

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In their notification,

are BT/AT & T (26) and AT & T/IBM (27). In BT/AT & T,
the Commission identified a market for ‘the provision of
packages of
customised enhanced and value-added
global corporate telecommunications services, hereinafter
referred to as the market for the provision of global
the
telecommunications services'.
parties agree with the Commission's assessment in BT/
AT & T that the product market should not be broken
down into narrower product markets
isolated
services included in the range of global telecommunica-
tions services. The parties also note that packages of
global telecommunication services are tailored solutions,
and that
they are therefore designed, packaged and
managed individually to meet a particular customer's
communications need at any given time.

for

(86)

(87)

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

international

(90)

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

global

Individual services v package of services

(91)

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

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

and purchasing

the functioning of

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

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

(89)

In seeking to verify the relevant market definition, the
Commission also investigated what would happen if the
prices for packages of GTS were uniformly increased by

(26)
(27)

IV/JV.15 — BT/AT&T of 30 March 1999.
IV/M.1396 — AT & T/IBM Global Network.

(92)

Respondents in the Commission's investigation generally
agreed with the product categorisation provided by the
Commission based on the listing of telecommunication
services provided by the parties. However
this was
subdivided in different ways by different competitors
when they sought to analyse whether the market was
narrower. In addition, a third party argued that other

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18.11.2003

services such as X.25, global software defined networks,
IP services (web hosting, value-
managed bandwidth,
added IP services, managed IP,
global messaging,
caching) and VSAT (very small aperture terminals) were
also part of the services which should be included in
the product market definition.

(93)

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

scope of

It
bandwidth, which was done in one country only.
had been explicitly rejected as an option for a Europe-
wide service as insourcing was not scalable to a Europe-
wide level, let alone globally. Other customers explicitly
rejected the possibility of converting back to an in-
for special services. A similar
house network, except
argument applies to outsourcing, where not only is the
network supplied externally, but the staff who operate
the network also work for
the
customer
self-provision
would be even more difficult under those circumstances.
Neither of these activities can therefore be considered to
be part of the relevant market.

to return to some form of

supplier. For

the

(94)

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

across

a

Self-provisioning and outsourcing

(95)

Customers who choose to self-provide their GTS needs
will buy certain elements from within the elements
which are contained in packages of GTS services.
However, the self-provision in itself does not constitute
part of the market as defined above in recital 86. More-
over, as noted in the BT/AT & T decision, to self-provide
is a strategic choice. Customers who choose to purchase
packages are unlikely to return to self-provision, though
this is not impossible, as the costs of switching back
and building up the in-house resources and expertise to
run the services will be high. Only one customer
raw
provided a concrete example of

insourcing of

Conclusion

(96)

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

C. RELEVANT GEOGRAPHIC MARKET

TOP-LEVEL OR UNIVERSAL INTERNET CONNECTIVITY

(97)

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

structure, a rise in prices

18.11.2003

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GLOBAL TELECOMMUNICATIONS SERVICES (GTS)

the second largest
market share in the range of 10 to 15 %.

top-level network provider with a

(98)

definition is

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

regarded as

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

the Internet sector or a measure of

there
the size of either

(101) The parties argue that, as stated by the Commission in
is no reliable
the WorldCom/MCI decision,
publicly available estimate of
the
Internet sector as a whole or any relevant subsector
and there is no consensus on a preferred unit of
measurement. Further, as was noted by the Commission
in the decision, the parties argue there is no specific
reporting obligation on ISPs
in relation to Internet
revenues and no consistent reporting. Accordingly, the
parties are not able to provide an accurate estimate of
the
the size of
market.
and
WorldCom advocated as the appropriate tool to measure
in the WorldCom/MCI decision may,
market
according to the parties, easily be inaccurate. Traffic
flows, as used by the Commission in the WorldCom/
MCI decision, would have even greater shortcomings
and cannot be accurately measured from a technical
viewpoint, given the lack of generally accepted measures.
[…]* However, Sprint estimates the top-level network
providers market shares based on revenues in 1999 at
[35 to 40]* % for MCI WorldCom, [10 to 15]* % for
AT & T, [less than 10]* % for Sprint and, for Qwest,
[less than 5]* % (28).

revenues, which MCI

Even Internet

shares

D. ASSESSMENT

TOP-LEVEL OR UNIVERSAL INTERNET CONNECTIVITY

Publicly available statistics of market shares

(100)

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

that provide estimates of market

(102) The parties submitted a number of publicly available
shares (29).
sources
According to these sources, MCI WorldCom and Sprint's
market shares are estimated from a minimum of 17 %
and 3 % respectively to a range of 21 to 45 % and 13
to 21 % respectively. The estimates relating to the 17 %
and 3 % shares are based on Internet service providers'
revenues and share by vendor. These should however be
they include companies such as
excluded given that
AOL and MSN that are not present
in the relevant
market as they do not own any networks providing
top-level connectivity. This leads to combined market
shares in the region of 34 % to 55 %. Also, estimates
third parties provided by the parties,
by independent
place the merging parties market shares between 20 to
25 and 13 to 20 % for MCI WorldCom and Sprint
respectively and the merged entity to between 34 to
45 % (30). These market shares are also in line with
figures provided by respondents to the Commission's

[…]*.

(28)
(29) TeleGeography 1999, The World's Top ISPs (winter 1998-99), p. 122;
International Data Corporation,
Internet Service Provider Market
Review and Forecast, p. 17; Cahners In-Stat Group, Show Some Back-
bone: ISPs Report Increasing Demand and Shifting Vendor Preference,
p. 7; Boardwatch, December 1999; Datamonitor, The Future of the
Internet; Hearing on the MCI WorldCom-Sprint Merger Before the [US]
Senate Committee on the Judiciary, Exhibit 3 (4 November 1999)
(testimony of Tod A. Jacobs, Senior Telecommunications Analyst,
Sanfor C. Bernstein & Co., Inc.), Bernstein Research, MCI WorldCom,
March 1999, p. 51; OECD, Internet Traffic Exchange: Developments and
Policy, DSTI/ICCP/TISP(98)1/FINAL, pp. 22 and 58-59.

(30) Credit Suisse First Boston, Morgan Stanley Dean Witter and Bear

Stearns.

L 300/16

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18.11.2003

market investigation (31). The size of the merging parties
traffic-flows should also be linked to the merged entity's
global network (capacity). MCI WorldCom's
Internet
division UUNet has ‘over 2 000 POPs, 500 of which
are outside the United States. This is bigger than any
other IP network on the planet by at least a factor of 2
and bigger by a factor of 4-5 than most of
the IP
backbones around the world’ (32).
In addition, UUNet
has a very large modem bank that serves wholesale
dial-up customers […]*.

Commission's estimates of market shares

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

(104) Many of

those consulted during the course of

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

networks could be accessed directly rather than through
a third-party network, then they would be added to the
list. The examination of this list showed some discrep-
ancies with the list of those who peer with both the
MCI WorldCom and Sprint networks. Companies that
did not feature on the third-party list were not with-
drawn from the universe of market participants while
those included but not peering with both networks were
added. This led to the addition of the four following
companies: Exodus, Digex, Abovenet and Epoch. Overall,
the analysis led to a universe of 17 networks (or groups
of) participating in the market
Internet
connectivity.

top-level

for

than the field of

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

for

(a) Market shares based on traffic flows

(105) However, a third party proposed its own list of top-level
connectivity providers by measuring the number of
these
routes available

their networks.

to access

If

(31) Bell Atlantic has estimated the merged entity's market share at
between 50 to 70 %, Cable & Wireless estimates MCI WorldCom's
share of global Internet traffic at 50 % and Sprint's at 18 % in
1998.

(32) WorldCom: Still a Cool Company, Salomon Smith Barney, 7 February

2000, p. 2.

(107) The parties have argued that traffic-flow measurements
shortcomings. Traffic-flow measurements
have great
measure traffic passing through specific parts of
the
network at specific points in time and, because IP
routing is dynamic, the same information sent between
same
always
two hosts may not
networks. Moreover, because traffic flows through more

travel over

the

18.11.2003

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Official Journal of the European Union

L 300/17

than one network from source to destination, estimating
the total amount of traffic by aggregating the amounts
served by each backbone inevitably involves double
counting. Therefore, because the amount of double
counting will differ between backbones, market shares
based on traffic estimates can be misleading.

shares can then be calculated for each network using
only the traffic statistics generated by this network. This
avoids
the need to add together measurements by
various networks to estimate market-shares. This also
prevents the market-share calculation being biased by
possible differences in measurement methodologies from
one network to another.

the particular

architecture of

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

(112)

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

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

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

is,

Internet

the total

traffic (that

(111) The total traffic flow of any given network includes the
traffic exchanged with other identified networks and its
internal
the traffic between customers
exchanged over this network). The market shares can
be calculated using traffic ratios without necessarily
having to have as an input
traffic
flow, according to the following methodology. The ratio
of the market share of network A to the market share
of network B,
traffic
is equal
traffic flowing
flowing through network A to total
through network B.
this ratio are
If both terms of
divided by the total traffic exchanged between networks
A and B,
it follows that the ratio of market share of
network A to the market share of network B is equal to
the ratio of the relative share of network A in the total
traffic flowing through network B to the relative share
of network B in the total
traffic flowing through
network A. Therefore the market shares can be calcu-
lated on the basis of the relative shares of each network
in the total traffic going through each network. Relative

to the ratio of

total

(113) Combining the

traffic

relative

share of

exchanged
between network A and B from A perspective and
then from B perspective provides a ratio of the market
shares of network A and network B. This method can
also be applied to networks A and C and then to
networks C and B to get another estimate of the ratio
of the market shares of network A and network B. The
Commission applied that approach to each of the top
five networks and obtained the following table of ratios
for the purpose of the statement of objections (33):

Ratio of size of network X to the size of the
MCI WorldCom network

GTE

Sprint

C&W

MCI WorldCom

AT & T

Total

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

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

(33) These ratios are provided in ranges in order to protect the confi-

dentiality of the information provided by third parties.

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

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

estimates

give

Ratio of size of
network X to the size
of the MCI WorldCom
network

GTE

Sprint

C&W

MCI WorldCom

AT & T

Others A

Others B

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

Market shares

[0-10]* %

[5-15]* %

[0-10]* %

[32-36]* %

[5-15]* %

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

(b) Estimates of market size and share based on

revenue figures

(118) On the basis of

the

the market,

the above, a total of 17 Internet
connectivity providers would have fallen within the
definition of a top-level network. As to the total size
information available was not
of
comprehensive, and estimates had to be made in respect
of the turnover of two firms for which accurate figures
were not available (34). Revenue for each of
the two
firms concerned was estimated at USD 100 million
each, which was believed to be a considerable over-
estimate of their actual revenues.

(119) Market shares were calculated in the statement of objec-
tions on the basis of two alternative methods. The first
took into account the total Internet revenues (including
collocation and
dial-up, dedicated access, hosting,
others). That
led to a market size of approximately
USD 6 500 million and to market shares of respectively
[40 to 50]* % and [5 to 15]* % for MCI WorldCom and
Sprint. Only one other player (AT & T) had a market
share between 10 to 15 % and two had market shares
in the 5 to 10 % range (C & W and PSINet). All of
these revenues are linked to the provision of Internet
connectivity. […]*. Similarly provision of dial-up gener-
increases the customer base and therefore
ates traffic,
the market position.

indication of market shares.

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

(34) Most of the information used to calculate market shares on the
basis of revenue and traffic was provided by the notifying parties
and third parties to the US Department of Justice in response to
investigation demands through the granting of waivers of
civil
confidentiality to both competition agencies.

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

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

for

(c) Conclusion on the calculations of market shares

(123) On the basis of market shares calculated on the basis of
the merged entity's
traffic flows as well as revenues,
market share would amount
to between [37-51]* %
based on traffic exchanged (35) and [30 to 65]* % based
on revenue. The market share of the next competitor is
never higher
the
methodology
investigation
shows that the merged entity will have market shares
based on revenue more than three times higher than its
closest competitors and four times as to market shares
based on traffic. These results remain robust even under
the implausible assumption that the combination of the
12 smaller top-level entities would be the twice the size
of MCI WorldCom.

than 15 per cent.
used,

the Commission's

Irrespective of

(d) The parties' response

(124)

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

(35) This market share would amount to approximately [30 to 40]* % if

assumptions extremely favourable to the parties were made.

the methods are likely to overstate the market share of
the merged entity.

share based on total

(125) According to the information available to the Commis-
sion at the time of the statement of objections, MCI
WorldCom's market
Internet
revenue is [40 to 50 %]* in a market comprising
17 top-level connectivity providers (36). This should be
compared to a [35 to 45 %]* market share in 1998 for
WorldCom. Despite the fact that the assumptions used
by the Commission in the current procedure are more
generous to the parties compared to the assumptions
made in the WorldCom/MCI decision in 1998, it can be
concluded from the above that MCI WorldCom's market
share based on total
Internet revenues has increased
since 1998.

(126) However, after the issuing of

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

(127)

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

(128)

the

three

their data was

third-party backbones

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

(36)

In 1998, the merged entity's combined market share was estimated
at [45 to 55]* % ([35 to 45]* % for WorldCom and [5 to 15]* %
for MCI) MCI's Internet business was later divested to Cable &
Wireless.

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Official Journal of the European Union

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Impact of the merger on competition

(133) This is also confirmed by the figures provided by the
concerning their percentage of multihomed

parties
customers. […]*

(a) Current market characteristics

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

(130) Since the merger between MCI and WorldCom, MCI
WorldCom has been able to maintain its number one
position and it
is perceived by many competitors as
close to being dominant. This is confirmed by the fact
that MCI WorldCom is able to demand significantly
higher prices (20 to 100 %) than any of its competitors
and Sprint and at
the same time sustain its leading
position […]* (37)[…]* (38)[…]* (39). Nevertheless, for the
purpose of
this transaction the issue of MCI World-
Com's single dominance can be left open given that the
investigation has shown that the merger would create a
dominant position.

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

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

significant.

(37)
(38)
(39)

[…]*.
[…]*.
[…]*.

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

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

(136)

(137)

is generally acknowledged by respondents

to the
It
Commission's investigation that the merged entity's large
network and its access to the largest number of hosts
and customers as well as key Internet sites is essential to
their own performance since their customers would
demand connectivity to the merged entity's network.
Given that
the merged entity would have the largest
number of customers it can also provide connectivity to
the greatest part of the Internet […]* (40) […]* (41).

It has been argued that being facilities based is not
important and that there is an abundance of capacity
this is contrary to MCI WorldCom's
to lease. Firstly,
own predictions (42) […]* (43). The Commission's investi-
gation has also shown that even though the cost of
transit has
fallen substantially, especially in Europe
during the last years, the transit costs have not always
fallen as much as the cost of
leasing infrastructure.
Thus,
Internet connectivity carries a premium. That
premium is greater for the larger, established networks,
with the greater number of routes. In order to circum-
leasing capacity or paying for
vent
transit,
larger European ISPs have now laid their own
circuits to the USA to reduce their costs for transit.
However, they are still purchasing transit from the top-
level connectivity providers in the USA.

the expense of

(40)
(41)
(42)

(43)

[…]*.
[…]*.
John Sidgmore at Spring Internet World 2000, UUNet chair says
industry concerned over capacity, Reuters, 4 April 2000.
[…]*.

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as

(138) The parties also allege that having a large network is no
guarantee of quality. This is contrary to the result of the
Commission's
information
investigation as well
submitted to the Commission by the parties […]* (44).
As stated above, the importance of private peering has
large corporate
been shown by the requirement of
clients for private peering points (45) since this increases
reliability of interconnection. Given that only the largest
top-level connectivity providers have private peering
arrangements with one another the size of the network
reliability […]* (46). The
and its architecture
investigation has also shown that
Commission's
the
quality of
service offered already today by UUNet
through its service level agreement (SLA) guarantees a
latency rate much lower than any of
its competitors.
Thus, in addition to its customer base, the merged entity
would also have one of the largest networks with reach
least […]* countries and a service level so far
in at
unrivalled by its competitors.

effects

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

1998

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

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

[…]*.

(44)
(45) See recital 23.
(46)

[…]*.

was concerned about not having enough network space
to handle the growing demand (47).

the merging parties this has not

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

top-level

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

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

relying on transit

(47)

John Sidgmore at Spring Internet World 2000, UUNet chair says
industry concerned over capacity, Reuters 4 April 2000.

