„Wholesale unbundled access (including shared access) to metallic loops and sub-loops for

the purpose of providing broadband and voice services”
wholesale market
Identification of the relevant market, analysis of competition, designation of service
provider(s) having significant market power, imposing obligation(s)in Hungary
I. Identification of the relevant market
The starting point for the definition of the market was for the National Communications
Authority’s Board (hereinafter referred to as ’Board’) an analysis of the wholesale market
No. 11 set forth in the Annex to the European Commission Recommendation 2003/311/EC of
11 February 2003 (hereinafter referred to as ’Recommendation’), namely „Wholesale
unbundled access (including shared access) to metallic loops and sub-loops for the purpose
of providing broadband and voice services”. The Recommendation proposes for market
analysis and considers to be relevant market for ex ante regulation the above wholesale
market.
In the market definition procedure the Board defined the content of the services on the basis
of the identification of the market and the terms defined in laws.
In the market analysis procedure the Board identified the wholesale unbundled access to
metallic loops and sub-loops for the purpose of providing broadband and voice services which
can be full or shared access as a service on the above wholesale market.
Full unbundled access to the local loop means that the obligated operator offers access to the
local loop or sub-loop that it owns to an eligible operator whereby use of the full frequency
band of the local loop or sub-loop is offered.
Shared access to the local loop means that the obligated operator offers access to the local
loop or sub-loop that it owns to an eligible operator whereby use of the frequency band of the
local loop or sub-loop above the frequency band actually used for provision of service is
offered; the obligated operator continues to use the part of the frequency band to which access
is not offered.
Full unbundled or shared access to the local loop can be offered through physical, distant or
virtual co-location. (In the case of virtual co-location the obligated operator owns and
operates upon assignment by the operator eligible for co-location the equipment connected to
the distribution frame, which satisfy the needs of the eligible operator.)
The co-location that is needed for unbundled access to the local loop enables the eligible
operator to connect its equipment to the local loop in the area of the operator obligated to
offer access to the local loop and this way to provide service to the subscribers.
Analysis of substitution at retail level
Analysis of the retail market connected with the examined wholesale market with special
regard to substitution:

1

the retail market named “Access to the public telephone network at a fixed location for residential customers” and the retail market named “Access to the public telephone network at a fixed location for non-residential customers” the Board established that there are demand-side and supply-side substitution possibilities on the retail markets connected with the examined wholesale market whose impact on the wholesale market should be particularly examined. So the geographic boundaries are identical with the boundaries of the service areas of earlier concession-holder telephone operators.4 GHz frequency (with some restrictions and they cannot be considered to have future perspective). Analysis of substitution at wholesale level In the definition of the examined market the Board was looking for substitution possibilities. On the basis of this approach in the identification of the geographic boundaries of the retail market the Board considered the access network of significant fixed-line telephone operators on which the DSL infrastructure is based. For the identification of the geographic boundaries of the market the Board used an approach based on the geographic market that can be identified on the market of nationally dominant xDSL services since the weight and growth dynamics of the other two mentioned access methods are behind that of the mentioned broadband service so they cannot significantly impact market competition. • access to the public telephone network at a fixed location for non-residential customers. which can modify the boundaries of the examined market. the retail market of broadband accesses. In the analysis of demand-side substitution that is possible on the wholesale market the Board examined whether offering wholesale full unbundled or shared access to metallic loops and sub-loops for the purpose of providing broadband and voice services can be substituted with other wholesale service. As a starting point the Board basically considered as retail market connected with the wholesale market the retail market of broadband accesses although considered in the analysis the relations also on the following two retail markets: • access to the public telephone network at a fixed location for residential customers. Out of the wholesale services existing on the Hungarian electronic communications market primarily access to various broadband cable television networks for the provision of internet 2 .In the process of analysing the potential demand-side substitution at retail level the Board examined whether substitute services selected by the consumers exist which have an impact at wholesale level on the operators offering unbundled access to the local loop. In the analysis of the retail markets connected with the examined wholesale market. At service level broadband accesses constitute part of the market since the following services can be considered as substitutes for each other: o xDSL access services which are the most widely used access on the market o modem-based access services which are also very widely used o and wireless broadband accesses using basically the 2.e. i.

