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Part XIB Case Study: Broadband Price Squeeze Investigation. Australian Communications and Media Authority & International Telecommunication Union International Training Program 2006 By Mark Rakers Communications Group Compliance Section ACCC. Overview.

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Part XIB Case Study: Broadband Price Squeeze Investigation

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Part XIB Case Study: Broadband Price Squeeze Investigation

Australian Communications and Media Authority

&

International Telecommunication Union

International Training Program 2006

By Mark Rakers

Communications Group

Compliance 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’


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


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”


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