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

(c) Market characteristics post merger

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

(149)

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

to enable

1. Ability to control technical developments

(147) The network of

the merged entity will enable it

to
provide services of a quality that its competitors may
have to agree with the merged entity to be able to
duplicate. This will become increasingly important for
new advanced Internet services. In order to send voice
over IP or video images over
the data
transmitted needs to be compressed before it can be
transmitted over an Internet network (48).

the Internet

(148) The technique of packet switching (49) sends the data
over the most efficient available route (not necessarily

(48) The analogue audio signal must first be converted into a digital
signal
in order to be transmitted over the Internet. After being
digitised, it is compressed and transmitted. The quality of the signal
will depend on the number of bits used to encode it.

(49) Packet switching is the method used to move data around the
Internet. In packet switching, all the data is broken up into smaller
packages. Each package has the address of where it came from and
where it is going. This enables the packages of data from many
different sources to co-mingle on the same lines, and be sorted and
directed to different routes along the way. This enables Internet
connectivity providers (and their users) to use the same lines at the
same time.

it

that all

is important

along the same route). In order to have a good quality
of service,
the data is reas-
sembled in the correct order and at the desired time. If
there is no agreed manner of giving certain types of
data priority as they pass over the Internet, there is the
inherent risk that the picture or audio sound will only
be transmitted to the user's computer once all
the
packets have arrived (leading to delay) or perhaps be
transmitted in an incomplete form.

to provide quality of service for advanced
In order
Internet services, such as voice over IP, video conferen-
cing and Internet banking, the reliability of the connec-
tion is very important.
In order to ensure quality of
service, Internet connectivity providers have to agree to
that will guarantee quality of
a standard (a protocol)
these services when passing through different networks.
Currently no agreed protocols exist for such services.
The merged entity would therefore be in an ideal posi-
tion to develop standards for such services that would
be offered either only on their network or at a much
better quality on their network unless its competitors
agree to certain conditions. Due to the merged entity's
absolute and relative size they would be able to dictate
the conditions for such future quality of standards. This
is also confirmed by the parties' own submissions
[…]* (50).

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

(151) Key new drivers of traffic on the Internet such as voice
over IP,
live video conferencing and advanced e-com-
merce solutions are only available when adequate levels
of quality of service can be obtained throughout the
networks across which such services travel. This is the
case with the QoS that can be obtained by keeping all
the traffic ‘on-net’,
i.e. on a single network end-to-end
[…]* (51).
In addition, when traffic travels across a
peering point, there is the inherent risk of loss of ‘the
package(s)’ and delays which jeopardise the possibility of
services. The merged entity's high
providing these
percentage of ‘on-net’ traffic will
increase its incentives
to degrade interconnection and reduce its incentives to
support cross-network QoS standards to reinforce the
attractiveness of its own network.

(50)
(51)

[…]*.
[…]*.

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2. Ability to raise prices

(152) Given its combined size and importance of

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

3. Ability to discipline the market

(153)

to achieve

It could be argued that since ‘everybody needs global
connectivity’ and also since the merged entity will be
dependent on its competitors
the
merged entity could not afford anticompetitive beha-
viour. However, as a result of the merger, the merged
entity will be in a position to discipline the market by
the mere threat of selectively degrading the connectivity
of
its competitors. This will allow it to control both
actual and potential competitors as well as customers in
this market.

this,

extent

(154) A non-dominant network would need its competitors
and their customer base too much to risk degrading the
quality of its connectivity offering. A degradation of the
peering interface between two competitors of equal sizes
to both connectivity providers.
would be detrimental
These two networks would see the quality of
their
connectivity
offerings degraded to the
depends on the other network in question. In response
to such a degradation, the customers of both networks
would likely switch to other providers. When there is
imbalance in the size of the two networks, the bigger
network depends less on the smaller one in order to
source connectivity than the smaller depends on the
larger. A degradation would then have greater effects
on the smaller network than on the larger one since the
smaller network is more dependent on the dominant
network for global connectivity than the dominant is on
the smaller ones.

their

(155) However, unless the degradation is so small

it
that
becomes unnoticeable by the customers of
the larger
network, or it is off-set by specific advantages of this
network (such as its absolute size and the extent
to
which it provides connectivity from its customers), the
larger network would still see its connectivity offering
than other non-degraded
become
less
networks. Pre-merger,
is not sure that either MCI
WorldCom or Sprint had reached the level of imbalance
their Internet network compared to their
in sizes of

competitive

it

(156)

(157)

networks that would have put them in a position to
degrade profitably the peering connections with their
competitors. However,
the merger of MCI WorldCom
and Sprint's Internet activities will create a situation
post-merger where
the merged entity will have a
network of such absolute [30 to 55]* % of the Internet
and more than [40 to 80]* % of its traffic remaining
on-net) and relative size ([several]* times bigger than the
second in the market) that it will be able to behave
independently of
selectively
former
its peers. The
degrading the connectivity quality of
mere threat of such degradation will allow the merged
entity to control both the technological developments in
the market as well as the prices of its competitors.

peers by

its

If the merged entity decided to decrease the capacity at
private peering points (which is the main point of
interconnection between top-level connectivity provi-
ders), or rather not increase the capacity in accordance
with demand, the degradation would not be immediate
for other top-level providers or customers of the merged
entity. But it would have an immediate effect on the
targeted competitor and its customers. According to
third parties, competitors and customers, as well as the
parties'
are
demanding high levels of quality. The reaction of the
degraded networks customers would thus be to try to
find an alternative to the degraded connectivity provided
by the degraded network, either through multihoming
and/or moving from the degraded network.

documents,

customers

internal

the

the

First,
the Commission's investigation has shown that
multihoming is used as a back-up and for redundancy
and to ensure global connectivity. The Commission's
investigation has also shown that direct access to custo-
mers improves the quality of service (i.e. less latency and
less risk of loss of ‘packages’). Thus, the merged entity's
customers would have no economic incentive to switch
the bulk of their traffic to the degraded network when
they can continue to be customers of the merged entity
which provides them with direct connectivity and direct
reach to a larger customer base. The same argument is
the degraded top-level
valid for
customers of
competitor. When comparing the quality of
service
being offered by the merged entity to its competitors
also these customers would find it more beneficial to
switch a bulk of their traffic away from the degraded
network to the merged entity.
the mere
threat (possibility) of the merged entity also degrading
other competitors' networks would mean that customers
of the degraded network would be likely to choose the
merged entity over other competitors since the merged
entity will have by far the largest network and will be
able to guarantee direct access to the largest number of
customers. Nevertheless, even with substantial multi-
homing, degradation would cause a movement of traffic
to the dominant network from other top-level networks
and increase the advantage over other providers of top-
level connectivity in the number of customers served.
The end result would likely be that the former top-level
the merged entity
competitor becomes a customer of
since it would no longer qualify for peering.

In addition,

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(158) Secondly, to enter into an extensive peering and transit
policy would impose additional burden on the compe-
titor since new and additional agreements would have to
be entered into. This would be both time-consuming
and costly. Even more importantly,
the service level
the connectivity would drop even further
(quality) of
given that the traffic would no longer go directly to the
merged entity's customer but would have to pass
through other networks. Contrary
to the parties'
submission, passing through a large number of hops
will affect performance quality and create delays (latency
[…]* (52)
[…]*.
increases with the number of hops)
the relationship
Despite this
from Sprint,
statement
between the number of hops and the quality of
the
service offered was contested by the parties in their
reply. However, third parties provided evidence to the
contrary of the parties' argument at the oral hearing.
This in turn would lead the degraded network's custo-
mers to find the larger network more attractive. The
degraded network would also find it more difficult to
regain the confidence of its lost customers.

(159) Additionally,

the merged entity could degrade

the
connectivity to its competitors (other top-level connec-
tivity providers) unless these competitors accept settle-
transit). The
(either paid peering or
ment charges
affected competitor would then have to pass the new
charges on to its customers and they in turn their
customers. Given the increased cost for connection, the
affected
by
switching from the connectivity provider or migrate
most of
top-level network
provider to keep their costs down. Given the size of
the merged entity's network (and its proportion of on-
net customers), the merged entity would be the best and
natural choice for these customers.

traffic to another

customers would

competitor's

react

their

(160) The options of the targeted competitor would be just as
it were hit with
limited in this latter situation as if
degradation through decreased capacity. As
already
shown in recital 160, by selectively degrading connec-
tivity to a competitor the merged entity would be the
natural choice, given its already large direct access to
customer base much larger than any of its competitors,
to gain the targeted competitors' customers. Given that
customers demand global connectivity and quality of
service offering, the reaction of new customers would
be the same. They would also choose the merged entity
before other competitors for the same reasons.

(161) The degraded top-level provider's only possibility to
retaliate would be to persuade single-homed customers
of
the merged entity to switch to its network, most
likely by multihoming to it, or enter into an extensive

(52)

[…]*.

new peering and transit policy to ensure that its existing
customers would stay with it. Otherwise, it is likely that
these customers (wholesale or large corporate customers)
would decide to switch their traffic to the merged entity,
or at least multihome with the merged entity.

(162) Even if pursuing a degradation strategy would degrade
the quality of service for both the merged entity and the
competitor concerned, the competitor would be hurt to
a greater extent, as his customers would lose connec-
than the
tivity to a larger portion of
merged entity's customers.
the
percentage of traffic affected by such a strategy would
be higher for the smaller network (the merged entity
its traffic as internal
would have [40 to 80]* % of
traffic, while its competitors maximum 32 %. The
smaller networks are thus proportionally more depen-
dent on the merged entity than the merged entity is on
the smaller networks).

the Internet
In proportional

terms,

(163)

In addition, if customers of the degraded network were
to decide to stay with the degraded network these
customers would have greater incentives to multihome
than would the customers of the merged entity since
the degraded network would not be able to provide the
same quality of global connectivity. Given that
the
degraded network is a smaller network, the customer
would have the incentive to multihome to a larger
network (i.e. the merged entity) since this network can
guarantee good quality of direct connection to the
largest number of customers. The effect of the degrada-
tion would thus be accentuated because the merged
entity's customers would have a much greater ability to
for off-net services/
substitute on-net services/content
content than would the customers of the other network.
Again, the result would be that the merged firm would
gain customers and traffic, while the degraded compe-
titor would lose both.

(164) Still, if one were to make the assumption that customers
of
the merged firm and the degraded network were
equally likely to multihome in response to degradation,
it is highly probable that degradation would still be in
the merged firm's interest and would achieve the objec-
tive of consolidating its dominant position. Even with
substantial multihoming, degradation would cause a
movement of
traffic to the merged entity's network
from other top-level connectivity providers and increase
its advantage over other competitors in the number of
customers directly connected to it. This would enhance
both the merged entity's market power and add revenue.
It can therefore be concluded that multihoming is no
deterrent to degradation.

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4. Potential competition

with the merged entity is not harmed. Second, from the
merged entity itself
that would have no incentive to
allow the potential competitor to undermine its domi-
nant position.

that

(165) The parties have argued in their submission to the
Federal Communications Commission (53)
the
merger will not impact the robust competition among
Internet backbone service providers because barriers to
expansion and entry are negligible and outside the
even though a
control. However,
merging parties'
number of new entrants have started to offer Internet
connectivity and there has been a large increase in
capacity built, there is still no significant entry into the
top-level network market. Any change in the identity of
the top players (such as the entry of Qwest, Level 3,
Global Crossing, and AT & T) have been by change of
ownership in existing networks, not by construction of
new networks. These changes of control, therefore, do
not alter the level of concentration in the market.

(166) With the necessity of matching the

size of

the
combined networks in order
to be a candidate for
peering relationship with them, potential entrants would
need to be certain to capture a very large portion of the
future growth in Internet traffic if they want to reach
the thresholds. In order to gain customers, they would
always need to rely, initially, on the merged entity. Even
if a new entrant would gain a substantial customer base,
it would be sufficient for the merged entity to engage in
the same behaviour against a potential competitor as an
actual competitor. It would then be able to prevent the
potential competitor from reaching peering status by
exercising the threat of degradation or, it would be able
to prevent the potential competitors from assuming top-
level status by setting the prices of transit high enough
to prevent them from building sufficient market shares.
This is due to the dependence of smaller networks (top-
level or others) on the merged entity for global connec-
tivity.

(167) Even if potential competitors were to join forces these
would not be better positioned than any other compe-
titor or customer, because they could not afford to do
without connectivity obtained from the existing top-level
providers to ensure that their customers did not move
to another connectivity provider. Potential competitors
would face this problem irrespective of whether they
were European or from other parts of
In
addition, any potential new entrant would be competing
with existing top-level connectivity providers that are
likely to be equally active in attracting new customers
to keep their
status. Potential competitors
would thus
face competition from two sides. First,
from existing top-level connectivity providers that are
competing with the merged entity and need to keep
their customer base to ensure that their peering status

the globe.

top-level

(53) Sprint and MCI WorldCom's submission to the FCC, Reply to
comments and petitions to deny application for consent to transfer control,
20 March 2000, pp. 89 et seq.

5. Customers' reactions

(168) Given the

importance of being connected to the
combined networks, also the merged entity's own custo-
mers would not be able to retaliate to an increase in
price or degraded connectivity. As stated in recital 130,
already today MCI WorldCom's customers accept prices
that are more than 20 % above those charged by its
competitors. This is since the entity already has a large
direct and indirect customer base and offers its custo-
mers a service level guarantee (latency guarantee).

(169)

(170)

stated by one European ISP ‘become
It would, as
unavoidable’ for it to switch from its current top-level
transit providers and purchase transit
from the new
merged entity or at least become multihomed with the
merged entity. This would be required from its custo-
mers, as a condition for purchasing services from the
smaller ISPs, that it has a direct relationship with the
merged entity's customer. Thus,
if they are not already
purchasing the majority of their transit from one of the
merging parties, the Commission's investigation shows
that the customers would establish a direct connection
to the merged entity given its large direct and indirect
customer base.

If the merged entity decided to increase prices custo-
mers could try to counteract such a strategy by moving
to the other networks to counterbalance the power of
the merged entity. However, unless the customers can
act as a unit (and there is no evidence that the customer
this) no
sufficiently concentrated to permit
base is
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. The risk of
degraded connectivity to the merged entity would be
too great.
In addition, customers connected to the
merged entity would not readily migrate to a smaller
network since they would still rely indirectly on the
merged entity to obtain full connectivity.

services

(notably mirroring

(171) According to the parties, the development of distributed
caching)
content
increases the bargaining power of customers such as
website and content providers vis-à-vis connectivity
providers. The parties allege that the former could easily
switch providers or switch part of the traffic onto their
own networks.

and

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(172) The aim of distributed content services is to accelerate
the speed of content delivery to customers by limiting
the amount of
traffic exchanged across the Internet.
However, they do not take away the need for content
providers to have access to as many end-customers as
possible. It is thus difficult to understand what impact
the increased use of such services may have on the
choice of connectivity provider.
If quality is what
matters,
then customers have an unchanged incentive
to select the combined network that would give them
access to an unrivalled portion of the Internet. It also
clear
investigation that web
content providers prefer to work with a single provider
who can provide collocation/hosting facilities on a
global basis,
simplifies
management, billing and contracts with customers.
Given that
the merged entity would have the largest
customer base, content providers using mirroring or
other techniques would also have the same need as any
other customer to have access to these customers. Once
this is achieved, the situation of competition is the same
as in the context of multihoming.

in diverse data centres. This

from the Commission's

(173) The merger will thus create a ‘snowball effect', because
the merged entity will be better placed than any of its
to capture future growth through new
competitors
customers, because of
for any new
customer of direct connection with the largest network
and its customer base, and the relative unattractiveness
of competitors' offerings owing to the threat of discon-
nection or degradation of peering which the merged
entity's competitors must constantly live under. As a
result the merger would provide the new entity with the
opportunity to enlarge its market share even further.

the attractions

(174)

Increased use of multihoming and content delivery
services will not change this fact. Despite increased use
of such techniques all existing and new entrants in the
market would have an incentive to connect, directly or
indirectly, with the merged entity to ensure global
connectivity. Given its increased market power due to
its large customer base and large network with global
reach,
there will be no retaliation possible for either
actual or potential competitors or customers.

The parties' response

(175) The parties argue in their reply to the statement of
objections that the Commission has failed adequately to
shares when
consider other
concluding that the merged entity would be dominant.

than market

factors

(176)

(177)

(178)

Indeed, according to the parties the Commission has
failed to consider (a) the short time necessary to deploy
an Internet backbone network and enter the market as
well as the sunk costs associated with the operation/
construction of an Internet backbone network, (b) that
customers of top-level connectivity providers are sophis-
ticated corporations that have access to market informa-
tion and are unlikely to accept any level of degradation,
(c) that innovation plays a fundamental role in keeping
pace with ever-increasing demand for high quality
services and (d) that the relevant market is characterised
by volatile market shares.

the parties'

the review of

reply runs
It must be underlined that
in the
contrary to all submissions made by Sprint
the WorldCom/MCI merger
course of
where it argued that
the combination of WorldCom
and MCI would result in an entity able to degrade the
peering connections of its competitors (including Sprint)
due to its absolute and relative size.