While shared access to the local loop was not offered on the domestic market in spite of the choice created by the regulation there are various examples of unbundled access to cable television networks for the purpose of providing broadband internet service. Because of the retail substitution the Board examined in the analysis of wholesale substitution also wireless accesses.service is possible as substitute service for shared access. The importance of these networks offered for unbundled access is also minor. while there is no reasonable alternative on the market for full unbundled access as wholesale service. while in cable networks only access to the full networks can be reasonably implemented. The owner of the network is member of the company group within which as a result of internal task sharing another specialised operator provides internet service. As we can see it is strongly questionable whether transactions are carried out on the basis of market-based considerations. The importance of these networks is minor. In the latter case unbundled access to individual loops is also possible. Bitstream access can be considered to a certain extent a substitute service for unbundled access to the local loop since both services enable the partner operator to provide broadband retail service with its use. nor on the basis of its functionality. In this case contracts are basically concluded on the basis of vertical integration. The Board found that there are basically three major different reasons for unbundled access to cable networks on the basis of domestic examples: 1. Another major reason is that functionally this type of unbundled access to the loop can substitute only to a limited extent shared access to the local loop that is possible on fixed telephone networks. The owner of the network does not possess the professional skills and facilities needed for the provision of internet service so enables another internet operator to provide the service on its network that is suitable for the provision of broadband service. which is one of the major reasons for which the Board does not consider unbundled access to these networks as part of the market of unbundled access to the local loop. 3. On the basis of the above considerations the Board established that access to star structure broadband cable television networks is not a substitute service neither on the basis of the market features of the transactions. 3 . The owner of the network provides itself internet service but there is another internet operator that was operating on the earlier purchased networks and the relevant contract could not be simply terminated or it would not have been reasonable. 2. but the Board’s view is that wireless access services at fixed location would not become so widely used to be comparable with the choice of metallic local loops offered for unbundled access.

So the Board established that the service market is „Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services” Geographical scope of the relevant market The Board defined the geographical area of the market on the basis of existence of homogeneous competition conditions. but optical fibres for which the relevant EU decree does not consider regulatory intervention to be justified. The Board established that there are only very limited possibilities of supply-side substitution of unbundled access to the local loop on the domestic electronic communications market. other operators than the earlier concession-holder operators did not construct significant quantity of local loops. The local access networks of new operators.The Board established that as a result of the large functional and price differences bit stream access cannot be considered on the Hungarian market a substitute service for unbundled access to the local loop for a market entrant operator. Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services in the relevant numbering areas of Matáv Telecommunications Co. The Board also established that with the current technology it is technically not possible to offer unbundled access to individual access loops of cable networks (not even in the case of networks modified for two-way communication). Examination of the geographic market is based on the smallest area unit. like the newly constructed access networks of the earlier concession-holder operators. On the basis of the earlier concession areas of the earlier concession-holder operators five geographic markets can be defined in which the conditions of competition are homogeneous and significantly differ from the conditions of competition in the other areas.’s earlier concession areas. The most important factor to be analysed is coverage with local networks since the market has basically only a supply side. To summarise the findings of the examinations in the analysis of substitution the Board did not find substitution possibilities that would justify expansion of the examined market on the demand side. On the basis of an analysis of the service and geographic markets the Board defined five separate markets as follows: 1. The conditions of competition are identical in each of the 54 numbering areas. which is the local loops of fixed telephone networks. the numbering area. To summarise the findings of the examinations in the analysis of substitution the Board did not find substitution possibilities that would justify expansion of the examined market on the supply side. 4 . are mostly not metallic loops. These five geographic markets together cover the total territory of Hungary.

Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services in the relevant numbering areas of Monor Telephone Company Co. 5. The Board established that the structural barrier to market entry on the examined market is significant.’s earlier concession areas. These are the following: 5 . Existence of high and not temporary entry barriers on the market 2. The rules applicable to the electronic communications markets describe at least three criteria and circumstances on the basis of which the conclusion can be drawn – in particular in respect of communications access related and interconnection related issues – that the methods of competition law are not sufficient in themselves. Another structural barrier to market entry is that the subscriber access points can be reached only through their own access network. 4.2. Checking the three cumulative ex-ante criteria The Board established the necessity of ex ante regulation of the markets listed in the Annex to the Recommendation with the examination of three conditions. In respect of independent application of competition law the common feature of ex post tools is that they aim at giving remedy after proceedings have been instituted upon a complaint or ex officio or market distortion has occurred. The Board established that the conditions of competition on the examined market have been basically unchanged over the last years because the offerings on the market remained unchanged. Construction of a new access network requires highs costs with long payback period.’s earlier concession areas. In the earlier concession areas operators are operating which have already reached the scale and scope needed for the provision of efficient service. These were the following: 1. Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services in the relevant numbering areas of Invitel Telecommunications Services Co. new operators did not enter for offering own services to compete with the offerings of the earlier concession-holder operators in the given geographic market and this is not expected to happen in the examined future time horizon either.’s earlier concession areas. Insufficiency of the (ex post) application of competition law The Board established that the legal and administrative barriers to entry to the fixed markets are not significant. 3. Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services in the relevant numbering areas of Emitel Telecommunications Co. Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services in the relevant numbering areas of Hungarotel Telecommunications Co. Approximation to efficient competition 3. A precondition to starting provision of electronic communications services is notification to the authority.’s earlier concession areas.

