Part XIB Case Study: Broadband Price

Squeeze InvestigationAustralian Communications and Media Authority

& International Telecommunication Union

International Training Program 2006

By Mark Rakers

Communications GroupCompliance Section

ACCC

Overview

Investigation in relation to Telstra’s wholesale and retail pricing of broadband services (‘vertical price squeeze’)

Part A Competition Notice issued to Telstra over broadband internet pricing

Series of wholesale price reductions occurred

Negotiated outcome, $6.5m rebate

Notification Protocol (safeguard mechanism)

Significant growth in broadband take-up

ADSL Broadband market in Australia

Telstra dominant supplier of ADSL wholesale services – control of copper access network

Vertical integration - Telstra also provides retail ADSL services via BigPond (Telstra’s internet arm)

In 2004, approximately 300 competitors in Australia offering dial-up and broadband services

Telstra’s retail price reductions

In February 2004, Telstra announced a new pricing structure for its broadband retail services

‘BigPond Broadband at dial-up prices’

ADSL Plan Speed New Monthly Price Reduction

256kbps $29.95 25%

512kbps $49.95 17%

1500kbps $119.95 >50%

Introduction of Download Caps

New BigPond retail plans offered download caps

Usage previously charged at 19.9 cents per MB

New plans - excess usage charged at 15 cents per MB once cap exceeded

ADSL Plan Speed Download Cap

256kbps 200MB

512kbps 500MB

1500kbps ‘Unlimited’ (rate-shaping after > 10GB)

Telstra’s wholesale prices

ACCC received a large number of complaints from Telstra’s wholesale customers following the announcement of the new retail prices

Telstra’s wholesale customers (and retail competitors) claimed a vertical price squeeze existed, as the new retail prices were below Telstra’s wholesale rates for the same services

Telstra retail prices < Telstra wholesale access charges

Vertical Price Squeeze

Vertical price squeeze – anti-competitive ‘low’ pricing:

Vertically-integrated firm

Market power for supply of key input in ‘upstream market’ (wholesale broadband access market)

Reduced margins for competitors who must purchase key input (insufficient to cover downstream costs)

Affects competitors ability to compete in ‘downstream market’ (retail broadband market)

Vertical price squeeze can be identified by the use of imputation testing

Imputation Testing Imputation test involves a comparison of:

retail prices charged by the vertically-integrated firm for the downstream service

wholesale price charged by the vertically-integrated firm for the upstream service

+ additional costs incurred in transforming the wholesale service into the retail service

Price squeeze if:Retail price < wholesale price + additional costs

ACCC competition concerns ACCC concerned that Telstra’s retail price

reductions not matched by a similar reduction in its wholesale price for similar services

Without reduction in Telstra’s wholesale rates, impossible to match Telstra’s new retail prices on a sustained basis

Key competition concerns at the important entry level area of broadband market

Possible foreclosure of retail broadband market at a vital stage of broadband growth

ACCC Consumer Protection Role

The primary focus of the investigation involved competition concerns

From a consumer perspective, ACCC was concerned about impact of megabyte usage limits on new broadband plans

For entry level plans, usage limits can be reached very quickly, especially by consumers new to broadband services

ACCC publicised concerns that consumers should be aware of excess usage costs

Advisory Notice

Prior to the retail prices taking effect, ACCC issued an Advisory Notice to Telstra

Advisory Notice essentially a strong warning

“Change conduct to avoid a breach of the competition rule”

Telstra was advised to reduce its wholesale prices to a level below its retail prices

Wholesale price reductions followed

‘1st round of reductions’

In response to Advisory Notice, Telstra announced reductions for some wholesale broadband services

ACCC assessed full impact of wholesale price changes (imputation testing)

ACCC continued to investigate the matter to determine any anti-competitive conduct

Consultation Notice

ACCC then issued a Consultation Notice

‘Reason to believe’ that Telstra has engaged in anti-competitive conduct

Consultation Notice informs Telstra that the ACCC proposes to issue a Competition Notice