Barriers to entry

it

It has been explained in recital 166 that barriers to
entry into the identified relevant market are high. The
Commission's investigation has shown that
is the
incumbent top-level provider that is perhaps best placed
to capture future growth. MCI WorldCom has, due to its
extensive network, large customer base and traffic flow,
been able to retain its leading position despite the
two
increased growth in the market during the last
years.
to challenge this
it not only needs an extensive network, but
position,
also a significant
customer base. Without a large
customer base, and traffic flows, a new entrant would
not be able to obtain peering with top-level connectivity
providers.

for a new entrant

In order

(179) To this effect the parties argue in their reply to the
statement of objections that peering is not a barrier to
entry. However, this argument is based on an assump-
tion that the Internet is not hierarchical, an assumption
that
is contradicted by Sprint and the Commission's
findings in this procedure. Top-level connectivity provi-
ders can only maintain their position by ensuring that
they continue to have peering agreements with all other
top-level networks. Otherwise they will be downgraded
to the second-tier level. In any event, as acknowledged
by Sprint in a submission to the Commission […]* (54).

(54)

[…]*.

18.11.2003

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Official Journal of the European Union

L 300/27

Customers reaction

(180) The parties then argue that degradation would be a
counter-productive policy in the Internet, where provi-
ders of
Internet connectivity services compete on the
basis of providing high quality connections. A degrada-
tion strategy would be as harmful to the merged entity's
customers as to the degraded network's customers and
that the extended period of time required to implement
fully such a strategy would cause the merged entity to
lose market share. The parties also argue that degrada-
tion would be easy to detect.

(181) The parties also argued that if the merged entity were to
engage in a selective degradation policy,
this would
affect the merged entity more than its competitors since
a customer would have a strong incentive to switch, not
to the merged entity, but to its largest rivals as only
these offer a non-degraded service. The parties argued
that the overall quality of the merged entity would be
inferior to any of its competitors.

(182) The Commission cannot share this analysis. As stated in
recital 164, if the merged entity were to slow down the
upgrade of private peering points this would not neces-
sarily affect its own customers to any significant degree.
This is further evidenced by the parties' own submis-
sions to the Commission (55). Their large customer base
combined with their extensive network reach would
enable the merged entity to maintain quality of services
since customers would not necessarily have to leave the
network which would otherwise increase these custo-
mers' exposure to latency, reliability and general perfor-
mance issues.

(183) Because the merged entity relies only marginally on each
of
its smaller competitors whereas it will be a major
source of connectivity to each of these competitors, the
quality of
service offered by MCI WorldCom/Sprint
would not be affected to any significant degree by a
selective degradation strategy. If the merged entity were
to degrade the connectivity of one of its four largest
competitors, this would only affect about [0 to 10]* %
of its overall traffic. But, it would amount to more than
the largest
[10 to 20]* % of such traffic for any of
competitors exchanged with the merged entity (off-net
traffic). Assuming that this would trigger a decrease by
50 % of the quality of the connection between the two
peers, this would translate to a decrease of one percen-
the service quality provided by MCI
tage point of
WorldCom and of seven percentage points by its smaller
competitor.

(184)

In addition, the on-net traffic of the combined entity
the traffic
to around [40 to 80]* % of
will amount

(55)

[…]*.

flowing through their backbone. This means that any of
the merged entity customers could access [40 to 80]* %
of the Internet space without using peering connections.
[40 to 80]* % of the quality of service would be in any
event immune from degradation. It should be noted that
the notifying parties have contested the significance of
the on-net traffic as measured by the Commission. In
their view, on-net
traffic should only include traffic
exchanged between end-customers of the merged parties
and not between resellers of Internet connectivity who
happen to be customers of MCI WorldCom/Sprint. This
allegation does not resist closer examination, as what
the merged-entity customers would
matters
access directly [40 to 80]* % of
the Internet space
without getting through a peering connection. Degrada-
this
tion of a peering relationship would not affect
access to [40 to 80]* % of the Internet space.

that

is

(185) The rapid growth in Internet

the merged entity, customers of

traffic would allow the
merged entity to implement its degradation strategy by
focusing on the development of its own network and
customers rather than upgrading the links with compe-
titors. This is especially so given the large customer base
of MCI WorldCom/Sprint compared to the merged
entity's competitors. If, as the parties argue, this would
be easily detectable by customers, both existing custo-
mers of
the merged
entity's competitors as well as new customers would be
more inclined to choose MCI WorldCom as their prin-
likely to be
cipal provider of connectivity. This
particularly true for large customers facing ISPs and
content providers that have to maintain good quality
connectivity to their sites and customers. Well-informed
customers are likely to react more swiftly to a degrada-
tion than other customers. They would also be in a
better position than less-informed customers of realising
the benefits of being directly connected to the merged
entity's large customer base.

is

(186) The parties have in their response argued that multi-
homing can be used to avoid degradation. According to
the parties a customer could easily compensate degrada-
tion by utilising a direct connection that would bypass
the degraded peering connection.

(187) However, as already stated in recital 36, multihoming
does not necessarily prevent traffic from passing over a
network with a degraded connection. The path of the
outbound traffic can to some extent be influenced so
that passing over a degraded network is avoided. But the
return traffic would not be possible to control to any
significant degree. A customer is in this situation likely
the degraded
to take the safest option and bypass
peering point by connecting directly to the merged

L 300/28

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Official Journal of the European Union

18.11.2003

entity rather than connecting to a smaller connectivity
provider since this would allow it direct connectivity to
it would decide
the merged entity's customer base.
also to multihome to another connectivity provider,
it
would be more likely that this connection is secondary
to its agreement with the merged entity and used as a
back-up to the principal connectivity provider, MCI
WorldCom/Sprint.

If

(192) The Commission does not share this view as this is only
true to a limited extent. It is correct that these techni-
ques are being used more and more to combat conges-
tion and latency. But, these techniques cannot be used
for all types of content. Furthermore, traffic still needs
to pass through the top-level connectivity providers to
ensure full connectivity.
these
techniques are also used by top-level connectivity provi-
ders to ease traffic congestion and bring content closer
to their customers.

In any event, some of

(188) The parties alleged that the possibility to increase prices
for transit on top of service degradation would only
accelerate the flight of customers from the merged
entity to other top-level connectivity providers, which
would offer better quality at a lower price.

(193) The parties have objected that the merged entity would
be able to control technical developments. According to
the parties, no individual ISP would be able to impose
standards on the Internet at the network level.

(189)

increase

universal

connectivity) without

In their argument, the parties assume that the merged
entity would apply blindly and indiscriminately such a
the parties will be able to target
strategy. However,
in prices on potential
degradation and/or
competitors that would want to enter the market. As
evidenced by the Commission's investigation, a potential
competitor would not be able to stay competitive (and
provide
obtaining
connectivity from the merged entity's customers. If the
potential competitor does not purchase transit from the
merged entity, it would need to start peering with it or
become a customer. It is not, however, obvious that a
peering relationship would be granted by the merged
entity. Alternatively, current customers could be disci-
plined by a threat of either degradation or higher prices.
Given the potential competitors and customers depen-
dence on the merged entity,
this strategy could be
effectively applied to targeted companies without any
significant risk to the merged entity's own market posi-
tion. In other words,
it is extremely unlikely that the
merged entity would uniformly increase its prices or
degrade its connections to discipline the market.

(190)

Furthermore, a large customer base combined with a
large network enables a connectivity provider to keep
higher quality of
than a smaller network
provider where customers would need to leave their
network which would increase these customers' expo-
sure to latency,
reliability and general performance
issues.

standards

Effect of innovation

(191) The parties also argued in their reply to the statement
of objections that both customers and end-users have
the possibility of bypassing degraded peering points
through new technologies such as caching and other
storing techniques.

role

in the

future development of

(194) However, given that innovation will play an increasingly
important
the
Internet, a dominant player with a large customer base
will be best placed to set the pace for such innovation.
The technology used by the dominant operator
to
provide a given service would become a de facto
standard since all customers of
this dominant under-
taking would have adopted the technology chosen by
the incumbent.

Volatility of market shares

as described in the

(195) The parties have also argued that market shares would
be volatile. However,
section
covering market-share calculation, the market share of
MCI WorldCom has shown a remarkable stability from
one procedure to the other. Market shares for the other
market participants have seen an increase for AT & T
and a decrease for all other competitors.

Conclusion

(196)

It follows from the above, that the notified concentra-
tion,
if not modified, will result in an entity of such
absolute (more than [35 to 45]* % of the market) and
relative ([several]* times larger than its closest compe-
titor) size, that this would enable the merged entity to
behave independently of competition and customers. For
instance, it will be able to increase prices to customers
or to impose its own standards on the industry.
Its
ability to diminish its rivals' quality of service at any
time through selective degradation will make it possible
for the combined entity to discipline the market. It can
therefore be concluded that the notified transaction will
lead to either the creation or the strengthening of a
dominant position in the market for the provision of
top-level or universal Internet connectivity.

18.11.2003

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Official Journal of the European Union

L 300/29

GLOBAL TELECOMMUNICATIONS SERVICES

Current market characteristics

(a) Parameters of competition

(197) Global

telecommunication services are provided on a
tailored basis to multinational companies. Because of
the highly technical nature of these services the market
functions typically with bids organised by the customers
telecommunication services providers
to which global
are invited to bid.

(198) To be a credible bidder, a candidate would need to meet
high quality requirements (for instance to prove that its
network has a global reach, that it is reliable, that it is
supported by enough sales and technical personnel
in
order to correct any fault in the service provided, etc.).
It appeared that brand/quality perception is also a key
element of competition. The fact that a provider already
has a significant number of global telecommunication
services customers and also some key accounts appears
to be a determinant factor for customers when deciding
whether it
is a credible bidder. Customers confirmed
that price was only relevant at the second stage of the
bidding process, when adequate levels of quality of the
service were ensured.

(199) The market investigation has shown that to participate
in such bids is costly and time and resource intensive.
Knowledge of past bidding history is a major asset to be
able to bid competitively as it provides high-level infor-
mation on recent market prices and bidding behaviour
rivals. Such information makes it possible for a
of
market participant to ensure that the price offered in
the first stage is in an acceptable range for the potential
customer and then to refine the price in the negotia-
tions in the second stage.

to complete the
require a significant number of staff
bidding process for the supplier. Consequently, partici-
pation in the market leads to high sunk costs. A true
global operator, according to one third party, can be
expected to receive a few hundred complex requests for
proposal each year and many more simpler ones. With
this volume and frequency of proposals, and the costs
of bidding for each one, the costs of entry into the
global telecommunication services market appear to be
high. In addition, even if the new entrant is prepared to
incur the sunk costs of bidding, they will then need to
overcome a further difficulty which will be the absence
of an existing customer base with which to convince the
they are a credible contender on the
customer
market. This includes support and sales staff
in their
organisation that have experience to implement the RFP
bid.

that

(201) According to one third party,

to enter

the market
involves a choice between constructing the network
based on leased lines, which is the quick way to build
but is more expensive, or to roll out its own network,
which will enable costs to be kept under control in the
future, but takes longer to do. Entry is therefore made
difficult in two ways, so that new entrants, assuming
that
they could reach the second stage of a bidding
process, who choose to enter the market quickly will be
unable to match incumbents with established networks
on cost if they rely on leased lines, whilst the building
of a new network will further delay the entry of the
company into the market. It should also be noted that
Equant, one of
the market participants, has recently
announced that it now intends to build its own network
instead of leasing fibre. Customers have also explained
that they prefer to deal with facilities based providers as
such providers are directly in control of the underlying
cables and therefore better able to control the quality of
their offering.

(202)

long to build its non-US business

[…]*. If such a strong company as Sprint would take
that
should the
merger fail, the task for new entrants without Sprint's
US network, brand image and its large customer base
would be even greater.

(b) Barriers to entry

(200) According to the notifying parties, barriers to entry to
the global telecommunication services market are low.
Yet evidence from both the notifying parties and third
parties suggests that this is not the case. The costs of
bidding can range from a few thousand dollars up to
over USD 500 000 for some bids. Bids can take up to a
year before the entire process is complete and may

(203)

[…]*.

(204)

[…]* (56).

(56)

[…]*.

L 300/30

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Official Journal of the European Union

18.11.2003

(205)

recitals

In order

show that

the previous

the
In conclusion,
barriers to entry for new players in the market are
high, contrary to the assertions of the notifying parties
in their submissions.
to achieve substantial
In order
entry, entrants need to bid for a substantial number of
to win such
contracts, which is expensive.
contracts, these companies need to have a network in
place that will satisfy the demanding terms that custo-
mers put into RFPs to be able to reach the second stage
of a bidding process, and this network generally has to
be extensive in order to meet customer needs and to
services. Even if new
enjoy low-cost provision of
they will still
entrants are able to fulfil
lack the bidding experience of
the existing market
players. This bidding experience would enable the new
information on competitors' past
entrants to extract
prices, likely costs and behaviour which is necessary to
help them to compete effectively.

these needs,

(208)

(209)

(c) Market participants

(206) On the supply side, prior to the merger,

there were
three main suppliers with a number of smaller compe-
titors. The three main suppliers were the Concert Alli-
ance (including BT, AT & T and their jointly controlled
subsidiary Concert), MCI WorldCom and the Global
One Alliance
(including France Télécom, Deutsche
Telekom, Sprint and their jointly controlled subsidiary
Global One). These three suppliers held substantial port-
folios of customers. They were able to participate in a
majority of the requests for proposals issued by custo-
mers and able to provide any sort of global telecommu-
nication services. The smaller players, including Cable &
Wireless and Equant, were only able to participate in a
few bids, rarely won important bids and could not
necessarily provide all services. One important competi-
tive advantage enjoyed by the three main players was
that through their wide participation in bids (there are a
they could accumulate
few hundred bids per year)
information on the cost and pricing of most of
the
demanded global telecommunication services.

(207)

In the BT/AT & T decision, the Commission found that
there were a limited number of actual or potential
competitors in the GTS market. These included BT/
Concert, AT & T/AUCS/Unisource/WorldPartners, Global
One, Equant, Cable & Wireless as well as other potential
local and IT based companies as potential competitors
on the market. In the same decision, on the demand
side, the Commission found that there was a short list
of companies which some GTS customers said that they
would always consider when issuing an RFP (BT/
Concert, AT & T/AUCS/Unisource/WorldPartners, Global
One, Equant and Cable & Wireless) (57).

by

third

parties'

customers
Information provided
regarding their bid history over the previous year for
obtaining global telecommunications services confirmed
that it was generally the same short list of suppliers
which bid for
those contracts, namely Equant, MCI
WorldCom, BT, AT & T, C & W and Global One.

assessment

the Commission's

In their notification, the parties do not specify which
companies are on or outside the market. Instead, they
compare
in the BT/
AT & T decision to the one made by the Federal
Communications Commission (FCC) on the same trans-
action (58). The FCC decision ‘identified a number of
other firms which are emerging as significant providers
of GTS’. These firms included the Regional Bell Oper-
ating Companies (RBOCs) and ‘[n]ew carriers’ such as
Qwest,
IXC and Level 3 as well as Global Crossing/
Frontier, GTS (which acquired Esprit Telecom in 1999)
the notification
and Colt. The parties' analysis of
concerns only potential
the notifying
parties do not challenge the list of actual competitors
set out in BT/AT & T. In further documents provided to
also identified other
the Commission,
entrants such as Deutsche Telekom,
Infonet, Telecom
Italia and Telefónica.

competition,

the parties

(210) The parties' allegations that there are a large number of
potential competitors who could easily enter the market
are contradicted both by their own submissions and by
the Commission's investigation, which both confirm the
analysis made in the BT/AT & T case.

(211)

In a submission (59) in the context of the BT/AT & T
procedure which concerned products similar to the ones
in the present
case, MCI WorldCom stated that:
[…]* (60)[…]*.

(212)

Furthermore, in documents provided to the Commission
during the course of the investigation (61), […]*.

(213)

In approving the BT/AT & T operation, the Commission
used the narrowest possible market definition to provide
the most rigorous analysis of the operation. Despite the
failure of the notifying parties to challenge the number
of competitors on the market to any significant degree,
it is necessary to identify whether the actors on the
market have changed over the last year as well as to
measure the effect of this operation.

