To provide or not to provide access? The Dutch broadband joint SMP case - Oxera
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Advancing economics in business
May 2020
How
To do non-poaching
provide or not to provide access?
agreements
The distort competition?
Dutch broadband joint SMP caseTo provide or not to provide access? The Dutch broadband joint SMP case
the approval of the European Electronic he helped to develop the framework that
Contact Communications Code (EECC): does the we use to think about how firms interact—
EU telecoms regulatory framework have that of ‘non-cooperative games’; and he
Felipe Flórez Duncan
a blind spot, limiting the ability of national established a way of working out what the
Partner
regulatory authorities (NRAs) to regulate outcome of that interaction will be—his
markets effectively? famous namesake ‘equilibrium’.6
Back in 2015, the Body of European This particular strand of mathematics—
Regulators for Electronic Communications game theory—played a key role in the
(BEREC) believed that this was indeed ACM’s joint SMP finding, and also in the
On 17 March 2020, the Dutch Trade the case.4 Concerned by the prospect that CBb’s evidence to undermine the ACM’s
and Industry Appeals Tribunal (CBb) cable operators’ growing footprints would arguments, drawing on Nash’s seminal
published its long-awaited verdict on match those of traditional copper and fibre contribution to the development of non-
the appeal against the Netherlands operators, BEREC worried that there might cooperative game theory.7
Authority for Consumers and Markets come a time where it would no longer be
(ACM) 2018 finding of joint dominance evident that a single operator held SMP. A game describes any situation in which
in the Dutch retail broadband market. However, it was also concerned that the two or more ‘players’ (e.g. people or firms)
Why did the CBb rule in favour of conditions for finding collective dominance can perform actions (strategies) that affect
the appellants, and what are the or joint SMP would be hard to prove, and not only their own ‘payoffs’ (e.g. profit),
implications of this finding for the therefore that there might be no recourse but also the payoffs of other players with
regulation of wholesale broadband to regulate imperfectly competitive markets whom they interact. As part of its joint
access in the telecoms sector? with a small number of operators. SMP assessment, the ACM considered
a simplified two-stage game in which the
Oxera advised VodafoneZiggo during this case. Despite BEREC’s concerns, the European two operators in the market (KPN and
Commission determined that the concepts VodafoneZiggo):
of single and joint SMP remained fit for
In its 2018 review of the Dutch purpose and, as such, they continue to be • first determine whether to grant or
broadband market, the ACM found that the only mechanisms through which NRAs deny access to their ‘wholesale
VodafoneZiggo1 and KPN2 held a position can impose targeted access obligations on fixed access’ network (the upstream
of joint significant market power (SMP) in telecoms operators. input to the provision of retail fixed
the retail broadband market, and required broadband services);
both firms to provide wholesale broadband In what follows, it is not our intention to
to retail competitors.3 This was the first reopen the debate regarding whether • then determine what price they will
time that the ACM had found joint SMP in there is a blind spot in the telecoms SMP sell broadband services at on the
the Dutch fixed broadband market—before framework—we have discussed this in retail market.
this, KPN was the only operator deemed some detail in previous articles and reports,
to have market power and subject to and we consider that the Commission made The combination of these two choices
wholesale access obligations. the right decision to retain the existing SMP- determines the profit that the parties can
based regulatory thresholds.5 Instead, this achieve; however, the level of profits for
Following a period of rapid growth through article explores two important elements of a single operator depends not only on its
mergers and acquisitions, as well as a the recent Dutch case: own choices, but also on the choices of its
major programme of network investment, rival, as follows.
VodafoneZiggo went head to head with, • first, the CBb’s reliance on game
and became more than a match for, KPN. theory-based economic models to • If either operator provides access
reach its conclusions; then extra retail competition lowers
However, the ACM was not convinced retail profits. However, the operator
that this new market structure would • second, the crucial role that providing access benefits from profits
be sufficient to guarantee effective commercial access agreements and, on the wholesale market, and it will
competition, and it pursued a case of joint more generally, incentives of parties also be able to gain market share
dominance. The ACM argued that, in the to provide wholesale access played in from its vertically integrated rival
absence of regulatory obligations to offer undermining the joint SMP finding, and in terms of the overall number of
wholesale access, the two firms would the implications of this for how NRAs connections, if the access seeker is
tacitly coordinate with each other to refuse across the EU must conduct market successful in the retail market.
