1. Bundle Regulation: The CMT’s approach to margin squeeze in bundled offers Workshop on EU telecommunications regulation Iván Santos Esteras Comisión del Mercado de las Telecomunicaciones 12-13/6/2012 Belgrado

2. Índice The CMT’s approach to margin squeeze 1. Introduction Bundling as the standard in the market BEREC’s approach to bundling 2. CMT’s approach to price squeeze in bundled offers Market analysis perspective Cost and revenues calculation Profitability test 3. Conclusions and future challenges 2 Outline

3. IntroductionBundling as the standard in the market Bundling has become the standard commercialization form of communications services… … increasing its complexity and the services included. CMT’s approach to margin squeeze in bundled offers 3 And recently, quadruple plays with: Mobile (flat rate) Fixed access

4. IntroductionBEREC’s approach Given this tendency, bundling has become a central point in the activity of BEREC. From the market definition side: Differences in the competitive situation Impact of retail situation in wholesale services And from the price squeeze perspective Technical replicability Wholesale price consistency Application of margin squeeze to bundles Consideration of discounts in margin squeeze tests CMT’s approach to margin squeeze in bundled offers 4 The above documents describe in detail the methodological aspects of a price squeeze analysis of bundled products

5. CMT’s ApproachImposition of obligations CMT has prohibited price squeeze practices by the incumbent operator in the market analysis procedure: At retail level: Market 1 Ex ante prohibition of anti-competitive prices, including price squeeze. At wholesale level: Markets 5 & 6 Wholesale prices should prevent price squeeze between retail and wholesale prices of the SMP operator. Market 15 Price squeeze test is used to assess the reasonability of mobile wholesale prices offered by MNOs. CMT’s approach to margin squeeze in bundled offers 5

6. CMT’s ApproachImposition of obligations In addition to the outright prohibition, CMT has also included two enforcement obligations (in markets 1 and 5): Ex ante communication of retail offers 21 days for access services (market 1) 15 days for promotions of broadband services 1 month for new tariff structures of broadband services Ex ante methodology of retail offers CMT assesses compatibility of retail offers according to NPV calculated ex ante (according to communicated prices) Methodology is reviewed every 6 months and submitted to public consultation (if major changes are included) CMT’s approach to margin squeeze in bundled offers 6

7. CMT’s ApproachProcedure In conclusion, CMT’s approach enforces ex ante obligations through a transparent analysis framework CMT’s approach to margin squeeze in bundled offers 7 Methodology General parameters and ex ante calculated margins (NPV) Ex ante communication of offers NPV (including discounts) > 0 No action Interim measures + wholesale price revision YES NO

8. CMT’s ApproachEnforcement: ex ante methodology Ex ante analysis of bundles: Market situation determines the appropriate test Implicit price (when only SMP operator competes via bundles) Joint test (if bundling is the standard in the market) Scope of the analysis Offer by offer vs service Cost assessment Wholesale service, network components and retail activities Profitability By customer or during a certain period CMT’s approach to margin squeeze in bundled offers 8

9. CMT’s ApproachEx ante methodology: the relevant test Bundles allow operators to pass through efficiencies of joint provision of services to the retail market. However, bundles could be a tool for extending market power. CMT differentiates the test depending on market situation CMT’s approach to margin squeeze in bundled offers 9 Implicit price of service 1 P2P2 PBPB P1P1 Price squeeze test applied to implicit price Joint price squeeze analysis Only SMP offers bundlesBundling is the standard

10. CMT’s ApproachEx ante methodology: cost analysis One of the key elements of the price squeeze test is the cost analysis and the standard to be adopted. CMT’s approach to margin squeeze in bundled offers 10 Retail price Wholesale service Network components Retail activities Margin Equally efficient operator Reviewed every six months Reasonably efficient operator Bottom up cost model Reasonably efficient operator Mix of wholesale services

11. CMT’s ApproachEx ante methodology: revenues Price of bundled offers is becoming more complex and includes long lasting discounts. CMT takes an offer by offer approach, considering all discounted elements. CMT’s approach to margin squeeze in bundled offers 11 Additional income Nominal monthly fee One off concepts Discounts Net nominal price effectively observed by consumers The problem of this approach is the resources it implies: number of offers to be analyzed

12. CMT’s ApproachEx ante methodology: profitability CMT assumes that acquiring a customer is an investment project. Cash flows are not perfectly correlated, but during the economic life of the project, NPV should be positive. Economic life of consumers is calculated given the average market churn rate (currently, 27 months). CMT’s approach to margin squeeze in bundled offers 12

13. Conclusions Price squeeze analysis in general and in bundled offers in particular is one of CMT’s main enforcement activities. Ex ante methodology increased transparency and legal certainty, reducing number of complaints. This experience with price squeeze analysis is being applied to new challenges: Price squeeze test in bundles offered by mobile operators. Already one decision: Vodafone vs Jazztel. Price squeeze test in bundles offered to high end business segment and in public tenders. Investigation into the business segment shows that retail conditions are currently an important entry barrier. CMT’s approach to margin squeeze in bundled offers 13

14. THANK YOU!! Iván Santos Esteras Comisión del Mercado de las Telecomunicaciones isantos@cmt.es