(58) Form CO page 39
(59) Response dated 23 November 1998 to Commission request for

(57) Since the completion of BT/AT & T, the WorldPartners alliance has
effectively disappeared and Unisource has been merged into Infonet
with AUCS.

information,
I.e. BT/AT & T/Concert.
[…]*.

(60)
(61)

18.11.2003

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Official Journal of the European Union

L 300/31

(214) As anticipated in the BT/AT & T decision, Unisource
have ceased to exist
in their previous form and the
WorldPartners alliance now appears to be moribund.
AUCS, the former AT & T-Unisource joint venture,
is
Infonet. Some multinational companies
now part of
for
have identified AUCS/Infonet as being suppliers
some bids.
In addition, another company identified
AUCS/Infonet as being a competitor on certain bids,
but primarily to small and medium-sized enterprises in
Europe, and not a true global player. This is also borne
out by the win/loss data provided by the companies in
the market where Infonet very rarely appeared as a
winner or losing bidder for the contracts for which the
Commission was provided information.

(217) Notwithstanding the above evidence, given the differing
interpretations of the number of players on the market,
for the purposes of this analysis, the Commission has
widened its view of
the players on the market and
assumed that some of the marginal players are on the
market. It was then assessed whether these can exert a
meaningful
the major players on the
following the concentration (MCI WorldCom/
market
Sprint and the Concert alliance (64)), or whether
the
two major players post-merger will enjoy a dominant
position, either singly or together.

influence over

(215) The Commission has also examined a number of other
possible new entrants into the market as identified by
the notifying parties. As set out above, these included
the regional Bell operating companies (RBOCs), Qwest,
Global Crossing/Frontier,
IXC, Level 3, GTS (which
acquired Esprit Telecom in 1999) and Colt. However,
the Commission noted in its statement of objections
that none of
these companies, with the exception of
Qwest which is considered in recital 216, featured at all
significantly on the win/loss lists provided by the major
suppliers, nor in the assessment of customers in reply to
the Commission's questions. Indeed, many of the above
companies appeared to be unknown by some customers
because there was either no comment or a question
mark against their entry in the table of possible compe-
titors. In addition, the internal analysis provided by MCI
WorldCom and Sprint did not identify any of the above
companies, with the exception of Qwest, as a serious
in as much as they were
competitor on data markets:
they were aggregated
considered to be competitors,
under the ‘other’ category in the analysis. Finally, the
President and CEO of Yankee Group, a major telecom-
munications consultancy firm, Berge Ayvazian, described
two of the competitors as: ‘second tier competitors such
as Qwest and Level 3’ (62).

(216) As mentioned in recital 215, of the potential competi-
tors identified by the notifying parties, Qwest
is the
most convincing possible actual entrant into the GTS
market. According to win/loss data provided by MCI
WorldCom and a third party, Qwest is beginning to be
regarded as a competitor for some bids. […]* (63)[…]* In
addition, as identified by the parties in their analysis of
the potential competitors on this market, Qwest has a
‘significant
joint
European long-haul fibre assets and expertise’. Therefore,
of all the possible new entrants in the market since the
BT/AT & T decision, Qwest appears to be the most
credible.

venture with KPN which holds

(62) http://www.yankeegroup.com/webfolder/yg21a.nsf/yankeetoday/

A+View+From+the+Top.+Our+President+and+CEO,+Berge+Ayva-
zian+discusses+the+proposed+merger+of+MCI+WorldCom+and+-
Sprint.
[…]*.

(63)

(218)

In submissions to the Commission during the course of
the procedure, both MCI WorldCom and Sprint
provided information on their assessment of the players
on the market on the basis of a list of the service lines
that they provide on the market place. This generated
the following overall results:

MCI WorldCom's view

Sprint's view

Company

Number of
services
offered

Rating
(between 1
(best) and 5
(worst))

Number of
services
offered

Rating
(between 1
(best) and 5
(worst))

MCI WorldCom

Sprint

Concert

AT & T

BT

Global One

Cable & Wireless

Equant

Qwest/KPN

Infonet

SBC

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

—

—

—

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

—

—

—

[...]*

[...]*

[...]*

—

—

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

—

—

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

(64)

I.e. Concert itself, together with its parent companies AT & T and
BT.

L 300/32

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Official Journal of the European Union

18.11.2003

MCI WorldCom's view

Sprint's view

Company

Number of
services
offered

Rating
(between 1
(best) and 5
(worst))

Number of
services
offered

Rating
(between 1
(best) and 5
(worst))

Deutsche
Telekom

France Télécom

—

—

—

—

[...]*

[...]*

[...]*

[...]*

(219) The above analysis, based on the parties' view of the
service lines, indicates that both MCI WorldCom/Sprint
range of
and the Concert alliance will offer a full
services after the merger. Some others offer a similar
range of services, but they do not have as good a set of
services on the market,
the notifying
parties.

in the view of

Effect of the concentration

(220)

In BT/AT & T the Commission found that the market
shares in that case (in the range 39 to 47 % — see
recitals 106 to 108 of the BT/AT & T decision) did not
by themselves indicate a creation of a single dominant
position. This was because of the presence of substantial
competitors to the Concert alliance such as Sprint/
Global One and MCI WorldCom as well as to a lesser
extent Equant and C & W, who were found to be able
to compete on equal terms with the joint venture. These
players were found collectively to exercise competitive
constraints on the notifying parties at the time of a bid
for a contract from a customer.
Indeed, they assured
customers that there would be enough bidders present
to ensure the maintaining of competition. This was
either because they are requested to bid as well by the
customer or because the parties know that, faced with
sophisticated customers,
impose their
conditions because in that case the customer would
extend the request for proposals to the other possible
providers.

they could not

(221) At

the same time as the notified concentration,
the
Global One Alliance has lost two of its members with
a twofold effect on competition. First, with the inclusion
of Sprint in the MCI WorldCom group, which is a direct
competitor of Global One, Global One loses its distribu-
tion partner, and therefore presence in the United States.
Second, the break-up of the Global One joint venture
and the sale of its assets to France Télécom also leads to

a similar effect in Germany, but there is no causal link
between the notified concentration and the withdrawal
of Deutsche Telekom from Global One.

(222) The importance of Sprint

to the Global One market
position is underlined by internal documents from the
parties. […]*.

(223) Existing and potential customers of Global One showed
a certain loyalty to their supplier when asked whether
they would switch. However, they stated that the ability
of Global One to provide coverage in the USA would be
examined closely during the remainder of the current
contract and at the time of renewals. In response to the
Commission's investigation? nearly all existing or poten-
tial customers rated Global One, after its acquisition by
France Télécom, as a medium-ranking player, behind
MCI WorldCom and the Concert alliance. This was in
part caused by the sudden lack in US coverage.

(224) The second effect of the notified concentration results
from the combination of Sprint's customers
in the
United States with those of MCI WorldCom. This
combination will reinforce the latter's already strong
position in the GTS market.

(225) The notifying parties argued in their notification and in
the course of
the existing Sprint
the procedure that
customers who are using Global One services will
remain with Global One and not Sprint. According to
them, such customers would be bound in some way to
the Global One network. This was however not
confirmed by the market investigation. This is contra-
dicted by both parties' analysis of the future of Global
One.

(226)

[…]* It is also generally expected that Global One will
lose a significant proportion of
its current customers
due to the merger notably because of the lack of US
coverage? as explained in recital 221.

(227) This second effect of the likely move of customers from
Global One to the merged entity is confirmed by Sprint
in a document supplied to the Commission […]* (65);
For instance, an MNC explained that Global One is
lacking a US presence and does not have a particularly
strong global presence but does provide very good
EMEA (Europe Middle East Africa) presence and good
they will
service capabilities. Another one stated that
probably not continue their relationship with Global
One but are awaiting further developments around that
company.

(65)

[…]*.

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(228) Therefore, the operation will result in the withdrawal of
Global One as an effective leading competitor on the
GTS market, because of the absence of its US reach and
the expected loss of a significant proportion of its US
customers to the merged entity. Consequently, the subse-
quent analysis is conducted on the basis that whilst
Global One will remain in the market,
it will be as a
niche player only able to bid for a limited set of
contracts because of its absence of its own US presence,
and its consequent reliance on Sprint, at least in the
short term.

(a) Market share analysis

(229)

In a document (66) supplied to the Commission during
the course of
the investigation, Sprint provided its
the market shares in the USa for data
perception of
services (which it defined as IP, Frame Relay and ATM)
as well as total external market
(the market which
included data, private line,
international voice, toll-free
and business outbound), Sprint provided market shares
for the two markets. […]* In 1999, for data services,
Sprint had [5 to 15]* %, MCI WorldCom [35 to 45]* %
and AT & T [15 to 25]* % with Qwest on [0 to 10]* %
and the remainder aggregated at [20 to 30]* %. For the
wider group of services, Sprint had a market share of
[5 to 15]* %, with MCI WorldCom on [30 to 40]* %,
AT & T on [30 to 40]* %, Qwest on [0 to 10]* % and
[20 to 30]* %. This data,
the others aggregated at
provided by the one of the notifying parties,
indicates
the strong position that the merged companies hold on
the GTS market.

(230) The Commission measured the market for GTS in two

main ways:

Method A: by overall revenues from products contained
in the GTS market;

Method B: by analysing the total sales of the companies
in the GTS market to around 200 large telecommunica-
tions spending companies (as was done in BT/AT & T).

data ascribed to BT are based on figures given in the
BT/AT & T investigation. These figures are likely to
represent an underestimate of BT's market position.

(233) Three further assumptions were made, all of which
work in favour of the notifying parties and the Concert
alliance. First, Global One was retained as being in the
market, when all the evidence suggest that Global One's
existing customers will migrate in large numbers to
Sprint or change to other providers and new potential
customers will be less likely to choose Global One until
its US and German presence is established. Second, even
though Qwest has been unable to provide data for the
it has been given a 5 %
Commission's investigation,
market share, which is well
the market
share which Sprint estimates it has in the US. Finally,
even though Infonet did not provide data, the figure for
AUCS has been doubled to allow for Infonet's sales in
this market. This implies that Infonet has a market share
of 5 %, the same as Qwest and represents an over-
estimate in that
identified as a major
competitor by Sprint
in their analysis mentioned in
recital 216, unlike Qwest.

in excess of

Infonet

is not

(234)

In the light of the above information, it is likely that the
tables under method A and B below represent a view of
the market which is more favourable to both MCI
WorldCom/Sprint and the Concert alliance than reality.

1. Method A

(235) Method A involved the collection of overall revenue
data from the companies in the market for their sales
of a list of services. This definition was global network
services (67).

Supplier

Market share (%)
(due to rounding the total may
not be exactly 100 %)

(231)

In addition, the Commission analysed the perceptions of
the companies on the market by customers and compe-
titors.

MCI WorldCom/Sprint (68)

Concert alliance

[25-35]*

25-35

(232) The

to

the

tables

behind

assumptions

calculate
methods A and B were based on the presence in the
market of a larger number of companies than had been
including companies which the
present in BT/AT & T,
notifying parties claimed in their notification were
actual or potential competitors on the market. BT were
unable to provide data in time for the Commission, so

(66)

[…]*.

(67) Global network services are defined as

international network
services (including voice and data (e.g. X.25,
frame relay and
ATM)), ancillary services (e.g. international 800, calling cards, etc.)
and whole circuit IPLCs. The definition does not include profes-
sional services or customer premises equipment. For the purposes
of the above definition, stand alone services such as international
IDD, long-distance or local connections are included only if they
are part of a larger bundle of global network services.

(68) MCI WorldCom: [15 to 25]* %, Sprint [0 to 10]* %. Sprint data
includes all of its existing customers for Global One services given
the likely decline of Global One.

L 300/34

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Official Journal of the European Union

18.11.2003

Supplier

Market share (%)
(due to rounding the total may
not be exactly 100 %)

Global One/France Télécom

15-25

< 5

< 5

5

5-15

< 5

< 5

< 5

< 5

Equant

Cable & Wireless

Qwest

AUCS/Infonet

Level 3

Deutsche Telekom

Colt

Williams

2. Method B

(236) The Commission then collected data from the compa-
nies on the market in order to discover the revenues
which each company earned from global network
services. This method, which was also used in the BT/
AT & T investigation,
involved the collection of data
from each supplier in the market of their sales to a list
of around 200 companies who formed the top interna-
tional telecommunications spenders worldwide. This list
was extracted from a wider list of the top 2 000 compa-
nies by the same measurement. These 200 companies
accounted for at least 35 % of the telecommunications
expenditure of the 2 000 companies. The services were
the same as used in method A.

Supplier

Market share (%)

Concert alliance

Global One/France Télécom

Equant

Cable & Wireless

Qwest

AUCS/Infonet

Level 3

Deutsche Telekom

Colt

Williams

35-45

5-15

< 5

< 5

5

< 5

< 5

< 5

< 5

< 5

(238) These data in the tables above appear to confirm what
Sprint has already identified regarding the position of
the notifying parties and the Concert alliance as the
principal players on the market, well in advance of any
other market actor.

(239) These market-share figures are confirmed by the win/
loss analyses the Commission has received from the
parties and third parties and the bidders competing to
provide services to the top 200 or so companies.

(b) Perceptions of the suppliers

(237) The companies on the list were identified as being large
multinational companies by the notifying parties when
asked to comment on the list and they regarded the list
the
as being an acceptable proxy measurement
market. Again, a similar analysis to that contained in
method A was carried out.

for

(240) The market shares outlined in recital 237 reflect past
contracts won and lost in bids but not necessarily the
future ability to win bids. They give an indicator of
future market power, but
is also
based on customer perception and the capability of
suppliers to incur costs and sustain their challenge in
bidding for contracts.

the bidding market

Supplier

Market share (%)

MCI WorldCom/Sprint (69)

[30-40]*

(241)

In order to discover the perception of
the customers
and competitors in the market, the Commission asked
third parties to rank the players on the GTS market on
a grading scale from 1 (worst) to 5 (best) for a number
included: US presence (70),
of
facilities-based, brand
global presence, service capacity,

factors. These factors

(69) MCI WorldCom: [30 to 40]* %, Sprint [0 to 10]* %. Sprint data
includes all existing customers given the likely decline of Global
One.

(70) As identified in the analysis of Global One in recitals 221 to 226,
US presence is important for GTS suppliers because of the number
of MNCs with headquarters there.

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respondents
and customer portfolio. A number of
than quantitative analyses
provided qualitative rather
which confirmed the quantitative analysis
the
strong firms on the market were MCI WorldCom/Sprint
and the Concert alliance with Equant, Cable & Wireless
and Global One being the following players with some
weaknesses but still in the market. Of the third parties
that provided a quantitative analysis,
the following
results were obtained:

that

Supplier

Customer rating

Competitor rating

MCI WorldCom

Concert alliance

Global One/France
Télécom

Equant

Cable & Wireless

Qwest

AUCS/Infonet

Level 3

Deutsche Telekom

Colt

Williams

GTS

3,7

4,3

3,2

3,1

2,9

2,9

2,6

2,6

2,2

1,1

—

—

4,3

4,7

3,7

4,0

3,6

3,6

3,6

3,0

2,9

2,7

2,6

2,5

though

(242) As can be seen from the table, customers and competi-
in how they rank the
tors are generally consistent
companies,
score
consistently
competitors
companies higher than customers, possibly because of
their more extensive knowledge of the market. The two
largest players on the market — MCI WorldCom and
the Concert alliance — score highest by both customers
and competitors. Following them come a number of
companies very close together in terms of rankings,
with Global One and Equant leading that group.

(243)

of

varying

the above table reproduces
It should be noted that
averages
to each
rankings
company. Only MCI WorldCom and the Concert alliance
scored consistently high for all criteria by nearly all
respondents.

attributed

(244) The table also seems to indicate that the players who
the notifying parties claim to be entering the market are
regarded as meaningful players on the
in fact not
market by either
It
confirms the Commission's view that
the market has
been drawn widely in its market analysis.

their customers.

themselves or

(c) Conclusion

(245) From the market-share analysis

and customer and
competitors' assessments outlined above, the statement
of objections concluded that only two players are able
to participate in a high number of bids. This seems to
be true both for the top 200 multinationals and for the
the resulting
other components of
market shares, both in absolute and relative terms, are
consistent.

the demand as

(d) The parties response to the statement of objec-

tions

(246) The parties say that the market share increase as a result
of the merger is minimal. This is because Sprint has few
GTS activities, as a result of its involvement with Global
One, and the increase in market share attributable to
Sprint is only […]*[0 to 10]* % to […]* % as a result of
the merger. The parties argue that this increase did not
justify the opening of proceedings under the Merger
Regulation.