to open up their networks to third parties, analyses—especially in situations
in an effort to keep retail prices at above where cable operators and copper/fibre • However, when the two network
competitive levels. operators (or multiple infrastructure operators in this model are competing
operators, for that matter) compete to provide wholesale access, they
VodafoneZiggo and KPN appealed this head to head in large parts of a country. can end up competing their wholesale
decision and, in a long-awaited judgment access charges down to cost, thus
that arrived on 17 March 2020, the CBb eroding any wholesale profits.
quashed the ACM’s joint SMP finding. As
A beautiful game
a result, no access obligations stemming Given this set-up, the ACM modelled
Many will recognise John Nash as the
from the ACM’s finding can be brought into the outcome of this game with a stylised
American mathematician depicted in the
force. ‘payoff matrix’ showing different profits
Oscar-winning film A Beautiful Mind, and as
to each firm depending on its decision to
the winner of the Nobel Prize in Economics
‘refuse’ or ‘provide’ access, together with
Ghosts of battles past in 1994 for his contributions to game theory.
the decision of the other operator, as set
out in Figure 1 overleaf.
This decision brings back a question Nash’s contribution to Industrial
that was extensively debated during Organisation theory, and hence competition
the legislative discussions that led to and regulatory economics, had two aspects:
May 2020 1To provide or not to provide access? The Dutch broadband joint SMP case
less inclined to adhere to any coordinated
outcome that might be envisaged, making
a position of joint SMP unlikely.
Back to reality
The primary limitation of the ACM’s
analysis, nonetheless, is the artificial
construct of the payoff matrix (see
Figure 1) and the assumption that both
parties have a unilateral incentive to
provide wholesale access. This was a key
point explained by Oxera in its report for
Figure 1 ACM payoff matrix: a prisoner’s dilemma VodafoneZiggo.9
Note: The payoff figures in this matrix are stylised and do not reflect actual profits. It is the relative magnitudes that are important for the
assessment of the game, not the absolute levels. In particular, when considering the market
realities, the following was shown.
Source: Oxera, based on payoff matrix in Authority for Consumers & Markets (2018), ‘Marktanalyse Wholesale Fixed Access’,
27 September, https://bit.ly/3dcixDx.
• VodafoneZiggo does not have
unilateral incentives to provide
This situation results in a ‘prisoners’ one party would expect such punishment if
wholesale access.
dilemma’—the analogy being of two it were to deviate, this would be sufficient to
prisoners who face the choice between enforce the tacitly collusive outcome where
• Simple observation shows that
confessing (providing access) or staying both parties refuse access at the wholesale
VodafoneZiggo did not provide
quiet (refusing access). level (and are therefore able to raise prices
access even when KPN was
at retail level).
regulated to do so.
In Figure 1, given the structure of payoffs,
each operator will always choose to provide However, as explained by Oxera in a report
• There is no compelling business
access, as doing so will always give it the for VodafoneZiggo,8 this is unlikely to be
case for VodafoneZiggo to
best payoff, taking as a given the choice of an effective punishment mechanism due
provide wholesale access—
the other operator. This means that there is to lengthy negotiation periods between
an analysis of the break-
a ‘stable equilibrium’ where both operators wholesale access providers and potential
even wholesale prices that
choose to provide access, and each access seekers.
VodafoneZiggo would have
obtains a payoff of 2.
to charge to recover the
Suppose that KPN deviates from the
incremental costs of providing
The two operators would jointly be better agreement by providing access to third
wholesale access to a new
off if they both refused to provide wholesale parties. By the time VodafoneZiggo
access seeker showed that
access, as—according to the ACM—they becomes aware of KPN’s deviation, KPN
such prices would be above
would then be able to increase prices on will have had the opportunity to approach
KPN’s wholesale price. Thus,
the retail market for (bundles with) Internet and negotiate a wholesale contract with the
if VodafoneZiggo offered
access to the detriment of the consumer, most important candidates for wholesale
wholesale access to a new
and each would achieve a payoff of 3. access. KPN will thus have gained a
access seeker at a price that
first-mover advantage, and punishment
matched that of KPN, this
However, both operators refusing access by VodafoneZiggo in the form of further
would result in profit losses for
is unstable: each party would have an wholesale access provision is likely to have
VodafoneZiggo.
incentive to deviate and provide access (in a limited impact since the most relevant
the hope of getting a payoff of 4). As soon access seekers will no longer be available.
• KPN does have unilateral incentives
as one party deviates, it is then in the best VodafoneZiggo then needs to wait until the
to provide wholesale access.
interests of the other party to also provide deviating network’s wholesale contracts are
access. The result? The stable equilibrium up for renewal before it can to retaliate.
