Highest Dutch court annuls ACM’s joint dominance decision in telecoms sector

Introduction

In a judgment of 17 March 2020, the Dutch Trade and Industry Appeals Tribunal (CBb) annulled the market analysis decision of 27 September 2018 by ACM. That decision defined for the first time a market for Wholesale Fixed Access, consisting of several forms of upstream fixed access to KPN’s copper and fibre network and VodafoneZiggo’s cable network. KPN’s network has nationwide coverage, while VodafoneZiggo’s network covers around 90% of Dutch households. In a landmark decision, the ACM found that VodafoneZiggo and KPN jointly hold significant market power (SMP) on this market and required them to provide access to their fixed networks.

The CBb, the highest administrative law court in this regard, annulled the ACM’s decision in its entirety. Its judgment considers in detail a number of ‘novel’ elements in that decision, including the application of a joint dominance theory to support ex ante regulation, the use of game theory in market analyses and the appropriate scope of the “modified greenfield approach” (each of which is discussed in more detail below). Other regulators and courts in the European Union faced with similar questions are likely to examine the judgment closely.

Market definition

In its market analysis, the ACM adopted a broad market definition encompassing both: (i) local (virtual) unbundled access to KPN’s copper and fibre network, and (ii) central access to KPN’s copper and fibre network and VodafoneZiggo’s cable network. In doing so, the ACM combined the distinct markets for local wholesale fixed access (market 3a) and central wholesale fixed access (market 3b) set out in the European Commission (Commission)’s Recommendation on relevant markets. The ACM also departed from a previous analysis it carried out in 2012, in which it had decided to discontinue regulation on the market for central fixed access. The ACM justified its new approach, referring to several developments relating to VodafoneZiggo’s cable network. Most importantly, the ACM concluded that there is a positive business case for central fixed access to the cable network and found that such access can be a substitute for (local and central) access to KPN’s copper and fibre network. The combination of local and central fixed access into an overarching wholesale fixed access market paved the way for regulating both KPN and VodafoneZiggo.

Market power assessment

This Wholesale Fixed Access analysis is unprecedented in the Netherlands, as it is the first market analysis in which the ACM based its regulatory framework on a theory of joint SMP. Joint SMP – which is analysed along the lines of the criteria for joint dominance - implies that at least two independent undertakings are able to adopt on a lasting basis a common policy with the aim of selling at above competitive prices, without entering into an agreement or resorting to a concerted practice. In its prior market analysis of unbundled fixed access in 2015, the ACM required KPN to provide access to its copper and fibre network on the basis of a theory of single-firm SMP. When the ACM concluded its 2015 analysis, the concept of joint SMP was becoming increasingly relevant in the field of prospective market analyses. For example, in December 2015, BEREC (the Body of European Regulators for Electronic Communications) extensively discussed the framework for ex ante assessment of joint dominance in its Report on oligopoly and regulation. BEREC’s report was followed by the Commission’s revised Guidelines on market analysis and the assessment of SMP (SMP Guidelines). The SMP Guidelines provide a framework for establishing joint SMP based on case law of the General Court and the Court of Justice of the EU, in particular the Airtours and Impala II judgments.

In the ACM’s opinion, the 2016 joint venture between Vodafone and Ziggo led to increased symmetry on the Dutch telecoms market since, following that merger, each of KPN and VodafoneZiggo now operated a fixed and a mobile network. Given this altered competitive landscape, the ACM commenced a new market analysis applying game theory and the Airtours criteria. The ACM found that, in the absence of regulation, KPN and VodafoneZiggo would have the incentive and the ability to tacitly coordinate on refusing wholesale access to their fixed networks. In support of this finding, the ACM deployed an analysis based on the classic game theoretic “prisoner’s dilemma” model. As a starting point, the ACM presumed that KPN and VodafoneZiggo have an incentive to grant access to their networks. However, the potential gains of granting access for one of the parties would decrease significantly if the other party were also to grant access. Therefore, despite their unilateral incentives, the most beneficial position for KPN and VodafoneZiggo would be to adhere to a common focal point of refusing access. According to the ACM, this common focal point would allow them to increase prices on the retail market to the detriment of consumers. However, during the appeal proceedings before the CBb, this theory proved problematic for the ACM.

Appeal proceedings before the CBB

The CBb judgment focuses on the analytical framework applied by the ACM and its assessment of market power. Procedural issues were also relevant to the judgment.

Analytical framework applied by the ACM

In order to assess whether the market for Wholesale Fixed Access should be subject to ex ante regulation, the ACM first analysed the two relevant downstream retail markets for (bundles containing) broadband access and business network services. To this end, the ACM applied a so-called “modified greenfield approach” as set out in the SMP Guidelines. According to this approach, “the effects of any regulation based on significant market power in place are excluded from the assessment” (SMP Guidelines, para. 74). In the ACM’s view, this approach should not only assume that the current access regulation is non-existent, but also that the threat of access regulation is non-existent. As the ACM considered that KPN would only offer access under the threat of regulation, it ignored the existing commercial access agreements between KPN and access-seekers as well as an existing commercial offer to enter into such agreements. Several grounds of appeal addressed this approach.

The CBb rejected the ACM’s position that commercial agreements cannot be taken into account in the market power assessment. The CBb observed that there could be circumstances under which the ACM must take agreements or offers into account. It accepted that if the threat of regulation is decisive for putting an offer in the market, any existing agreement or offer should be disregarded in the market assessment. On the other hand, the CBb held that the ACM may be required to take into account an existing agreement if the main motive behind that agreement is a mutual commercial benefit for KPN and the relevant third party customer, and where KPN has no incentive to restrict competition. It is for the regulated party to substantiate the reasons why an existing agreement or offer must be taken into account by the regulating authority.