(247)

It should be noted that it is incumbent on the Commis-
sion to investigate any creation or strengthening of a
dominant position in a notified operation. Increase in
the market share of the parties is one of the indicators
looked at to assess the changes in the market power
detained by the notifying parties. The statement of
objections found that this contributes together with the
disappearance of a potential US leg for any competitor
on the relevant market
the joint
dominant position as identified in the statement of
objections.

to the creation of

(248) Next, the parties allege that the concentration has no
causal connection with the change in ownership and
control of Global One. They say that the decision to
change the ownership structure of Global One was
taken well before the decision of Sprint to merge with
WorldCom. They continue that the statement does not
focus on the small increase in market share attributable
to Sprint, but instead to the consequences of a different
operation which had already been assessed by the
Commission.

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(249) The Commission accepts that

there is no causal

link
between this operation and the break-up of Global One
(see recital 221). However, the break-up of Global One
is relevant to assessing competition on the market. The
Commission has an obligation to take into account the
facts on the market and make projections on how the
market will develop in the future. Indeed, the decline of
Global One is a fact following the change in ownership
and the loss of its US partner: Sprint.

(253) The parties criticise the Commission's statement which
said that the potential competitors identified in the BT/
AT & T decision had not featured significantly in the
win/loss lists supplied to the Commission. According to
the parties, potential competitors would not feature in
such lists, only actual competitors would. In addition,
the parties point to the RBOCs and Global Crossing in
particular as being significant potential competitors.

(250) The parties then pointed to the BT/AT & T decision
where the market for GTS was found to have ‘substan-
tial competitors’ and to be ‘highly competitive and fast
moving’ and that customers were ‘sophisticated’ and
were ‘powerful enough to dictate their demands’. They
also pointed to the numbers of serious potential compe-
titors which the Commission noted in that decision.
They also pointed to the FCC Decision on the BT/
AT & T case taken in October 1999 where that organi-
sation also did not find significant competition issues.
They believed that the changed market structure which
the Commission identified in its statement of objections
could not have taken place in such a short period of
time.

(251) As set out in recitals 206 to 218, the market partici-
pants retained by the Commission do not only include
all of the companies who the Commission considered to
be on the market in the BT/AT & T decision (and which
MCI WorldCom believed constituted the market players
along with the now defunct Unisource in the course of
the BT/AT & T procedure) but also other companies
who the parties claimed were also on the market (some
of which did not feature significantly on the win/loss
lists obtained by the Commission).

first

(252) The parties alleged in the reply that the Commission has
underestimated the degree of competition on the GTS
market. On actual competitors,
they argued that
Equant and Cable & Wireless remained global competi-
tors on the market. Second, they pointed to Infonet,
Level 3 and Teleglobe as being significant new players.
The parties went on to argue that Global One will
remain a significant force on the market by building
up its US presence through new investments and a
possible alliance with a US operator together with the
retention of its existing US customers and its capture of
some customers from Sprint where Sprint is distributor
of Global One's new service. According to the parties,
customers confirm the view that Global One remains a
significant player even after the severing of its links with
Sprint.

(254) The parties quote the BT/AT & T decision on potential
competitors extensively in their reply. Since that decision
was taken in March 1999, only the companies that the
Commission has
such as
Qwest, Williams and GTS have started to feature in
bidding contests. This suggests that the role of the other
companies identified as potential competitors in the BT/
AT & T decision is less credible than was thought at
that time.

identified on the market,

(255) The final criticism by the parties of the Commission's
analysis is that the Statement overestimated the market
power of the combined entity. In particular, the parties
pointed to four main alleged defects to the methodology
used. First,
the Global Network Services market-share
measure used did not correspond to the market defini-
tion and exaggerated the Concert market share. Second,
they pointed to method B as being flawed, as there is
no justification as to how the 200-company sample,
taken from a wider sample of 2 000 companies, can be
considered to be representative of all the MNC custo-
mers. Third, they believed that the market share attribu-
table to Sprint was too high as the statement assumed
that Sprint will retain all of
its customers for Global
One services. Finally, they argued that the Commission
cannot treat the Concert alliance as one single entity for
the purposes of calculating market share, as BT, AT & T
some
and Concert compete with one another
contracts.

for

(256) The Commission notes that the 200-company sample is
an alternative method of measuring the market to the
method based on total revenues. The point about the
share has already been addressed in
Sprint market
recital 249. As
the Concert
alliance market shares, this aggregation of the market
shares of a group of companies bound by joint venture
agreements is entirely consistent with normal competi-
tion law analysis.
the
It should also be noted that
the Concert alliance distribute the same
members of
Concert products.

to the aggregation of

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Creation of dual dominant position

(a) Absence of single dominance

(257)

In the light of the market share information given in
recitals 235 and 237 and the ability to bid extensively
for new contracts, neither MCI WorldCom/Sprint nor
the Concert alliance can be expected to enjoy a single
dominant position. Should either company attempt to
exercise market power alone, the other would be able to
that attempt given its own presence on the
defeat
market. However, the Commission took the view in the
statement of objections that together the two companies
would have a market position to exercise joint domi-
nance on the GTS market.

(b) Criteria for parallel behaviour

global

is on the basis of

customer, it does not appear at first sight that they are
homogeneous. However,
telecommunication
services are assembled from the same basic components
for a particular
and competition between suppliers
customer's business
same
the
It is difficult to assess the symmetry
customer needs.
and stability of market shares as this market is recent
and has witnessed shifting alliances
(of which this
merger is only the most recent) and concentration over
the past two years. Barriers to entry are certainly high
as a market participant would need to possess an
extensive infrastructure and would have to incur sunk
costs due to the participation in bidding processes. On a
value basis, demand is growing materially even if on a
volume basis (i.e. the number of customers with global
telecommunication service needs) this growth is much
smaller. Demand is not significantly sensitive to price as
quality is the key driver of competition in this market.
There are technological changes occurring in the market
place but they affect all players in a similar way.

(258)

cases,

former

collective dominance

In many
the
Commission has applied the following series of criteria
to establish the likelihood of the creation or reinforce-
ment of a collective dominance position. These criteria
are as follows: (i) the relevant product should be homo-
geneous; (ii) market shares should be stable and symme-
(iv) symmetry of costs;
trical;
(v) demand should be
and
and inelastic
(vi) there should be a low level of technological changes.

(iii) barriers to entry;

stagnant

(259) These criteria are,

in most circumstances,

in addressing the four

important
tools
fundamental questions
related to the analysis of collective dominance cases
under the Merger Regulation, i.e.:

(a) are there incentives for the market players to engage

in parallel behaviour?

(b) is it easy for market players to monitor the compe-

titive behaviour of the other market players?

(c) are there disincentives for

the market players to

deviate from the parallel behaviour?,

(d) is

it possible for
parallel behaviour?

the demand to constrain the

(261) The statement of objections argued that in the case of a
market like motor fuel retailing (see the Exxon/Mobil and
TotalFina/Elf cases), competition takes place on prices
and the market operates with individuals as price takers.
It is in that instance relevant to look at the series of
criteria set out in recital 258 (71). Incentives to coordi-
nate in those cases were found to be high because
market participants were all purchasing motor fuel on
a wholesale market and had symmetrical market shares.
The homogeneity of motor fuel and the full transpar-
ency of prices made it easy for market players to
monitor the competitive behaviour of their competitors.
The excess refining capacity made it easy to retaliate
against any cheater. Low demand price elasticity and its
scattered nature made it very difficult for demand to
counter any parallel behaviour.

(262) The statement of objections argued that in the German
long-distance gas transmission market (see the Exxon/
Mobil case), the Commission raised objections even if
few of the criteria set out in the series of criteria in
recital 258 were met. The objections were not based on
collusion on prices, but on market geographical parti-
tioning. Because of a former cartelisation of the market,
market participants (with one exception) each had a
territory on which it held a strong market position. All
market participants had similar
incentive to preserve
their strong home-territory market position. In addition,
this geographical demarcation of
territories made it
relatively easy to monitor the behaviour of competitors
and, if any crossed the border, retaliation would take the
form of crossing the border in return.

(260)

the statement of objections

In summary,
took the
following view of the criteria. Since global telecommu-
nication services are tailored to the need of each

(71) Cases M.1383 Exxon/Mobil of 29 September 1999 and M.1628

TotalFina/Elf of 9 February 2000.

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Official Journal of the European Union

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(263)

In the case at stake, the market functions on a bid basis
where providers are selected essentially in the first
instances of the bidding process on their ability to offer
high quality tailor-made sophisticated services that can
only be provided by a limited number of providers.
Given that barriers to entry are high (as stated in
recital 205 it is not enough to have the possibility of
providing the network and perhaps also the services, it
is also necessary to have a proven track record) if there
were parallel behaviour, this would centre around the
bidding process and the ability to offer competitive
services to the companies requiring these services.
In
such a case, collusion would not take place on prices
but on who wins what bid (and who has won what
bids).

(c) Changes in the incentive to compete

1. Two leading players and a tail of followers

(264) The statement of objections argued that because it
would be implemented at the same time as the consid-
erable lessening of the competitive position of Global
One, the notified merger would result in a market with
two leading players (MCI WorldCom/Sprint and the
Concert alliance) followed by smaller competitors. With
the addition of the Sprint market share to that of MCI
WorldCom,
in market
the merged entity increases
presence. Post merger, both leading market players
would thus present similar competitive characteristics
and would enjoy
the
remaining competitors.

advantages over

significant

(265) First, as is clear from the market-share analysis, they will
customers
approximately similar portfolios of
have
(together they amount to approximately 60 to 80 % of
the market) and market positions.

(266) Second,

It

that

follows

the statement of objections argued that

they
would enjoy a similar cost basis in terms of the under-
lying infrastructure. The notifying parties have consis-
raw capacity is available on the
tently argued that
market place.
the costs of network
provisioning are necessarily constrained by the prices
charged in the market place for raw capacity. As the
parties have explained, the network costs of providing
more elaborated services are a function of the under-
lying network costs. As the functions are similar with
similar inputs, it results that both players enjoy similar
network costs. In addition, the size of their networks
their service offering enables
and the importance of
both entities to benefit from scale and scope economies

to enter

into the market. As

smaller competitors.
that are not available to their
Neither MCI WorldCom/Sprint nor the Concert alliance
has to incur
the sunk costs of building out global
networks, providing support services or employing sales
teams
indicated in
recitals 200 to 205 this is an expensive and long-lasting
process which will take years to achieve before even an
existing player who has recently exited from an alliance
(e.g. Sprint or Global One) can reenter the market on a
credible basis. The other categories of costs relate either
to telecom equipment or labour costs. The statement of
objections
of
exogenous market places and are therefore similar to
it is likely that
both leading players. Given their size,
equipment and labour costs will be lower for
these
companies compared to smaller companies, bringing
them further competitive advantages.

both were

functions

argued

that

(267) Thirdly, both the merged entity and the Concert alliance
will benefit from similar range and quality of service
portfolios that are not provided to the same extent and
scope by its main competitors. This is supported by the
market-share analysis set out in recitals 229 to 244 and
by the market investigation. Both have a wide range of
services which they can offer
to large multinational
customers. Others have a wide range of services, but
MCI WorldCom/Sprint and the Concert alliance are
consistently highly rated for a majority of their services,
whereas others have more significant weaknesses.

(268) Fourthly the statement of objections argued that both
the merged entity and the Concert alliance have a
substantial and well-established brand image, which
leads to a general high perception of the quality and
reliability of those suppliers. Both the merged entity and
the Concert alliance are
facilities-based in a large
proportion of the world and have good control over
the quality of their network and an extensive geographic
reach as a consequence. Smaller competitors may have
good global networks, but are perceived in the market
place as having ‘thin’ networks which may not have
sufficient bandwidth to satisfy increasing customer
demands in the future. Also, they have the necessary
technical support and sales services available globally to
their customers.

(269) Finally, unlike the other players on the market, by
participating in a majority of the bids the merged entity
and the Concert alliance have much more complete
information over
their competitors and the different
bids than any of the smaller competitors that are not
able to participate in all bids. According to the win/loss
either MCI
data
WorldCom/Sprint or the Concert alliance are present in
the majority of bidding procedures. For instance, in the
win/loss bids data
either MCI
WorldCom/Sprint or the Concert alliance is the winner
of a very significant number of the total submitted bids.

received from BT,

the Commission,

obtained

by

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As for the data received from C & W, a similarly very
significant number of
the total bids lost by C & W,
include MCI WorldCom and the Concert alliance as
competitors.
In MCI WorldCom's own win/loss lists,
smaller players hardly appeared at all either as winners
or as main competitors likely to be on the final short-
list. On the contrary, Sprint or the Concert alliance
appeared as winners for half of the bids lost by MCI
WorldCom. According to win/loss data supplied by
AT & T, the vast majority of their strong competitors
where they won bids were either MCI WorldCom or
Sprint.

(274)

(270) Also, it should be noted that MCI has been distributing
Concert services as part of the break-up agreement with
BT, while Sprint will continue to distribute Global One
services and serve Global One contracts in the United
States for a transitional period. This increases the trans-
parency in the market as regards the identity of custo-
mers and the nature of
the services which they are
using for the time when the next RFP is issued.

(271) The statement of objections concluded that the merger
would bring MCI WorldCom/Sprint and the Concert
alliance into close parity with one another on the GTS
market.

2. The bidding game

(272) The statement of objections further argued that the new
market structure resulting from the merger is prone to
tacit coordination by MCI WorldCom/Sprint and the
Concert alliance given the manner in which they both
participate in bids.

In such circumstances,

(273) There are two possible bid situations. The first situation
concerns bids to renew or upgrade a telecom offering
where either the merged entity or the Concert alliance is
the
the incumbent provider.
statement of objections argued that other competitor
would have no strong incentive to challenge the posi-
tion of the incumbent. This is further reinforced by the
inherent cost advantage to the incumbent
(switching
costs can be as high as 20 %) and there is also an
understandable
about
consequences of the change (the changing of network
connections from one supplier to another, maintaining
the operation of the network during the change, etc.),
For instance, one customer stated that in case they were
not happy with their supplier,
the difference in the
price/performance ratio with the current provider would
have to be significant to overcome the costs of migra-
tion to a new provider. The second situation is where
neither the merged entity nor the Concert alliance is an

nervousness

customer

other

incumbent
service to an existing GTS customer).

(i.e.

for a new GTS customer or a new

(i) MC I Wo rld C om / Spr i n t o r

t he Co n ce r t al li -

a n c e a s i n c um b e n t s upp l i er

to the extent

for a contract

the statement of objections argued that

In the case of the merged entity or the Concert alliance
to be
being the incumbent
supplier
renewed,
the
other would have incentives
to participate to the
in
bidding process, but not
jeopardy the position of the incumbent. To participate
in the bidding process, would bring various benefits to
the other oligopolist. First of all, it would be able to get
further information for use in future bids. In addition, it
further strengthens the perception that it is a competi-
tive bidder while by its simple presence it limits the
ability of third parties to be serious contenders in the
bidding process.

to put

(275) By not competing strongly in the second stage on
prices, the other competitor provides incentives to the
incumbent to behave in a similar way in the converse
situation. This is likely to happen within a short time-
frame given the frequency of bids.
In addition, by
helping to maintain higher prices, the other provider
the market place is fed with price
makes sure that
information that will not put
in jeopardy a similar
strategy in other bids where it will be the incumbent.

(ii) N e w cu s to me r or

thi rd -pa r t y

i n c um b en t

s u p p l i e r

(276)

In such bids where neither the merged entity nor the
Concert alliance is the incumbent,
the statement of
objections argued that both entities would have equal
they
chances to win the bid and would know that
would benefit
their
available
smaller competitors.

from advantages not

(277) The statement of objections described the following
strategy. Their first strategy would thus be to put in an
offer with a portfolio of tailored services that, in prin-
ciple, only the two or them would be able to offer, in
other words to compete primarily on non-price factors
at the first stage of the bidding process. Secondly, their
pricing strategy would likely be to price initially within
a given range (even though at the stage of responding
to the RFP, pricing is not the most important issue). The
top end of the range would be based on information
derived from earlier bids where either of them was the
incumbent. The bottom end, on the other hand, would
be the maximum price at which they would be sure to
exclude other bidders (if any).

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(278) The statement of objections argued that it would be to
the advantage of both the merged entity and the
Concert alliance to win such bids and to acquire infor-
mation. This would reinforce their
reputation with
customers as leaders while raising the barriers to entry
and expansion for the other actual or potential compe-
titors who would have to incur sunk costs that they
from a pre-existing
could finance through earnings
portfolio of customers. Asymmetries
in information
about past bid history in favour of MCI WorldCom/
Sprint and/or the Concert alliance induce each firm to
sacrifice short-run profit by raising its price in order to
build a reputation with the aim of consistently charging
higher prices in the long run.

