The DT Margin Squeeze Case Stefan Lechler Head of Competition Law and Merger Control Deutsche Telekom AG Global Competition Law Centre London, 10 December 2004

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 2 The DT Margin Squeeze Case Main issues Future analysis of all types of wholesale access and retail charges in the telecommunications sector Overlap/interaction of EC competition rules and Member State sector- specific regulation Economic principles applied by the Commission to complex price squeeze situations

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 3 The EU Commission's decision History Spring ‘99:Several complaints of competitors Summer ‘99:Requests for information During 8 months no reaction by EU COM Spring ‘00:EU COM informs DT that proceedings were initiated against Germany (Art. 226) No further steps/communication for more than a year Spring ‘01:Several further requests for information until January 2002 May ‘02:Statement of objections (amended in February 2003) Fall/winter ‘02: Hearing, further requests for information Commission decision

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 4 The EU Commission‘s decision Summary EU COM: DT abused its dominance in the local loop by charging unfair prices for wholesale access and retail access (“Margin Squeeze”): Insufficient margin for competitors between the tariff for ULL and the tariff for retail access Price-Cap 1998 until 2001: Decrease in call charges could have been used for an increase in retail access charges From 2002: Tariffs for ULL were lower than retail access tariffs, however the ULL tariff plus product-specific cost was higher than the average weighted retail subscription The Commission’s decision of May 2003 is pending before the CFI

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 5 Procedural issues The EU Commission has exceeded its jurisdiction No jurisdiction to act as a Super-Regulator All of DT‘s relevant tariffs were subject to price regulation: Access: approved by RegTP within Price-Cap ULL: set by RegTP (cost based) RegTP decisions: "no price-squeeze in Germany" Commission’s decision undermines regulation by the RegTP and puts legal certainty at risk If the RegTP or the Price-Cap-regime contravenes EU law, the Commission must take infringement action against Germany The Commission’s decision infringes principles of good faith

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 6 Substantive issues DT has no discretion to set wholesale prices for ULL DT is bound by RegTP’s approved wholesale rates RegTP would not have approved lower wholesale rates EU law: ULL access rates to be cost-based Cost of efficient service provision is determined by RegTP via its own cost model Result: DT could only have restricted competition by charging too low retail tariffs Dumping-test would have been the correct method

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 7 Substantive issues DT has no discretion to set retail subscriber line prices DT is bound by the RegTP’s approved retail rates. RegTP approval is needed for any price-adjustment. RegTP considerations: Tariffs have to be based on cost of efficient service provision Tariffs have to be in line "with other legal provisions" (e.g. Art. 82) The 2002/2003 price caps precluded DT from increasing subscriber line prices RegTP rejected DT's application for an increase in excess of the price cap margin for 2003 Local loop price squeeze cannot be based only on DSL charges No proof for low price elasticity No causal link between DT not increasing DSL charges and the alleged price squeeze

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 8 Substantive issues EU Commission fails to prove Price Squeeze (1) Comparison between unbundled access charges and subscriber line fees is economically unsound Commission compares weighted retail prices for various types of sub- scriber line access with weighted one-off and monthly wholesale charges Economic analysis is solely based on Commission's market definition without taking into account the reality of the market place Failure to consider competitor's incremental revenue opportunities is economically unsound Telecommunication service providers compete on bundles of access and individual call services

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 9 Substantive issues EU Commission fails to prove Price Squeeze (2) US Regulator FCC also includes other revenue in its local loop price squeeze analysis (Verizon New Hampshire & Delaware Order 2002) Differences in regulatory approaches to unbundled access and subscriber rates Inconsistent application of the Commission’s own approach due to the inclusion of inefficiency costs Commission ignores the prospect of positive margins by focussing only on average calculations

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 10 Lack of market-analysis EU Commission fails to prove a hindrance to competition ECJ (Hoffmann-La Roche): Hindering "maintenance or growth of competition" is prerequisite for application of Art. 82 Focus of DT's competitors on attractive market segments creates lively competition “Mixed calculation" possible Regional areas as origin of competition Wholesale charges in Germany are clearly below EU average New entrants into the German local loop market account for more than 85% of all unbundled subscriber lines in Europe Germany accounts for half of all European local loop operators More than 30% of the German population have access to two or more operators; 22% have access to three to five operators

The DT Margin Squeeze Case Stefan Lechler 10 December 2004 page 11 The success of competitors is measurable In comparison with other EU countries, Germany plays leading role Retail subscriber market Wholesale market Germany is the unchallenged leader for unbundled local loop access 77% of all subscriber lines can be served by competitors. The market conditions in certain areas of Germany demonstrate that current ULL charges allow extensive competition. Source: EU-Commission Implementation Report Dec. 2002