To ensure a comprehensive analysis the Board also examined aspects. Analysis of potential competition requires in the first step examination of the entry barriers. Market analysis. The Board established that in addition to the earlier concession-holder operators. which are less important for judging significant market power. obstacles to expansion overall size of the operator control of infrastructure not easily duplicated easy or privileged access to capital markets and financial resources economies of scale economies of scope vertical integration. etc. 5. II. In respect of the market of wholesale unbundled access to metallic loops and sub-loops for the purpose of providing broadband and voice services it can be established that due to the nature of the service only one vendor. detailed regulatory purpose accounting statements. 3. the earlier concession-holder operator operating in the given area. which are present on the relevant wholesale market with their offerings there is hardly any other 6 . On the basis of the above considerations the Board established that each of the five markets defined are relevant markets so market analysis is necessary and when needed SMP operators must be designated. market share lack of potential competition. 8.). On these markets the owner of the given fixed network has 100% market share in respect of the local loops offered for unbundled access to third parties on the wholesale market. In the definition of the market the Board defined as separate geographic market the areas covered with the local network of the five earlier concession-holder operators. 4. control of conditions involving technical aspects too. For this reason the analysis criteria related in a certain way to the relations between different market players with similar role on the market and comparing their market situation and power are less important for the judgement of significant market power. 2. creating legal certainty is of very high importance. can efficiently and with sufficient coverage provide the service and new vendors (either operators already on the market or new operators) cannot enter the market. Analysis of these cases below shows that competition law in itself is not sufficient for the regulation of the given communications market. 7. recurring and/or time-consuming interventions (tests) are unavoidable.g.• • • identification of the conditions of intervention needed for correction of a market distortion and control of their existence is a complex and complicated task (e. cost analyses. designation of SMP operators According to the Board’s findings out of the criteria used in the Commission Guidelines for the analysis of market power and assessment of dominance the following criteria have theoretical importance on the wholesale market of unbundled access to metallic loops and sub-loops: 1. 6.

7 . EBITDA rate). In addition to the general goals the Board considered also the following principles: • The obligations should aim at elimination of the consequences of lack of competition prevailing on the market of wholesale unbundled access to metallic loops and sub-loops for the purpose of providing broadband and voice services. This situation is a market entry barrier in itself. On relevant market No. (However significantly differing economies of scale can be found on the five relevant markets!) The Board established that although the operators which are dominant on the basis of their market share can use the advantages of economies of scope – since they offer a very wide scope of services on basically the same infrastructure – the resultant market advantage cannot be interpreted in this case either since there is only one vendor on the market. The Board addressed the infrastructure as entry barrier already in the definition of the market. 3. The Board established that in this case this market advantage cannot be interpreted on the relevant markets since there is only one vendor on each of the five markets. 4 Emitel Telecommunications Co. The imposed obligations must be justified by the obstacles to competition revealed • and be proportional to them. 2. When an operator can produce a product by better using economies of scale it can result in market advantage. Out of the domestic fixed operators the earlier concession-holder operators have the strongest financial background due to their stable cash flow and high (operating) profit level (e. On relevant market No. On relevant market No. The Board examined the issue of technological determination which means that only the given earlier concession-holder fixed operator can offer wholesale unbundled access to the metallic loops and sub-loops for the purpose of providing broadband and voice service in the given network. 2 Invitel Telecommunications Service Co. 5. protection of the interests of entities carrying our or using electronic communications activities and promotion of the creation and sustenance of fair and efficient competition. Imposition of obligations In the definition of obligations the Board tried to ensure undisturbed successful operation and development of the electronic communications market. 3 Hungarotel Telecommunications Co. On relevant market No. On the basis of analysis of the above criteria on the relevant markets the Board designated the following operators as operators with significant market power: 1. 4. III. The Board established that vertical integration exits in respect of all five earlier concessionholder operators and it can play a role in the fact that the operators can use their dominance on the relevant wholesale market (without regulation).g. 5 Monortel Telephone Company Co. On relevant market No. 1 Matáv Co.operator providing retail access service to the public telephone network at a fixed location that could be comparable to the earlier concession-holder operators in terms of financial strength or company size.