(d) Sustainability of the parallel behaviour

1. Incentive not to deviate

(279) The statement of objections

to the risk that

found that both MCI
WorldCom/Sprint and the Concert alliance would have
incentives not
to deviate from the parallel behaviour
explained in recital 273 in a situation where bids are
frequent. Each firm, by independent but parallel beha-
the other firm
viour, exposes itself
undercuts it in the final stage of the bidding process,
and that
it loses this first bid. However, because the
identity of the winner of the bid is immediately known,
the cheating firm reveals itself as a non-cooperative
to
firm. As there are frequent bids,
retaliation and therefore foregoes future extra profits
that it could have derived from parallel behaviour.
If
the horizon is long enough (i.e.
if there is a sufficient
number of bids where both leaders can interact) the loss
of future profits exceeds the immediate gain of cheating.
Both firms having equal chances to participate and to
win bids will be therefore better off coordinating. BT
data mentions
that MCI WorldCom/Sprint and the
Concert alliance have participated in 1999 in more
than 70 bidding procedures.

it exposes itself

listed more often than competitors that are not incum-
bents as often.’ (72)
is therefore easy to detect any
deviation from the parallel behaviour.

It

(281) According to the statement of objections, the scenario
outlined in recital 273 would lead to supra-competitive
prices for some categories of contracts and to prices
closer to market levels in other bids. It could be argued
that the higher prices would not be sustainable as these
customers would be made aware of
lower prices
charged in the industry. The statement of objections
found that this was unlikely for the following reasons.
First, such services are differentiated, and comparisons
for customers on the basis of prices are difficult
to
draw.
the basic elements of costs are
known, the specific needs of a given customer are not
available to other customers. Secondly,
it relies on the
assumption that the two leading players would have an
incentive to compete when one of them is the incum-
bent. As explained in recital 275, this is not the case.
Neither could smaller players afford to challenge the
incumbent
the
switching costs for the customer and the competitive
disadvantages due
and
quality.

they would have

Indeed, even if

to overcome

information,

to lower

cost

as

(282)

global

It could be further argued that as the market for the
telecommunication services
provision of
is
increasing in value,
this would lead to incentives to
deviate from the parallel behaviour. The statement of
objections dealt with this issue with the following argu-
ment. The growth when translated into number of
customers is much lower, as there are not many new
companies with global
In
addition, as the merged entity and the Concert alliance
have equal chances to win new bids, the fact that they
would compete on these bids does not undermine the
stability of
It would rather
further entrench their positions as dominant oligopo-
lists, as this would make it even more difficult for the
smaller players to get significant customers and would
further feed their reputation.

telecommunication needs.

their parallel behaviour.

2. Smaller competitors and new entrants will not be able to

challenge the parallel behaviour

(280) From the win/loss information available, and the infor-
mation on the market for the supplies to the top 200
companies it is clear that companies know the identity
of the incumbent supplier to these large MNC custo-
‘The account
mers. For example, according to Sprint:
team is more likely to know about and list incumbent
providers. Because AT{START_ENTITY}nbsp;& T and
MCI WorldCom are the incumbent provider in a rela-
tively high number of bids, they are more likely to be

(283) The statement of objections stated that smaller competi-
tors are very unlikely to be able to bid successfully
against the two leaders for three main reasons.

(72)

[…]*.

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Official Journal of the European Union

L 300/41

(284) First, because they do not have the same all-round
qualities as the two main players on the market. As
rated by their competitors, MCI WorldCom/Sprint and
the Concert alliance have excellent global reach, a reli-
able global network with ample bandwidth in key
markets; they also have an excellent product offering,
covering both older technologies, for which a demand
continues to exist, as well as the newer technologies, on
which potential entrants appear to be relying.

series of bids, while the incumbents might be willing to
bid down to their average variable costs,
the new
entrants would not bid below their average total cost.
A new potential bidder could be more efficient than the
incumbent, but
the latter would always be able to
undercut it, thus deterring potential entry. Hence, the
statement of objections found that MCI WorldCom/
Sprint and the Concert alliance will be then able to
renew the existing contract at non-competitive terms.

to sustain.

(285) Second, competitors do not have the same cost and
price information advantage as MCI WorldCom/Sprint
and the Concert alliance. Cost advantage and price
information are essential to be an active bidder with a
credible chance to win at the end of the bidding process
in the market, as bidding costs are high and bidding for
contracts without such an advantage is extremely diffi-
cult
Indeed, competitors do not have the
same
sophisticated price information systems, cost-
targeting coupled with greater scale and scope econo-
mies which the notifying parties and the Concert alli-
ance enjoy. Finally, the statement of objections argued
that
they do not have the same larger customers'
portfolios, essential to keep costs under control as well
information on rivals' costs
as an access to relevant
through bidding price histories. This is borne out by
competitors' evaluations of MCI WorldCom/Sprint and
the Concert alliance which are consistently high, and no
other competitor consistently matches that evaluation.

(286)

If

the bidding process,

It is indeed likely that the smaller competitors will have
an interest in following the price signals sent by the two
leading players.
they were to launch price wars in
order to win customers, assuming that they were able to
reach the second stage of
they
would run a high risk of the two oligopolists pricing
at very competitive rates that would eventually force the
smaller players out of
the market. This would be
sustainable for the two leaders as smaller players would
participate in a much smaller number of bids than they
do. Repetitive losses of deals would quickly make it
unprofitable to remain on the market. The two leaders
retaliation against a given smaller
could also target
competitor by competing forcefully on bids where it
would be the incumbent.

(288) The statement of objections also argued that entry can
be also discouraged further because of the long periods
of time that each bid takes. Even if the new entrant
thought it had a prospect of winning a contract, it has
to consider the length of time that will elapse before it
receives any revenue.

(289) The statement of objections further suggested that possi-
bilities for retaliation are increased by the presence of
MCI WorldCom/Sprint and the Concert alliance as
competitors in a number of different markets. These
internet connectivity,
for top-level
include the market
long-distance and international telephony in the United
States and Europe and the ownership of
international
cable capacity. These activities in other markets make it
the jointly dominant
possible for
companies to be maintained in the GTS market, by
increasing the possibility of punishment
in another
market.

the discipline of

(290)

In the light of the above, the statement of objections
concluded that it would be very unlikely that neither
smaller competitors nor new market entrants would be
able to prevent this parallel behaviour.

3. Customers will not be able

to challenge

the parallel

behaviour

(287) When a new entrant is seeking to bid, they will face the
strengths of the two leading players, who will always
have a considerable comparative advantage. A new
competitor has to make major investments in network
capacity, points of presence and sales teams,
incurring
costs which are already sunk for MCI WorldCom/Sprint
and the Concert alliance. So, and at least for the first

(291) The statement of objections stated that

It argued that

there are no
obvious constraints on the demand side to prevent
such parallel behaviour.
if customers
consider changing suppliers for whatever reason, they
are faced with a number of expensive choices. They can
return to self-provision, which, even if possible, which
seems unlikely from customer replies, would be expen-
sive and time consuming. However, customers indicated
that ‘[t]he company will have a need for these services,

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Official Journal of the European Union

18.11.2003

so there is no debate about whether or not we will
purchase them.’ or ‘[i]n case of a uniform price increase
of an individual service, we would probably be forced to
continue buying such a service’. The increasing sophisti-
cation of the services being offered to MNCs and the
considerable time, cost and complications involved in
changing supplier combined with the decreasing number
of effective players on the market leads to a reduction in
influence by the customer over the supplier.

a

customer who chose

(292) According to the statement of objections, the alternative
to move
from MCI
for
WorldCom/Sprint or
the Concert alliance to another
provider would be to contract with a smaller and
inferior provider, and seek to do some service integra-
tion by themselves which would incur extra costs and
could jeopardise the reliability of the network. This will
add a powerful additional
incentive for customers to
stick with one of the two companies.

(e) The parties' response to the statement of objec-

tions

(296)

Bidding process

conduct

customers

(293) The parties pointed to four aspects of the analysis by
the Commission of the competitive bidding market as
being faulty. First, not all bidding processes are two-
stage ones. Some
sudden-death
processes where the winning bid is chosen after the
RFPs have been received, without the second stage of
the bidding process referred to in recital 78. Second, the
parties argued that the Commission does not give price
the importance that it deserves in the bidding process,
and that
is
the parties disagreed
important
with the Commission that being facilities-based is neces-
sary to operate on the GTS market to be a credible
bidder, and that customers do not demand this from
suppliers.

some customers have indicated that
in their reply. Third,

it

(294) On the other hand even if the bidding process were to
the tacit coordination
be one stage rather than two,
might remain possible. All of the advantages of asym-
metry of
information, greater bidding experience and
lower cost base would be as effective in other bidding
structures since the purchaser would need to make a
first, implicit or explicit, selection of the bidders based
on quality.

Creation of collective dominance

share. Second,

WorldCom/Sprint and the Concert alliance. First, as
outlined in recital 248, the merger will have no more
impact on the market and the
than a de minimis
combined entity's market
again as
mentioned earlier, the parties do not believe that the
Concert alliance can be considered to be a single entity
with an aggregated market share. Third,
the parties
argued that there is no economic basis for the concept
of collective dominance in the post-merger GTS market.
Notably, the parties explained that in bidding markets,
suppliers are able to price-discriminate between custo-
mers. Moreover, firms with a small market share e.g.
Equant and Cable & Wireless are able effectively to
constrain the behaviour of
companies with larger
market shares. Finally, there is no legal basis for the
finding of collective dominance.

In respect of the legal grounds for a collective domi-
the parties quote the Kali and Salz
nance analysis,
judgement, amongst others, and say that the Commis-
sion must find that there is moderate growth on the
demand side, with inelastic demand and insignificant
countervailing buyer power in order to find collective
dominance. The supply side has to be highly concen-
trated with high market
transparency for a homoge-
neous product, mature production technology, high
entry barriers and suppliers with financial
links and
multi-market contacts. The parties alleged that the state-
ment only focused on and failed to prove the existence
of homogeneity, high barriers to entry, market transpa-
inelastic demand and stagnant growth, mature
rency,
production technology and retaliation.
In addition,
according to the parties, the statement overlooks a key
factor
identified in Gencor/Lonrho, namely counter-
vailing buyer power.

(297) The parties accuse the Commission of mischaracterising
the supply side of the GTS market. First, they state that
the Commission does not accurately represent
the
heterogeneous nature of the products being supplied to
the Commission's
customers. Second,
analysis of costs is self-contradictory and that different
suppliers' cost models are different. The parties challenge
the Commission's analysis of
the
GTS market as they say that no two packages are
identical and are tailored to the needs of the customer.

the homogeneity of

they assert

that

(295) The parties pointed to four main areas why the merger
lead to collective dominance between MCI

will not

(298) As regards high barriers to entry, the parties argue that
neither the brand, the existing portfolio of customers,
the costs of bidding, the experience in previous bids nor

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Official Journal of the European Union

L 300/43

the ownership of facilities amount to high barriers to
entry in the GTS market.

C. INTERNATIONAL VOICE TELEPHONY

(299) The parties explained that the amount of information
available to bidders during the bidding process is much
less than the statement says.

(300) The parties argued in their reply that

the market

is
growing rapidly, and that demand is sensitive to price,
contrary to the statement of objections. The parties
stated that technological change is advancing rapidly in
the market and that customers will demand it when
they are comfortable that the new technology will serve
their needs. The parties concluded that any possibility
for retaliation would mean that the GTS market was
operating as a cartel.

(301) Finally, the parties asserted that the statement makes no
the countervailing buying power of GTS
mention of
customers, where customers have sheer size and sophis-
tication and control
information and contract lengths.
The parties indicated that buyers are sophisticated and
they
have countervailing buyer power.
pointed to the presence of consultants who act on
behalf of customers and the tendency of companies to
use more than one supplier with the possibility of
transferring between them at a lower cost than would
be the case for a new bidding process.

In particular,

Conclusion

(302) The Commission recognises that

the

existence of

it was not able to
show the absence of competitive constraints from actual
competitors such as Equant or Cable & Wireless to the
merging parties and the Concert alliance. An important
consequence of
such competitive
constraints is that the demand could exercise counter-
vailing powers against any parallel behaviour by the two
leading players. Indeed, customers could foster the emer-
gence of other leading players by contracting with the
existing smaller competitors. Therefore, one of the key
factors to examine when proving the creation of a
collective dominant position, i.e. the absence of possibi-
lity for the demand to counterbalance the position of
the possible oligopolists, could not be shown. Regardless
of the merits of the other arguments put forward by the
parties in their Reply, the Commission decided not to
pursue further its objection related to the market for
providing global telecommunications services.

(303) As to the international voice telephony market,

a

has

number

received

the
Commission
critical
comments from US-based and EU-based operators that
the merger would lead to the creation of a dominant
position on the international voice telephony market as
a result of the parties' important position together with
AT & T on the US retail or wholesale long-distance
markets.

of

the Merger Regulation on the market

(304) The Commission's assessment of the competition issues
raised by third parties has led to the conclusion that if
there was any risk of the creation or the strengthening
of a dominant position in the meaning of Article 2(3)
of
for interna-
tional voice telephony, this would be a consequence of
dominance on domestic US retail and/or wholesale
long-distance markets. However, it is uncertain that any
dominant position will be created or strengthened as a
consequence of a dominant position on another market.
For
the merger
between the parties on the US long-distance markets
will have immediate, substantial and foreseeable effects
on the European Community.

it cannot be said that

this reason,

(305) There are two principal ways for a European carrier to
convey telephone calls between Europe and the US.

the traffic at a notional point

— The first is for the European carrier transporting the
phone call to agree with a US carrier that it will
hand over
in the
middle of the Atlantic (half-circuit). This is subject
to commercial negotiations and usually there is a
financial settlement only if one party sends more
minutes of phone calls than the other. A condition
sine qua non for such transaction to take place is
least an
likely to bring at
is
that each carrier
equivalent amount of minutes to the other.

— The second is for the European carrier to own a full
circuit across the Atlantic and to contract with an
American carrier to convey and terminate the phone
calls on the US territory.

(306)

In both instances, the phone call will follow a similar
route once it lands on the US side. It is first conveyed
regional
to a
by long-distance operators
exchange point and then the call
is eventually termi-
nated by a local exchange carrier. End-consumers typi-
cally purchase local
loop telephony services from local
exchange carriers and long-distance (including interna-
tional) services from the long-distance operators.

local or

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(307) AT & T, MCI WorldCom and Sprint are the clear leaders
on the retail side of
the long-distance market. This
seems to be due in particular to the high recognition
of their brands by end-consumers. These three compa-
nies are also the only operators owning a network
covering the whole of the US territory. A number of
other operators own networks covering a material part
of
the US while some others are simply resellers of
long-distance conveyance. This diversity of long-distance
operators has
resulted in a wholesale long-distance
market that is generally described as competitive.

(308) The proposed merger between MCI WorldCom and
Sprint reduces the number of
tier-one players in the
US long distance industry from three to two. A number
of complainants have explained that
in so doing the
transaction would lead to an increase in the prices of
international calls between the USA and Europe. Two
theories have been submitted to the Commission.

(309) Under the first theory, post merger, AT & T and MCI
WorldCom/Sprint would be able to leverage their unique
coverage of the US territory in the long-distance market
into a joint dominant position in the wholesale long-
distance market. They could dictate their conditions to
European carriers that would want to settle their inter-
national calls with them or would want them to convey
over the long distance the calls that they transported to
the US shore.

(LATAs) would see the number of

(310) This alleged effect of the merger appears however unli-
kely to occur. The parties have shown that only 12 local
territories
long-
distance players being reduced to two by the merger.
These areas (for instance parts of the Midwest of the
United States and Alaska) are sparsely populated and
represent less than a percentage point of the total long-
distance phone calls in the USA. Moreover, even the
complainants have accepted that it would be difficult for
AT & T or MCI WorldCom/Sprint to bundle their long-
distance offering to these desolate regions with the long-
distance services to the rest of the US territory. This
assessment relies however on the assumption that the
retail long-distance market(s) remain competitive. If that
it might be that the parties would
was not the case,
abuse
long
distance market by squeezing their wholesale competi-
the market by internalising their current
tors out of
purchases on the wholesale market and other behaviour.

their dominant position on the

retail

the international

telephony minutes

to be
most of
exchanged with European carriers. This would put both
players into a strong bargaining position vis-à-vis the
European carriers and enable them to impose their
conditions in the settlement negotiations.

(312) However, as long as the wholesale long-distance market
remains competitive, the European carriers would have
the option of carrying the calls on their own transat-
lantic circuits and then recourse to the wholesale long-
distance market to have them conveyed directly over the
long distance instead of using settlement transactions.