• KPN is already in the market. As
where both parties provide access.
such, it has built up a profitable
Therefore, given the long-term nature
wholesale business over the
Aside from explicit collusion, which of the first-mover advantage gained by
years, and has already incurred
would be illegal, the only way to reach deviating, the threat of the other operator
the sunk costs of setting up
an outcome where both parties refuse also providing access is unlikely to be a
various wholesale access
access would be to have a repeated sufficient punishment to deter deviation at
products and supporting services
game with tacit coordination between the the wholesale level.
such as wholesale billing and
two operators supported by a credible
support functions.
punishment mechanism that could be Furthermore, once a long-term contract
imposed on any party that defected from has been signed, the decision to grant
• By continuing to provide
the coordinated outcome. access cannot be reversed until the
wholesale access on a
contract period has ended. As the key to
commercial basis, KPN protects
In its assessment of the operators’ ability to effective punishment mechanisms is that
its existing wholesale access
trigger the credible punishment mechanism they are reversible (so that the coordinated
revenue stream and investments.
needed to maintain effective coordination, equilibrium can be reached again in future),
On the other hand, by stopping
the ACM argued that, if one party shifted the specific nature of wholesale agreements
the provision of these wholesale
away from the coordinated outcome (e.g. undermines this necessary condition.
access services, KPN would run
started to provide access), the other would
the risk of inducing market entry
punish it by also providing access. If the In the absence of any credible threat of
by VodafoneZiggo.
conditions in the market were such that any punishment for deviation, the parties will be
May 2020 2To provide or not to provide access? The Dutch broadband joint SMP case
• Evidence that KPN had also such an offer on terms that were evidently
contracted, on a commercial
The end of open access? attractive to access seekers, given they had
basis, with some access Not so fast… entered into these commercial agreements.
seekers to provide access, even
in the absence of regulation, As discussed, a key part of the CBb’s By not taking into account the commercial
demonstrates KPN’s commercial decision was a consideration of the offer or the fact that the offer and the
incentive to provide access. commercial incentive of KPN to offer contracts would continue to exist in the
wholesale access even in the absence coming regulatory period, it was determined
In a case where only one of the parties has of regulatory intervention. As part of this, that the ACM had not complied with the
a unilateral incentive to provide access, the CBb considered the assumptions that requirements of the SMP Guidelines.
the payoffs in the matrix are fundamentally the ACM had applied in its assessment of Specifically, the ACM had not fully taken
altered (see Figure 2 below). This new competition. into account ‘the existing market conditions
payoff structure leads to a new equilibrium as well as expected or foreseeable market
in which KPN supplies access but While the CBb found that the ACM was developments over the course of the next
VodafoneZiggo does not. As this is a stable correct in assessing SMP in the relevant review period in the absence of regulation
equilibrium, there is no prisoners’ dilemma. market by applying the ‘modified greenfield based on significant market power’.11
Without a prisoners’ dilemma, there can be approach’ set out in the SMP Guidelines
no joint SMP. (such that ‘the effects of any regulation based The CBb found, therefore, that the ACM
on significant market power in place are incorrectly assumed that there would
Citing Oxera’s game theory analysis and the excluded from the assessment’),10 it rejected be no access agreements (and thus no
adjusted payoff matrix, the CBb concluded the ACM’s interpretation of this in practice. competition at the retail level from access
that a credible alternative scenario exists seekers) in the absence of regulation.
where, absent access regulation, it The ACM had assumed not only that current
would be economically rational for KPN access regulation would not exist, but also
to continue to offer access to its network that the threat of access regulation did not
What now?
regardless of what VodafoneZiggo would exist. Coupled with its conclusion that KPN
The consideration of commercial incentives
choose to do. The CBb therefore agreed would not offer access without the threat
to provide wholesale access and how these
with Oxera that the market outcome would of regulation, the ACM ignored all access
should be accounted for in future market
not be characterised by tacit coordination. agreements prevailing in the market. This
analyses is highly relevant when looking
To our knowledge, this is the first time that included ignoring some existing commercial
at how regulators should assess telecoms
economics game theory models have access agreements already in place between
markets in future.
played such a central role in a market KPN and access seekers (as well as a
review appeal decision in the electronic commercial offer to extend such agreements
In particular, in the roll-out of new full-fibre
communications sector. to other access-seeking parties).
