Margin squeeze in telecoms: the TeliaSonera ruling, indispensability, reliance or…?

A margin squeeze occurs if the difference between the retail prices charged by a dominant company and the wholesale prices it charges its competitors for comparable products is negative, or insufficient to cover the costs to the dominant company of providing its own retail products on the downstream market.

These issues are discussed in Chapter Four of Competition Law and Regulation of Technology Markets.

Since the book went to press, the Court of Justice has given a preliminary ruling in the TeliaSonera case (Case C-52/09, Judgment of the Court (First Chamber) of 17 February 2011, Konkurrensverket v TeliaSonera Sverige AB, ECR reports 2011 Page 00000), and the European Commission has issued a prohibition decision against Telekomunikacja Polska, the Polish telecoms operator, fining it € 127 million for a margin squeeze. (Press release here.)

Case C-52/09 TeliaSonera

TeliaSonera is the Swedish fixed telephone network operator, owning the local telecoms infrastructure – the local loop. TeliaSonera offered its retail competitors unbundled access to the local loop in line with its obligations under Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop (OJ 2000 L 336, p. 4).

It also offered an ADSL product intended for wholesale users, enabling those operators to supply retail broadband services to end users, but it did so voluntarily, without regulatory obligation.

At the same time, TeliaSonera offered retail broadband connection services directly to end users, in competition with the companies to whom it supplied wholesale services.

Further to national court proceedings alleging a margin squeeze, the court referred the following questions to the Court of Justice.

1. Under what conditions does an infringement of Article [102 TFEU] arise on the basis of a difference between the price charged by a vertically integrated dominant undertaking for the sale of ADSL input products to competitors on the wholesale market and the price which the same undertaking charges on the end-user market?

2. Is it only the prices of the dominant undertaking to end users which are relevant or should the prices of competitors on the end-user market also be taken into account in the consideration of question 1?

3. Is the answer to question 1 affected by the fact that the dominant undertaking does not have any regulatory obligation to supply on the wholesale market but has, rather, chosen to do so on its own initiative?

4. Is an anti-competitive effect required in order for a practice of the kind described in question 1 to constitute abuse and, if so, how is that effect to be determined?

5. Is the answer to question 1 affected by the degree of market strength enjoyed by the dominant undertaking?

6. Is the dominant position on both the wholesale market and the end-user market of the undertaking engaging in the practice required in order for a practice of the kind described in question 1 to constitute abuse?

7. For a practice such as that described in question 1 to constitute abuse, must the good or service supplied by the dominant undertaking on the wholesale market be indispensable to competitors?

8. Is the answer to question 1 affected by the question whether the supply is to a new customer?

9. Is an expectation that the dominant undertaking will be able to recoup the losses it has incurred required in order for a practice of the kind described in question 1 to constitute abuse?

10. Is the answer to question 1 affected by the question whether a change of technology is involved on a market with a high investment requirement, for example with regard to reasonable establishment costs and the possible need to sell at a loss during an establishment phase?

The Advocate General advised that a margin squeeze could constitute an abuse either when the wholesale product was either essential (likening, at paragraph 16, dealing at a high price to a constructive refusal to deal), or when its supply was mandated by regulation.

The CJ’s ruling was broader than the Advocate General.  A dominant company could be responsible for an unlawful margin squeeze even if the wholesale product was not “indispensable”, though indispensability would be good evidence that a margin squeeze would be likely to have anti-competitive effects (paragraphs 70 and 71).

In a maze of double and triple negatives, the Court argued that,

“72. However, taking into account the dominant position of the undertaking concerned in the wholesale market, the possibility cannot be ruled out that, by reason simply of the fact that the wholesale product is not indispensable for the supply of the retail product, a pricing practice which causes margin squeeze may not be able to produce any anti-competitive effect, even potentially. Accordingly, it is again for the referring court to satisfy itself that, even where the wholesale product is not indispensable, the practice may be capable of having anti-competitive effects on the markets concerned.”

In other words: it is possible that a margin squeeze may have anti-competitive effects even if the wholesale product is not indispensable, and the national court must examine such potential effects.

The Court highlighted both relevant and irrelevant factors in the assessment.  Relevant factors are:

– as a general rule, primarily the prices and costs of the undertaking concerned on the retail services market should be taken into consideration. Only where it is not possible, in particular circumstances, to refer to those prices and costs should those of competitors on the same market be examined, and

– it is necessary to demonstrate that, taking particular account of whether the wholesale product is indispensable, that practice produces an anti-competitive effect, at least potentially, on the retail market, and that the practice is not in any way economically justified.

The following factors will typically be irrelevant:

– the absence of any regulatory obligation on the undertaking concerned to supply ADSL input services on the wholesale market in which it holds a dominant position;

– the degree of dominance held by that undertaking in that market;

– the fact that that undertaking does not also hold a dominant position in the retail market for broadband connection services to end users;

– whether the customers to whom such a pricing practice is applied are new or existing customers of the undertaking concerned;

– the fact that the dominant undertaking is unable to recoup any losses which the establishment of such a pricing practice might cause, or

– the extent to which the markets concerned are mature markets and whether they involve new technology, requiring high levels of investment.

This is a tricky ruling to understand.  One potential basis for finding a margin squeeze to be potentially abusive, even absent its being an indispensable input, would be that a purchaser of the wholesale service might be in induced to forego wholesale investments or to make additional retail investments, as a result of the (not indispensable and voluntarily made wholesale offer).  The anti-competitive effects therefore come about through a type of detrimental reliance.

However, the Court also says that it is typically irrelevant whether the customers are new or existing.  If they are new customers, then typically there would have been no such detrimental reliance.

This then cannot be the basis – or at least not the exclusive basis – of the Court’s finding that a margin squeeze can be abusive even absent an indispensable wholesale product.  At the same time, being able to demonstrate such detrimental reliance would be helpful – see the discussion of relationship-specific investments at paragraph 84 of the Commission’s Guidance on Enforcement Priorities.