Opportunity for Telstra to respond

ACCC must consider Telstra submissions before determining whether or not to issue a Competition Notice

Further wholesale price reductions

‘2nd round of reductions’

In response to the Consultation Notice, Telstra announced further reductions for some wholesale customers

Reductions occurred for wholesale rates at the entry level area of the market

Other reductions on wholesale charges (eg. installation charges) separate to monthly wholesale rates

Part A Competition Notice ACCC issued Part A Competition Notice to

Telstra ACCC still concerned as to ability of Telstra’s

retail competitors to compete in medium-long term

ACCC considers Telstra has engaged, and is engaging, in at least one instance of anti-competitive conduct

Competition Notice:

allows retail competitors to seek damages for specified anti-competitive conduct while notice is in force

In 2004 - maximum penalties: $10m for each contravention, $1m for each day conduct continues

Telstra revised wholesale broadband pricing structure

‘3rd round of reductions’ In response to the Competition Notice, Telstra revised

its wholesale broadband pricing structure

2 wholesale pricing packages offered on a mutually exclusive basis

Protected Rates package: Wholesale charges set at rates 40% discount off retail prices

across all plans (including entry level plans) Designed to address concerns about available margin

between retail and wholesale prices

Growth Option package: Wholesale charges with further price reductions on high-

speed plans Designed to allow retail competitors to differentiate their

retail offerings from Telstra’s plans

Competition concerns still existed

Protected Rates option discouraged competitors from selling high-speed plans (limited to entry level area of the market)

Growth option discouraged competition for entry level plans (competitors still faced high wholesale rates for entry level)

Mutually exclusive basis forced Telstra’s retail competitors to choose between being a provider to entry level customers or to high-speed customers

Telstra still free to compete for both areas

Competition Notice remained in force

ACCC decided to keep the notice in force, still having reason to believe that Telstra was engaging in anti-competitive conduct of a kind described in the Competition Notice

Wholesale pricing still likely to substantially hinder the ability of Telstra’s wholesale customers to compete at the retail level

Preparation to commence proceedings for breach of the

competition rule

Higher threshold - level of evidence required to determine whether the ACCC should take further action is greater than that required to decide to issue or to revoke a Competition Notice

ACCC consulted retail competitors (complainants) in relation to evidence and preparation of witness statements

ACCC also had the benefit of information gathering (s. 155) powers to require documents and information from Telstra

Legal advice sought

ACCC gathered witness statements from industry

Legal advice sought as to strength of case

ACCC made the decision to accept the series of measures offered by Telstra to resolve the matter after obtaining senior legal advice and taking account of evidence received from a number of Telstra’s wholesale customers

Negotiated Outcome The ACCC reached agreement with Telstra

resolving matters raised in Competition Notice

Telstra made further reductions to its wholesale pricing

ACCC considered that efficient wholesale customers no longer hindered from competing with Telstra’s retail plans

Telstra agreed to rebate $6.5m to its affected wholesale customers

Acknowledgement by Telstra

Telstra acknowledged that its pricing changes made in February 2004 for its retail broadband services may have adversely affected the competitive position of its wholesale broadband customers.

Notification Protocol

Important part of resolution was the introduction of a safeguard mechanism to prevent the recurrence of similar conduct in the future

Formal arrangement entered into which obliges Telstra to advise the ACCC up to 15 working days in advance of future retail broadband prices and specials

Allows the ACCC to assess the likely effect on competition of price changes and specials

After preliminary assessment, any concerns may be raised with Telstra prior to price changes taking effect

Broadband growth in 2004-2005

Australia’s broadband penetration increased by approximately 100% during 2004-2005

ADSL services continued to achieve the highest growth rates

Broadband growth was shared between Telstra and its retail competitors

Level of broadband take-up has made it increasingly more viable for access seekers to roll out their own DSL infrastructure

ACCC Communications Compliance

Any questions?

Our website: www.accc.gov.au

See ‘Telecommunications’, ‘NewsCentre’, ‘Publications’

Information paper on website - “Assessing vertical price squeezes for ADSL services”