In respect of its motive for putting a commercial offer in the market, KPN argued that it had an economic incentive to grant wholesale access to its network. At the same time, the CBb observed that the ACM itself relied on a game theoretical model which showed that, in the absence of access regulation, KPN would in fact have an economic incentive to grant access to its network. Given this incentive, the CBb found that the ACM’s modified greenfield approach incorrectly assumed that there would be no access agreements (and thus no competition from access seekers) in the absence of regulation. The CBb also observed that the ACM should not disregard changes to the market structure as a result of its pre-existing access regulation imposed on KPN, as well as differences between the existing access possibilities in the networks of KPN on the one hand and VodafoneZiggo on the other.

Market power assessment

In respect of the ACM’s market power assessment, the CBb stated that demonstrating a hypothetical possibility of dominance is not a sufficient basis for regulation. Instead, the ACM should demonstrate that an undertaking has the incentive and the ability to restrict competition. Although the ACM can use economic and/or game theoretic models to this end (such as a prisoner’s dilemma), it must still take into account the specific characteristics of the undertaking and the relevant market(s) as far as possible.

Based on game theory and the Airtours criteria, the ACM concluded that KPN and VodafoneZiggo have the incentive and the ability to tacitly coordinate on refusing access to their fixed networks in the absence of regulation. In its market analysis, the ACM applied the Airtours framework to both the downstream retail market for (bundles of ) broadband access and the upstream market for Wholesale Fixed Access. In its judgment, the CBb focused on the application of the Airtours criteria to the retail market, as the alleged joint dominance on the retail market was the basis for regulating the upstream market for Wholesale Fixed Access.

Following the holistic approach described in the SMP Guidelines, the CBb critically assessed the ACM’s theory of harm against these criteria as a whole. In general terms, the CBb pointed out that the ACM’s market power assessment did not address several potentially relevant factors discussed in the grounds of appeal. For instance, the ACM did not take into consideration the high degree of broadband penetration and availability of fast broadband access demonstrated by VodafoneZiggo – factors which do not support the ACM’s theory of joint SMP.

As to the Airtours criteria, the CBb held as follows:

Symmetry

In its assessment, the ACM relied on several similarities between KPN and VodafoneZiggo (eg their cost structures, market shares and level of vertical integration) that would enable a common understanding. However, in contrast the CBb observed several important differences between the parties. In particular, there are considerable differences between the market shares of KPN and VodafoneZiggo on segments of the retail market and the infrastructure of their fixed networks. Furthermore, the CBb found that the apparent symmetry observed by the ACM would be destabilised by the on-going leap-frogging between VodafoneZiggo and KPN at the retail level.

Transparency

For tacit coordination to be possible, oligopolists must be sufficiently able to monitor each other’s adherence to the common focal point. To demonstrate that this is the case for VodafoneZiggo and KPN, the ACM argued that pricing in the retail market for (bundles of ) broadband access is transparent and standardised. However, the CBb effectively disagreed, holding instead that retail pricing was complex (eg due to the prevalence of individual discounts) and therefore not conducive to a coordinate outcome. The ACM also argued that retail price decreases can be used as a retaliatory mechanism to ensure compliance with the common focal point. In this respect, the CBb held that it is difficult to assess in practice whether a price decrease stems from actual competition or from the imposition of a deterrence mechanism. Overall, the CBb found that it was doubtful whether pricing is sufficiently transparent to reach a common focal point.

Deterrence mechanism

To demonstrate that the common focal point of KPN and VodafoneZiggo would be sustainable over time, the ACM described two deterrence mechanisms. In addition to price decreases on the retail market, the ACM argued that each party could grant fixed access on the wholesale market in order to deter the other party from leaving the common focal point. The CBb, however, did not consider the latter form of retaliation to be a credible deterrence mechanism. In the CBb’s view, granting fixed access does not qualify as a proportionate form of retaliation as it cannot be reversed (an access agreement would likely extend to several years). As a result, it is not plausible that granting access will result in a return to the common focal point.

External factors

Finally, the ACM did not find any external factors that could jeopardise the common focal point between KPN and VodafoneZiggo. Reiterating that the ACM should not disregard all forms of access to KPN’s network in its analysis, the CBb found that the ACM should have attached more importance to the potentially destabilising impact of third party competitors. In particular, the CBb referred to local cable operators and other providers that are starting to become active in the Netherlands on the basis of their own fixed network.

Conclusion

Applying the test of the ACM’s theory of harm against the Airtours criteria, the CBb found that the ACM did not meet the required standard of proof and that it failed to demonstrate joint SMP. As a result, the CBb ruled that the market analysis decision for Wholesale Fixed Access must be annulled. Although T-Mobile asked the CBb to impose interim measures in the event of an annulment, the CBb found no grounds for such measures.

Key takeaways

• The theory of joint dominance on which the ACM relied was scrutinised closely by the CBb. The CBb’s in-depth engagement with the facts and economic analysis ultimately shows that joint SMP will not be easy to prove.
• As to the “modified greenfield approach”, regulatory authorities must disregard existing access regulation in their market power assessment. However, contrary to the ACM’s position in its analysis, this approach does not rule out that commercial access agreements or offers exert competitive pressure.
• A theory of joint SMP implies that (at least) two parties have both the incentive and ability to tacitly coordinate on a common focal point. A regulatory authority can rely on an economic model in order to demonstrate this, yet any such model must take into account the specific characteristics of the relevant undertaking(s) and market(s) concerned as far as possible.