(313)

It therefore follows that for the merger to have anti-
competitive impact on the international voice telephony
markets, the Commission would first need to establish
the new entity would become jointly dominant
that
with AT & T on the retail
long-distance market(s) and
that secondly AT & T, MCI WorldCom and Sprint
would be able to extend that dominance to the whole-
sale long-distance market. Such an extension do not
appear be sufficiently foreseeable and immediate to
grant
the Merger
Regulation over this aspect of the transaction.

the Commission jurisdiction under

(314) Assuming that there was dominance on the retail long-
distance market, it appears difficult to predict that this
would necessarily translate into dominance on the
wholesale market. Demand in the wholesale market
comes not only from retailers but also from customers
such as big corporations or major foreign operators.
Even if the merged entity and AT & T each decided to
integrate their operations vertically and to stop buying
in the wholesale market,
the remaining demand and
supply would still be able to match each other. It would
probably take a deliberate abuse of
long-
distance dominant position for the parties to be achieve
a dominant position on the wholesale market. It cannot
therefore be concluded that the effects on the interna-
tional voice telephony market of the dominant position
acquired by the parties on the retail
long-distance
market would be immediate and foreseeable.

their retail

(315)

For these reasons, the Commission had no jurisdiction
under the Merger Regulation to examine the effects of
the merger on the US long-distance markets.

VI. UNDERTAKINGS

(311) The second theory focuses on the market for retailing of
long-distance telephony. The concentration would lead
to the creation of a dual dominant position held by
AT & T and MCI WorldCom/Sprint on that market.
Thanks to that position these two players could capture

(316) On 8 June 2000, the notifying parties submitted to the
Commission an undertaking regarding the divestment of
the Sprint Internet business. The text of this undertaking
is attached to the [confidential version of the present
decision]*. On 27 June 2000, the parties withdrew the
submitted undertaking.

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L 300/45

A. SUMMARY OF THE PROPOSED UNDERTAKING

as SecureID and ACE/Server software, with a suite of
managed IP security solutions.

1. ACTIVITIES

2. ASSETS

(317) The parties proposed to divest the public Internet activ-
ities of Sprint (hereafter ‘Sprint Internet’). This included
the following service lines.

Dedicated Internet access

(318) Also known as SprintLink, this service offers high-speed
continuous access to the Internet over Sprint Internet's
backbone at speeds ranging from 56 Kbps to 2,5 Gbps
(OC48). SprintLink service is available globally through
320 points of presence (POPs) in the USA and six POPs
in Europe.

Dial Internet access

through more

(319) Also known as DialNet, this service provides 56 Kbps
and ISDN dial-up Internet access and related services to
ISPs and retail customers connecting them to Sprint's
networks
located
throughout
the USA DialNet service is also sold to
over […]* business customers and enterprises in the
USA as ‘IP Dial’ remote access service, which enables
businesses to provide their mobile employees around the
world with secure dial-up access to intranets, extranets
and the Internet.

than 450 POPs

(323) The proposed undertaking includes all US and interna-
tional routers, servers, modems, ports, domain name
and authentication servers
Internet access, web-
for dial network and other
hosting servers,
equipment deemed necessary by the parties to operate
Sprint Internet.

servers

for

(324) Where necessary,

shared systems,
to the purchaser of the divested business […]*.

the parties have offered to make
infrastructure and personnel available

(325)

[…]*.

(326) The parties propose, at the option of the purchaser, to
enter
into one or more network-specific supporting
agreements in order, according to the parties, to give
full effect to the proposed divestiture […]*.

(327) Such agreements would include the following:

— Network facilities agreement […]*.

— Network transport agreement […]*.

— Local access agreement […]*.

Internet virtual private networks

3. PERSONNEL

(320) Sprint Internet's Internet virtual private networks (IVPN)
service is an enhanced network protocol service that
enables companies to establish continuous, high-speed,
dispersed
secure
employees,
and suppliers over
Sprint's dedicated and dial Internet access networks.

customers, partners

connections with

geographically

Web hosting

(321) These services allow companies to manage their Internet
content and applications on a shared infrastructure
managed by Sprint Internet at its network nodes and
data centres.

Managed security

(322) Such services are designed to protect customers' Internet
traffic and internal networks from unauthorised access.
Internet provides fully integrated
For example, Sprint
managed firewall and user authentication services, such

(328) According to the parties, Sprint

Internet will have
between […]* dedicated employees, including over […]*
operations and engineering professionals and over […]*
located throughout
sales and sales support personnel,
the USA and Europe. The parties explain that
these
the
professionals possess
in developing,
experience
integrating,
selling, delivering,
designing, marketing,
managing and maintaining Internet network infrastruc-
ture and services that
is necessary to operate Sprint
Internet.

(329) As to the sales personnel, the parties argue that Sprint
Internet currently uses multiple sales and support chan-
nels to respond to the demand. These channels include
a […]*.

(330)

In December 1999, Sprint created a […]*. According to
the parties, these services are often purchased by execu-
tive level employees and have a significant impact on
how a company differentiates itself from its competition.
[…]*.

(331) Finally,
[…]*.

the parties also explained that during 1999,

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Official Journal of the European Union

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the

employees

transferred from Sprint

(332) The merging parties have undertaken not to employ any
of
to the
purchaser without the purchaser's prior consent for an
agreed period after the sale of Sprint Internet. In addi-
the sale of Sprint
tion,
for an agreed period after
the purchaser
Internet, neither WorldCom/Sprint nor
would solicit any employee of
the other engaged in
certain Internet activities without the other's consent.

4. CUSTOMERS

(333) The parties intend to transfer Sprint's entire Internet
including ISPs, small business Internet
large commercial customers, govern-

customer base,
access customers,
ment customers and web-hosting providers.

(334) Customer

information such as

and
existing historical data relating to the provision of
Internet services to that customer base and all existing
associated contracts for Sprint Internet's wholesale and
retail customers would be transferred to the purchaser.

customer

lists

(335) Some contracts may require consent from the customer
before transfer. For these contracts, Sprint would use
reasonable best efforts to obtain the necessary consents
and would offer additional
inducements as deemed
necessary. For contracts where the necessary consent
could not be obtained, MCI WorldCom/Sprint under-
takes to keep the traffic on the divested network and
pass the associated revenue through to the purchaser.

(336) The notifying parties undertake not

to solicit any
existing customer of Sprint Internet that is not also an
existing Internet service customer of MCI WorldCom at
the time of closing, with the purpose of providing that
customer with the
is
Internet
purchasing from the Sprint Internet. […]*. There is no
specific non-solicit clause for the Internet services other
than the provision of dedicated access.

service

access

it

(337)

In addition, the parties undertake not to take any steps
to cause the transfer of Internet services business from
Sprint to MCI WorldCom, or to multihome such busi-
ness on MCI WorldCom networks beyond the ordinary
course of business, prior to closing.

5. SETTING-UP OF AN AUTONOMOUS UNIT

(338)

[…]*.

transfer of ownership. Any difficulty met by the
of
divested entity would result in a limitation of its growth
and lead quickly to a relative lowering of
its market
share. The combination of the uncertainties exposed in
the recitals below make it highly unlikely that
the
divested entity could exercise in the short to medium
term any competitive constrain on the parties. In addi-
tion, the text of the undertakings raises numerous issues
that
increase even more the uncertainties as to the
efficacy of this proposed remedy.

(340) The proposed undertakings raise fundamental doubts on
at least six grounds: (i) the scope of the services divested
is too narrow; (ii) the divested entity would have little
power to retain its customer base; (iii) there are many
uncertainties as to the experience and know-how of the
personnel to be transferred; (iv) the divested entity will
its
remain dependent on MCI WorldCom/Sprint
continued operation and any attempt to gain indepen-
dence would
consuming;
(v) monitoring would be a difficult task; and (vi) there
is uncertainty on some assets to be transferred.

costly

time

and

for

be

1. SCOPE OF THE SERVICES TO BE DIVESTED IS TOO

NARROW

(341) The proposed undertakings provide for the sale of the
activities related to the sale of Internet dedicated access
services, the sale of Internet dial-up access services, the
sale of web-hosting services, the sale of firewall services
and the sale of Internet virtual private network services.
All of the services that the parties intend to divest run
over
the public Internet. There are however other
services that use the Internet protocol (called IP services)
that the parties are not proposing to be included in the
divestiture. The parties argue that only the IP services
that are carried over
the public Internet should be
divested.

(342) However, the Internet protocol

(IP) used to carry the
data generated is also used to carry data for the virtual
private network type of services (intranets, extranets,
voice over IP, etc.) as well as other enhanced services.
Generally, such services do not use the public Internet
but are
the public
Internet.

sometimes partly carried over

B. ASSESSMENT

(343)

(339) Given the high growth of the Internet and the impor-
tance attached by customers to the quality of service,
any proposed business for divestiture should be in a
position to compete fully and effectively from the date

In addition, public Internet services as well as other
services carried over IP are provided through using part
or all of the underlying network facilities (transmission
facilities as well as
switches and modems
routers,
connected to the underlying transmission facilities). This
underlying Internet network infrastructure is also used
for Sprint's telecommunications needs (voice and data).

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(344) During the course of

the Commission's investigation,
third parties have explained that the inclusion of intra-
nets and extranets and other enhanced services carried
over IP in the package to be divested is necessary to
ensure that the divested entity would be a full competi-
tive force. First, according to third parties these services
represent the highest expected growth area in Internet-
related services (up to over 200 % growth rate between
1999-2000). Secondly, customers usually purchase such
services
the one who
provides access to the Internet. Finally, customers also
purchase bundles of services that include both Internet
services and non-Internet services such as ATM and
private-line
Internet
connectivity provider's market power reflects both its
network and its customer base, a divestiture should
encompass all of these.

from the same provider as

services. Because

top-level

the

(345) This was indeed the position taken by Sprint

submissions to the Commission in the course of
WorldCom/MCI procedure in 1998 […]* (73).

in its
the

third parties and Sprint, customers are increasingly
buying a bundle of services and products and end-to-
end solutions.

2. THE DIVESTED ENTITY WOULD HAVE LITTLE POWER TO

RETAIN ITS CUSTOMER BASE

(348)

[…]*.

Customers
services

for

Internet

and

telecommunications

(349)

[…]*. Some
combining the connections
bundling of
brings economies of scale.

third parties have

explained that by
location,
Internet and telecommunications services

to a customer

(346)

the provision of

In WorldCom/MCI, the Commission stated that it was
not necessary to include enhanced IP services for three
reasons. First,
it noted that some IP-based VPNs might
be based on other underlying protocols such as X25,
Frame Relay or ATM and that the Internet component
of the VPN might be very small. Secondly, it explained
that
intranets or extranets was in
general
less complex than a public Internet network,
and in principle easier to run, hence not requiring the
special skills which were required for the Internet at
the Commission considered it doubtful
large. Thirdly,
whether
the offering of services such as intranet or
extranet could provide a gateway to the offering of
Internet services.

(347) The market investigation conducted by the Commission
in the present case has shown that these conclusions are
no longer applicable. The trend in the industry is to
optimise the use of the Internet protocol by limiting to
the maximum the superposition of layers of protocols
on the underlying facilities. This is exemplified by Sprint
and third partie technological choices. Irrespective of the
underlying transport protocol (IP, Frame Relay or ATM),
applications and services are being based on IP […]* (74).
As
the provision of
enhanced IP-based services, it appeared from the parties'
own statements and from the third parties' submissions
that such services are usually tailored to the needs of
the customers and are by definition complex. Finally, as
to the link between the offering of public Internet
it should be
services and IP based enhanced services,
noted that all of the leading Internet access providers
provide both categories of services. According to both

to the level of complexity of

(73)
(74)

[…]*.
[…]*.

(350) According to the Commission's calculations based on
data provided by Sprint, approximately […]* % of the
Internet revenue of Sprint for the year 1999 is generated
by customers purchasing only Internet services from
Sprint. The merged entity will therefore continue to be
in contact with […]* % (in terms of revenue) of the
customers. When the terms of these contracts will end
[…]*, these customers may turn back to the merged
entity. The parties have endeavoured to address that
issue by proposing a non-solicitation clause in their
proposed undertaking. This is evaluated in recital 358
et seq.

(351) Similarly, excluding Sprint's contract with […]*, […]* %
of Sprint Internet turnover was generated by customers
([…]* % in number of customers) who spend at least as
much on Internet services as on other telecommunica-
tions services purchased from Sprint.

(352) This means that knowledge about the customer needs,
technical
etc. would remain with MCI
the proposed divestiture. This
WorldCom/Sprint after
retention of customer knowledge will be aggravated by
two other factors.

specificities,

(353) First, […]*.

(354) Secondly, MCI WorldCom/Sprint will

in any case need
contact persons to serve the remaining telecommunica-
tions needs of most of the Internet customers. […]* As
the proposed divestiture is structured, it appears that a
significant number of
account managers or other
personnel with knowledge of the account will not be
transferred. This is certainly true for those customers
who spend more on telecommunications services than
on Internet services ([…]*). Sprint would therefore retain
knowledge about the customer Internet needs and main-
the divested
tain on-going relationships with most of
business customers.

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Multihomed customers to MCI WorldCom and Sprint

(360)

It should be noted that Sprint had drawn the Commis-
sion's
attention to this potential problem in the
WorldCom/MCI procedure. […]* (75). […]* (76).

(355)

they describe as not complete,

[…]*. On the basis of
information supplied by the
it
parties and that
appears that […]* % of the […]* related Sprint Internet
for 1999 is generated by customers who
revenues
purchase Internet
from MCI WorldCom as
well. […]*.

services

services,

telecommunications

(356) The consequence […]* of multihoming with Sprint
Internet and MCI WorldCom is that in addition to the
general knowledge of the account on the Sprint side for
the other
the merged
entity would continue to provide Internet services to
many divested customers. The parties have argued that
it is very easy for a customer to shift its demand among
the existing providers of Internet services. Any perceived
limitation in the ability of the divested entity to provide
top-quality services would be likely to be punished by
customers
towards MCI
WorldCom/Sprint. As the merged entity will be made
aware of the new needs of the multihomed customers
as they arise through its existing commercial relation-
ship, this may make it easier for the merged entity to
gain a competitive advantage over the divested entity.

demand

shifting

their

Earthlink

(357) Earthlink is, after AOL, one of the largest retail dial-up
Internet access providers in the USA. Sprint has a long-
lasting relationship with Earthlink that takes the form of
rights over […]* % of the share capital of Earthlink and
extensive supply agreements in the Internet field. Earth-
link represented […]* % of the overall Internet revenues
in 1999. The proposed undertaking would
of Sprint
lead to a transfer of
the Internet contracts but does
not address Sprint's link in Earthlink capital. As the
main shareholder in Earthlink, Sprint will have substan-
tial
transferred
contract. This may jeopardise the long-lasting nature of
Earthlink's relationship with the divested entity.

influence over

renewal of

the

its

Absence of protection of the divested business

(358)

It could be argued that the parties could propose a non-
the divested entity from
compete clause to protect
witnessing
to MCI
back
feeding
customers
its
WorldCom/Sprint. The parties have not included such a
full non-compete clause in their proposed undertaking
but only a limited undertaking not to solicit Sprint's
Internet customers.

(359)

[…]*.

(361) An additional difficulty that may arise involves custo-
mers who signed contracts that require their consent to
be transferred to another person than Sprint. According
to the parties and on the basis of
limited sample of
contracts, this represents a […]* part of Sprint Internet
revenues. […]*.

(362)

It therefore appears that the Internet customer base of
the divested entity would be likely to shrink significantly
if
the proposed divestiture was accepted. This would
result in a materially smaller competitive force on the
market.

3. THERE ARE MANY UNCERTAINTIES AS TO THE
EXPERIENCE AND KNOW-HOW OF THE

NUMBER,
PERSONNEL TO BE TRANSFERRED

(363) According to Sprint, […]* of the staff to be allocated to
its future Internet business unit are already dedicated to
Internet activities. The other […]* are only partially
dedicated.

(364) There are doubts as to the experience of most of the
identified personnel (for the moment, only the alleged
dedicated personnel have been identified). For instance,
many of the selected persons have […]* experience in
field. This is probably due to the […]*
the Internet
teams dedicated to the sale of Internet products.

(365) The doubts are even greater as regards the staff

that
spend only part of their time on Internet services. Such
personnel have yet to be identified. The following table
sets out the extent to which each of the units consti-
include either staff already
Internet will
tuting Sprint
dedicated to Internet or
staff partially involved in
Internet activities. It shows the proportion of staff for
each of these units that will replace persons spending
only part of their time on Internet issues. Apart from
the Operations and Engineering unit, […]* of the staff
in all other units will be taken from staff previously not
fully dedicated to Internet activities.