Notification procedure The draft decision has been sent to EU Commission and to the other NRAs for notification. the customers and finally the consumers. identified the competition problem. evaluated the available regulatory tools and selected the obligations which are in line with the competition problems revealed (i. As closing of the notification procedure. to distort competition.e. The obligations should to the highest possible extent reflect the particularities of the defined markets. Regulation of loop unbundling tariffs is in line also with the spirit of Law on Electronic Communications (and the European Union regulations) that tries to solve competition problems primarily through wholesale regulation. As a result of this process the Board imposed the following obligations on each of the five operators designated as operators with significant market power: • • • • Transparency (preparation of reference offer) Accounting separation Access and interconnection related obligations (ensuring access to the network elements and services needed for the use of the service and related facility sharing) Cost-based and controllable prices (required cost accounting model: FDC) IV. The Board identified as competition problem on the relevant markets that the operators have dominant economic position that enables them to perform their operations to a large extent independently of the competitors. The alternative operators’ view is that in addition to the pricing problems the lack of demand is caused by the contractual conditions which are unfavourable for them. the European Commission made the following comments on 01. On the market of wholesale unbundled access to metallic loops and sub-loops for the purpose of providing broadband and voice services in Hungary the basic problem is that as a result of earlier regulatory decisions there is supply. which have been out of use for a considerable period of time. The Board examined the impacts of dominance prevailing on the five relevant markets.e. Reaching the competitive level will in the long term remedy the market distorting impacts. June 2005: “Non-imposition of ex ante regulatory obligations concerning “out of use local loops”: For certain local loops. In respect of loop unbundling tariffs it can be established that until recently when the currently applicable reference offers were published in the summer of 2004 they exceeded the average European Union level so any obligation imposed by the Board should have the final goal to bring the loop unbundling tariffs to a competitive level and keep them at about that level. i. Consequently it is necessary to adopt and maintain regulatory measures which help the reduction of competition distorting impacts and promote the creation of competition and better protection of the consumers’ interests.• • The imposed obligations may not result in unreasonable burden for the operators. physical deterioration may imply that the functionalities of such lines and the 8 . are justified) and proportionate. but there is no demand primarily due to the prices and conditions applicable until recently.

“out of use” loops should be included in the relevant market. A general exclusion of all “out of use” local loops from the relevant market and from the remedies proposed is not justified in light of (i) the objectives of the Framework Directive (including in particular promoting competition in the provision of electronic communications networks. Therefore.costs to reactivate them may affect their substitutability with other local loops. following their immediate deactivation onwards. as well as the fact that full unbundling prices are above the EU average. potential excessive costs and the incumbent’s efficiency. proportionate and justified). unless it is technically not possible or economically not viable to unbundle a particular local loop that has been out of use8. and made subject to the remedies proposed for local loops in use. it is doubtful whether this would automatically be the case for all “out of use local loops”. However. services and associated facilities). However. National Communications Authority of Hungary 9 . notably in terms of tariffs.” Pursuant to Article 7(5) of the Framework Directive the Board took the utmost account of the comments above and appropriately completed and adopted the draft decision on September 2005. Choice of an appropriate cost accounting methodology: NHH considers the choice of a FDC model to be proportionate with regard to the current state of the relevant market. given the low penetration rate of LLU in Hungary. (ii) the objectives of the Regulation on unbundled access to the local loop9 (namely intensifying competition on the local access market) and finally (iii) Article 8(4) of the Access Directive (according to which regulatory obligations imposed by NRAs shall be based on the nature of the problem identified. NHH should follow market developments carefully and assess whether a forward looking approach long-run incremental cost (“FL-LRIC”) model would not be more appropriate in addressing the lack of effective competition.