networks, wholesale access agreements
are going to be key to filling in capacity,
Given the incentive of KPN to provide The CBb rejected the ACM’s position that
even where the firm making investments
access, the CBb concluded that the such commercial agreements should not
is vertically integrated. This is particularly
ACM had not sufficiently proven that, be taken into account in the market power
likely to be the case where there are
absent regulation, both firms would enjoy assessment. Rather, the CBb ruled that
already strong brands operating at the
joint dominance in the retail market (for they may be taken into account where the
retail level, as is the case in the UK (brands
broadband Internet or bundles including motive behind the agreement is a mutual
including Sky, TalkTalk, BT and Vodafone),
Internet services). As a result, the ACM’s commercial benefit for KPN and the relevant
in Germany (Freenet, Vodafone and
remedy, requiring both firms to provide third-party customer, and where KPN has
Telefónica), and in Ireland (Vodafone and
regulated wholesale access, was ruled no incentive to restrict competition. The
Sky).
as being without effect and is no longer in CBb found that the ACM had not properly
force. assessed the relevance of the commercial
The findings of this case are therefore
offer, nor the incentives of KPN to make
important when considering the evolution
of the telecoms market in different EU
jurisdictions. Considering the ambitious
EU and national targets for coverage of
very-high-capacity networks (VHCNs)—
such as a target of access to connectivity
offering at least 100Mbps for all households
(with a pathway to gigabit connections)—
investments may be made by a number of
competing operators.
In turn, this is likely to result in a growing
number of cases where single dominance
(SMP) is not a foregone conclusion and
market analysis will increasingly be based
on the joint dominance paradigm.
However, while any future regulatory
analysis needs to be undertaken case by
case and market by market, it is clear that
Figure 2 Payoff matrix adjusted to reflect market realities
consideration of commercial wholesale
Note: The payoff figures in this matrix are stylised and do not reflect actual profits. It is the relative magnitudes that are important for the access agreements is very important to
assessment of the game, not the absolute levels. the understanding of the likely competitive
nature of the market absent regulation,
Source: Oxera.
May 2020 3To provide or not to provide access? The Dutch broadband joint SMP case
1
VodafoneZiggo is a Dutch company offering fixed, mobile and integrated communication and entertainment services to consumers and
and is thus likely to become increasingly businesses. It is a joint venture of Liberty Global, the largest international TV and broadband Internet company, and Vodafone Group, one of
relevant to the analysis. the world’s largest telecoms companies.
2
KPN is a Dutch landline and mobile telecoms company.
For example, in the UK, physical duct and 3
Netherlands Authority for Consumers and Markets (2018), ‘Market analysis decision on Wholesale Fixed Access’, 28 September,
pole access is being pushed as a solution,12 https://bit.ly/2TOcj5d.
and Virgin Media, CityFibre and some 4
BEREC (2015), ‘Report on oligopoly analysis and regulation’, BoR (15) 74, June, https://bit.ly/2zFYxux.
smaller players are rolling out networks,
5
making head-to-head competition in many The arguments are summarised in Oxera (2017), ‘Regulating oligopolies in telecoms: a solution in search of a problem?’, Agenda,
September, https://bit.ly/2M3PsOH.
parts of the UK a reality. In these and
6
Oxera (2015), ‘A beautiful mind: the Nash legacy’, Agenda, June, https://bit.ly/2M2xcFw.
similar cases, a close look at commercial
incentives to supply access in the absence 7
Nash, J.F. (1951), ‘Non-cooperative games’, Annals of Mathematics, 54, pp. 286–95.
of regulatory obligations, and the impact of 8
Oxera (2018), ‘Economic review of the ACM’s finding of joint SMP in retail and wholesale fixed access’, prepared for VodafoneZiggo,
this on retail market competitiveness, will be 10 April.
of key importance to any decision on single 9
Oxera (2018), ‘Economic review of the ACM’s finding of joint SMP in retail and wholesale fixed access’, prepared for VodafoneZiggo, 10
or joint SMP and the need for continued April.
regulation, as the CBb ruling shows. 10
European Commission (2018), ‘Guidelines on market analysis and the assessment of significant market power under the EU regulatory
framework for electronic communications networks and services (2018/C 159/01)’, para. 74.
Indeed, wholesale access is likely to be 11
European Commission (2018), ‘Guidelines on market analysis and the assessment of significant market power under the EU regulatory
a central element of any infrastructure framework for electronic communications networks and services (2018/C 159/01)’, para. 17.
investor’s business plan, even when 12
Ofcom (2020), ‘Promoting investment and competition in fibre networks – Wholesale Fixed Telecoms Market Review 2021-26’,
vertically integrated, given the high cost and consultation, 8 January, https://bit.ly/36BZyjr.
risk of stranded assets.
Contact
felipe.florez.duncan@oxera.com
Felipe Flórez Duncan
michael.weekes@oxera.com
Michael Weekes
maurice.devaloisturk@oxera.com
Maurice de Valois Turk
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