Dedi-
cated

FTE

Total

% FTE

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

(75)
(76)

[…]*.
[…]*.

18.11.2003

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Official Journal of the European Union

L 300/49

Dedi-
cated

FTE

Total

% FTE

MCI. For that reason, the undertakings had left open the
number of employees to be transferred as a matter for
negotiation between the vendor and the acquirer.

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

Total

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

[...]*

Note: FTE stands for full-time equivalent, a notional number that repre-
sents the number of persons who would need to be working full time to
replace staff who spend only part of their time on Internet activities.

(369) As reflected in Cable & Wireless' FCC submission,

it

its
acquisition of Internet MCI met a number of difficulties
and this shows that
is not easy for a potential
purchaser in the circumstances of a forced divestiture
to evaluate the number of staff and to identify the
relevant persons needed to run the divested business as
an effective and immediate competitor. This is particu-
larly so in the case of the divestment of an integrated
business where information is not readily available. This
is further substantiated by the Federal Trade Commis-
sion study on remedies (78). The Commission cannot
therefore rely on negotiations between the notifying
parties and any third party to identify the adequate
number of staff to be transferred.

(366)

It is well known that any divestiture encounters issues
of cultural adaptation. Given the formally integrated
structure of Sprint Internet, such issues would be likely
to be raised twice, once at the time of selecting the
relevant staff to be allocated to Sprint Internet and again
at
integrating the divested entity into a
purchaser organisation. As each of these units are essen-
tial to the proper functioning of the entity proposed for
divestiture, the uncertainties are multiplied by the reli-
ance of each of them on ‘FTE’ personnel.

the time of

4. THE DIVESTED ENTITY WILL REMAIN DEPENDENT ON
MCI WORLDCOM/SPRINT FOR ITS CONTINUED OPERA-
TION AND ANY ATTEMPT TO GAIN INDEPENDENCE
WOULD BE COSTLY AND TIME CONSUMING

(370) The Internet activities of Sprint

[…]* within Sprint,
many of its support services […]* provided by Sprint.
[…]*.

to be materially lower.

(367) When comparing the staff count of the proposed dives-
titure to competitors, the […]* number submitted by
the parties appears
Indeed,
AT & T, GTE-Genuity, Cable & Wireless and obviously
UUNet all put forward figures in the region of or higher
than 2 000 people. This puts
into question the
proposed number of personnel to be transferred. This
For
discrepancy could be
instance,
It
could also be explained by the fact that, because it will,
inter alia, not be facilities-based, the divested entity will
on MCI
a
be
WorldCom/Sprint for the continuation of
its activities
[…]* (77). This latter aspect is addressed in the following
recitals.

it does not appear to include […]* staff.

explained by omissions.

dependent

significant

degree

to

(368)

In its WorldCom/MCI decision, the Commission stated
that 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

(77)

[…]*.

(371) Sprint Internet dedicated access customers connect to
Sprint's network via a private line to the local exchange
carrier which in turn connects to one of the 320+ Sprint
POPs. These POPs
the
(that
customer
includes equipment such as routers and switches) via a
backhaul
line does not belong to the
backbone. The same architecture is applied in the case
of the dial-up services.

[…]*. From the POP,
connected to a backbone node

line. A backhaul

are

is

(372)

two consequences.

It is important to note that all of the abovementioned
lines and backbone) are multi-
assets (POPs, backhaul
purpose. This has
First, Sprint
Internet bears only internal transfer prices for the use
of these facilities as opposed to relying on market prices
In addition, as
that are normally materially higher.
explained in recital 140, John Sidgmore, Vice-Chairman
of MCI WorldCom, explained recently that there is a
shortage of available capacity on the market. This is
confirmed by submissions from third parties. Secondly,
to
the way the backbone has been structured was
maximise economies of scope of Sprint's existing tele-
communications facilities.

(78) Federal Trade Commission, A Study of the Commission's Divestiture

Process (1999), www.ftc.go v/os/1999/9908/ind ex.htm#6.

L 300/50

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Official Journal of the European Union

18.11.2003

(373) The same business choices have been applied to the

operational support services […]*.

independently of

the divested
ferred assets. For instance, personnel of
entity should,
the merged entity, be
able to access the collocated equipment and to deploy
and/or repair equipment. It is not sure that such a space
would be readily available within all Sprint's POPs.

(374) The parties offer to sign support services agreements
with any purchaser to provide for continuation of these
shared services during the transition period needed by
the purchaser to set up or migrate to its own systems
or processes.

(380)

(375) The proposed undertakings provide for support agree-
ments for the following services: collocation of Internet
([…]*), network
equipment within Sprint's premises
transport capacity ([…]*),
local access agreements (no
indication on timing and pricing on commercial terms),
other operational
report,
entry, billing services, network management,
order
network provisioning and other
reasonably
required). […]*.

(customer

services

services

service

(376) However,

investigation and

the Commission's

the
purchase of
Internet MCI by Cable & Wireless show
that such agreements can be extremely complex to draft
and difficult to implement and monitor. In addition, the
purchaser would depend to a material extent on the
merged entity for
the
former Internet activities of Sprint. This will negatively
affect the cost basis and the quality of service of the
divested entity.

the continuing operation of

(377)

It should for instance be noted that the Internet part of
GTE, now named Genuity, has just been separated from
its mother company to be floated in the market. To
enable Genuity to remain a genuine competitor, the new
entity will also own its network and will not depend on
a third party for its underlying facilities.

Collocation

the

(378) Third parties have explained that to be fully effective, a
collocation agreement needs to enable the purchaser to
protect
actions
(changes in equipment, free access, etc.), to have enough
space to expand the equipment to meet future growth
and to avoid electromagnetic interference from cables
on switches.

confidentiality of

its business

In addition, third parties explained that the purchaser
would need to be able to expand collocated facilities
within Sprint's POPs (including the right to interconnect
existing installations within Sprint's premises with new
installations located in other premises and the right to
there
cross-connect
would be space and personnel available to accommodate
such expansion.

is not obvious that

facilities).

It

(381) Furthermore, they drew the Commission's attention to
the fact that there are no standards for the pricing of
such collocation services and that generally they avoid
collocating with a competitor.

(382) Any purchaser of Sprint Internet would have to collo-
cate at Sprint premises for a transitional period starting
from the date of closing and until customers, equipment
and networks have been fully migrated to the purcha-
sers' own facilities. It is estimated by a majority of third
parties […]* that such a process is very lengthy and
takes from two to four years to complete (see below).
This means that the purchaser will be dependent on the
merged entity for collocation for a very long period.
During that period the merged entity may benefit from
information on the divested
confidential commercial
entity actions, may limit
the divested
entity by simply lacking space or allocate available space
to accommodate its own growth first and may impose
costs difficult to monitor on the purchaser.

the growth of

(383)

In addition, given the circumstances of a forced dives-
titure, any purchaser would lack the necessary informa-
tion and time to negotiate optimally collocation agree-
ments and would have to take Sprint's proposed draft of
the agreement.

Network transport agreements and local access agree-
ments

(379) To enable the divested entity to continue to operate the
divested equipment effectively and independently from
the merged entity, third parties argued that a collocation
agreement should include detailed provisions concerning
the space made available to accommodate the trans-

(384) Such agreements would provide for the underlying cable
facilities to connect the customer premise to a POP, to
the POP to the backbone (backhaul) and to
connect
supply the cables used by the backbone.

18.11.2003

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Official Journal of the European Union

L 300/51

to price. First,

(385) These agreements raise similar issues as for the colloca-
tion of premises. Third parties explained that the provi-
sion of such services is difficult
these
services are currently supplied internally within Sprint.
The cost of provisioning these services benefits from
economies of scope drawn from the multiple use of the
network facilities. Therefore the current cost of use is
materially lower than any market price. Secondly, some
of the underlying services are said not to be available
on commercial tariffs. This is notably the case of the
largest capacity cables (as OC-48) that are currently put
in place to accommodate the growth of traffic.

(386)

In addition, the divested entity will be dependent on
MCI WorldCom/Sprint to meet increased traffic demand
(for
further capacity, connections, etc.). The merged
entity would benefit from confidential commercial infor-
mation from the divested entity which would allow it to
control the growth and network costs of the divested
entity.

(387) Finally, it was explained that such agreements are of a
very complex nature. Any purchaser would lack the
necessary information and time to negotiate optimally
depend on Sprint's
such agreements
proposed draft of the agreements.

and would

Migration

(388)

It could be argued that
the shortfalls exposed above
attached to the conclusion with the major competitor
on the market of collocation agreements, network trans-
port agreements and local agreements could be avoided
by a swift transition to the facilities of the purchaser.

(389) The Commission in its WorldCom/MCI decision noted
the view of third parties that the purchaser of Internet
MCI would be dependent on the seller and that this
would not provide a long-term solution.
It was also
noted that to be a successful top-level Internet connec-
tivity provider one needs to be facilities-based. Indeed, a
purchaser who had to lease facilities permanently from
a competitor would be dependent on that competitor.
The Commission concluded that an acceptable buyer
ought to be in a position either to migrate its traffic
more or less immediately onto an existing alternative
network, or to build its own network in a reasonable
period of
time and then migrate traffic onto it. The
Commission tried therefore to assess whether arrange-
collocation and other network services
ments
provided adequate time for the migration of the traffic
onto a new network. It concluded on the basis of third-
party submissions that a two-year period for which
preferential terms were offered would be sufficient to
permit the transfer of all relevant activity to the alter-

for

native network and to permit that network to operate
fully independently of MCI.

(390) However, both third parties and previous migrations by
third parties and by the parties themselves show that
migrating an Internet business is a very complex task
and may take between two to four years to complete.

(391) The construction of an Internet backbone involves a
number of successive steps. First, the backbone operator
needs to define its network architecture. Secondly,
it
needs to build new POPs. Thirdly, it needs to build out
the transition network to connect the POPs. Fourthly, it
needs
support
to develop or migrate operational
systems. After this, the process of migrating the custo-
mers can commence.

(392) The most time-intensive part of the whole process is the
migration of the customers. The main constrains on an
Internet connectivity provider who would want
to
migrate from one network to another is to ensure that
customer satisfaction is maintained during the migration
process. For that reason, past migrations have avoided
sudden substitution of connections and rather opted for
a gradual approach where the connections to each of
the
transitional
period. To change the connection to the customer, the
supplier will need to provide new local exchange circuits
the customer to install new
and to get
equipment or change the connections of the lines.

are duplicated during a

the help of

customers

(393) This process is labour intensive. As explained above, it
is not sure that
the divested entity would have the
necessary staff resources to run its day-to-day business.
Even if the purchaser hired (at its own costs) a signifi-
the purpose of
cant number of additional staff
migrating customers, the process of migrating customers
would be very lengthy.
the time,
management attention and cost of the migration would
have to be borne by the purchaser.

instances,

In all

for

(394) This means that the network costs of the divested entity
will be determined by negotiation with MCI WorldCom/
Sprint until the purchaser has been able to migrate its
networks to other facilities after a period of at least two
years.

Operational supporting services

(395) Most of Sprint Internet operational supporting services
[…]*. The parties explain it will be easy to isolate
Internet specific tasks within their systems. However,
they undertake to provide such services to the divested
entity but not to transfer systems to the purchase.

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Official Journal of the European Union

18.11.2003

(396)

John Sidgmore, Vice-Chairman of MCI WorldCom,
‘the
recently stressed the importance of such services:
real success drivers will not be transmission speeds — it
will be operating efficiency,
Internet marketing and
billing’ (79).

assuming that a trustee with such extended talents could
be found, the degree of complexity of the task increases
materially the uncertainties attached to the effectiveness
of the realisation of the remedy.

(397) The reliance of the divested entity on the merged entity
raises a number of risks. First, the merged entity may
benefit from confidential commercial information drawn
from the existence of integrated systems. Secondly, the
ability of the divested entity to innovate on operational
support services will be limited because it would need
the agreement of its main competitor, MCI WorldCom/
Sprint.

(398) The building-up of new systems is a lengthy and costly
process and would be likely to take more than one year
to set up. The parties themselves estimate that migration
of systems would take a year to complete (80).

Conclusion

(399)

from the above developments
the
It appears
absence of
facilities and systems from the entity that
the parties are proposing to divest leads to significant
risks as to efficiency and competitiveness of the divested
entity, which would be dependent for a significant time
on its main competitor.

that

6. OTHER ISSUES

(404)

[…]* Furthermore, an undertaking to continue to peer
does not necessarily mean that necessary increases in
capacity are made at the relevant peering points. This
increases the uncertainties as to the commercial viability
of the proposed divestiture.

(405) The proposed undertaking provides for the right of use
of
intellectual property rights and other assignable
permits or authorisations held by Sprint. Third parties
have explained that the detention of intellectual property
importance in an innovation-
rights is of paramount
driven market.
intellectual prop-
Indeed, ownership of
erty rights makes it possible to innovate by, for instance,
further extending the scope of the underlying intellec-
tual property. This puts further into question the ability
of
the divested entity to be immediately an effective
competitor.

(400)

John Sidgmore, Vice-Chairman of MCI WorldCom,
stated recently that ‘if you own the network, you have
better control of cost and quality and we get to decide
when to implement new products and services’ (81).

7. CONCLUSION

(401) Sprint explained in 1998 that the Internet MCI business
was integrated within MCI in a similar manner to the
integration of Sprint Internet. […]*.

(406)

In summary,
the proposed undertaking would have
significantly altered the economics of the divested entity
by separating it from the wider Sprint activities such as
the underlying infrastructure,
the operational support
services and the necessarily arbitrary selection of staff
to be transferred.

5. MONITORING WOULD BE EXTREMELY DIFFICULT IF NOT

IMPOSSIBLE

(402)

It may be argued that a trustee could be put in place to
monitor the proper implementation of the collocation,
network transport,
local access and other operational
support systems agreements and ensure that the merged
entity could not hinder in any way the development and
independence of the divested entity.

(403) However, such a task would be extremely complex and
the undertakings would be difficult to monitor. It would
require many staff and skills and extended powers
would have to be attributed to the trustee. Even

(79) Keynote address at ‘Supercomm 2000’ conference held in Atlanta

on 7 June 2000.
[…]*.
[…]*.

(80)
(81)

elaborate undertakings

(407) As stated in paragraph 180 of the Commission's 1999
Annual Report on Competition Policy, when the nature
they
such that
of a competition problem becomes
require
and mechanism to
remove the concerns, the Commission has to consider
carefully whether accepting complex undertakings will
lead to a truly satisfactory result from the competition
point of view or whether
should
instead be prohibited.

such transactions

(408)

future growth of

In addition,
the business will be
constrained by the necessity to rely on the merged
entity to provide for additional
resources during a
transition period of between two to four years until
the purchaser would be able to migrate the divested

18.11.2003

EN

Official Journal of the European Union

L 300/53

business to its own facilities. This migration, necessary
for the competitiveness of the divested entity, will also
entail substantial migration costs that will be borne by
the purchaser.

(409) For the above reasons, the Commission concludes that
the proposed undertaking would not have been appro-
priate to re-establish with enough certainty as to their
effects immediate and effective competition on the rele-
Internet
the provision of
vant market
connectivity.

top-level

for

VII. CONCLUSION

(410)

for

the provision of

In the light of the above, it can be concluded that the
merger of MCI WorldCom and Sprint would lead to
either the creation of a dominant position […]* or the
reinforcement of a dominant position […]* in the
market
top-level or universal
connectivity, as a result of which competition would be
significantly impeded in the common market within the
meaning of Article 2(3) of the Merger Regulation. The
undertaking submitted by the parties on 8 June 2000
would not have remedied [the Commission's competitive
concerns]*. The Commission has accordingly come to
the view that the notified concentration is incompatible
with the common market and with the functioning of
the EEA Agreement.

HAS ADOPTED THIS DECISION:

Article 1

The notified concentration consisting of the merger between
MCI WorldCom and Sprint is declared incompatible with the
common market and the functioning of the EEA Agreement.

Article 2

This Decision is addressed to:

MCI WorldCom Inc.
1801 Pennsylvania Avenue
NW; Parkway
Washington, DC 20006
United States of America

Sprint Corporation
2330 Shawnee Mission
Westward
Kansas 66205
United States of America.

Done at Brussels, 28 June 2000.

For the Commission

Mario MONTI

Member of the Commission

ANNEX

UNDERTAKING SUBMITTED BY THE PARTIES ON 8 JUNE 2000 AND WITHDRAWN ON 27 JUNE 2000

[…]*