Summary of substitutability analyses performed in the previous market analysis

Low-speed and analogue leased lines

From a strictly functional point of view, the low-speed digital leased line service (up to 64 kbps inclusive) is presented as a possible alternative to analogue leased lines, since both services provide a permanent and dedicated physical connection between two points, with symmetrical speed, allowing transmission of voice and/or data traffic, distinguished by the provision of higher levels of quality of service and flexibility of use to end corporate clients.

The application of the hypothetical monopolist test on the prices presented by Grupo PT confirms that, given a 10% increase in the price of analogue circuits, substitutability exists between analogue circuits and digital circuits up to 64 Kbps ¹.

In view of the evolution of prices for leased lines from 2004 until 2008, it is seen that the prices for installation and the monthly fees charged for analogue lines have remained fairly flat or increased only slightly, whereas the prices of low-speed digital lines decreased by an average of 2% between 2006 and 2008. Therefore, the trend in the tariff by itself constitutes an incentive to the substitution of analogue lines by low-speed digital lines ².

The supply of analogue lines and low-speed digital lines can be supported using the same platform/technology solution, with the main difference found in terms of the network terminal equipment. Consequently, the substitution of an analogue service by a digital service is essentially the replacement of this network equipment, which is a relatively simple process from a technical point of view ³.

Over recent years a substitution has been reported of analogue lines with digital lines, whereby the volume of analogue lines has been declining steadily, with a less pronounced decline reported in the set of low-speed digital lines. This trend of technological substitution will remain in place and even grow, given the progressive migration of electronic communications networks to more advanced digital supports.

Therefore, and also taking into account the added functionality of low-speed digital leased lines, ICP-ANACOM concluded that these lines can, on the demand and supply sides, be regarded as substitutes to analogue circuits, which conclusion is maintained from the previous market analysis.

Asymmetric services or other data transmission services

It is possible to identify a set of broadband and data transmission services that could hypothetically be analyzed from a perspective of substitutability of the leased line service by retail customers, including ADSL-based services and transmission services provided over the cable television distribution network ⁴ or over wireless systems.

However, with these services there is no guarantee to the end-user of an end-to-end symmetric connection ⁵ that is dedicated (not shared/ without contention) and transparent between two locations. As such, these services are not fully comparable to those provided over leased lines. Moreover, these latter services have more demanding assured levels of quality of service. Therefore asymmetric services have features which are distinct from the leased lines services, whereby they do not impose constraints on the behaviour of a hypothetical monopolist offering the latter service.

On the supply side, it is concluded that most providers of the leased lines service also participate actively in the provision of ADSL-based services, including access to broadband Internet, whereas the reverse is not true ⁶. As such, besides the limited complementarity indicated with respect to the offer of both services, it is considered that the possibility of an asymmetric service provider initiating provision of the leased lines service, following a small but significant and non-transient increase in pricing (e.g. 10%) of this service, is not deemed relevant.

Moreover, the price differences between ADSL services and leased lines services are so significant that they do not indicate real substitutability (on the demand side) between the two services, reflecting rather the difference in functionality and performance levels. For example, the monthly charge for a Class 29 local access ⁷ was, in mid-2009, 15.02 euros and the monthly payment for a terminating terminal segment with equivalent capacity - 1024 Kbps - 75.26 euros.

Indeed, in addition to the guaranteed speed, the quality of service guaranteed by leased lines, both in terms of fault repair and in terms of availability, is substantially higher than that provided by the asymmetric and data transmission services.

Therefore, it is not considered that there is effective substitutability, either in terms of demand or in terms of supply, between leased lines and asymmetric services, particularly considering the differentiation in terms of the features associated with each of these services. The characteristics of services and offers in question and the size of the segment potentially affected by the possibility of substitution between the two types of services under analysis are not sufficient to consider that the behaviour of a hypothetical monopolist would be constrained by any such substitutability ⁸.

On the other hand, the services supported by FWA, Radio Local Area Networks (RLAN) ⁹ and VPN and capacity management services ¹⁰ could only be considered substitutes for the leased line service in the case that, among other factors, they had similar territorial coverage, the number of customers of these services was comparatively relevant and the level of pricing was similar to that of the leased line service, which continues not to be the case.

Moreover, for most of these services, there are important limitation in terms of the provision of transparent and dedicated end-to-end links (there is usually a sharing of resources ¹¹), of quality (levels) of service and contracted speed. There is also a high level of uncertainty associated with the evolution of these services, both at a technological level, and in terms of the definition and stabilization of the offer of the service itself and business model.

Likewise, for data services (e.g. VPN) and those supported over wireless networks, it is unlikely that any provider of these services will, in the short term, start to offer symmetrical leased lines to retail customers, where it is not already in possession of the network infrastructure required to do so, without incurring significant investment ¹².

The analysis of substitutability on the demand and supply sides makes it possible, given the difference in terms of their specifications and their features, as well as in terms of current penetration, to reject the hypothesis that the asymmetric services and the services supported over FWA, RLAN and VPN and capacity management services might constitute a substitute for leased lines.

It is further noted that most of these services (including data transmission) are actually supported using a leased lines wholesale offer. Specifically, according to the website of PT Prime, "the Broadband/ATM family of services is based on the country’s largest and most advanced ATM backbone, supported by more than 70 ATM switching nodes and SDH/DWDM transmission network over optical fibre, widely deployed in major urban centres".

Finally, and with regard to services supported over symmetric xDSL technologies such as HDSL and SHDSL, from the standpoint of the retail customer's intended use and the actual characteristics of the product, these may constitute effective substitutes for the "traditional" leased lines service, for speeds of up to 2 Mbps or even slightly higher. In fact, these services enable the end-to-end transmission of voice and data traffic in a symmetrical transparent and dedicated manner. For example, Sonaecom mentions, on its website, that "During the second half of 2008 the number of COs unbundled for SHDSL circuit interconnection remained stable. With these circuits (installed at 174 COs), Sonaecom is capable of operating direct connections for most of our mobile access network, thus further reducing the dependency on the incumbents' leased circuits" ¹³.

Therefore, the conclusion of the previous market analysis is maintained, whereby, unlike the symmetrical services supported over SHDSL, asymmetric services and other data services are not deemed part of the same retail leased lines product market, and no significant developments are expected prior to the next market definition and SMP analysis.

Large companies vs. SME

Since the retail market for leased lines is primarily targeted at the corporate sector, it is important to examine whether there is some segmentation in terms of supply and demand between SME and large enterprises.

Even though the requirements of small and medium enterprises (SME) and large firms are not, a priori exactly the same, with larger firms typically more demanding in terms of needs, with more profound knowledge of electronic communications products and services and with greater negotiating power ¹⁴, the conditions of the offer advertised by the operators for leased lines are not dependent on the type of user.

There seems to be chain substitutability, on both the demand and supply, among non-residential customers of different sizes, which would determine the definition of a single market.

Indeed, operators provide leased line services throughout the entire territory and without apparent discrimination according to type of customer, although large firms may be located in different areas to SME. Currently, companies that offer services to SME, usually also offer them to large enterprises, and vice versa, regardless of the existence of a small but significant non transitory price increase by a hypothetical monopolist.

Considering the uniformity of the conditions, including pricing, of the leased lines offer for large companies and SME, and since there appears to be no restrictions on pricing, while acknowledging some differences between the SME and large enterprise segments, ICP-ANACOM maintains the view set out in the previous analysis that the relevant retail market includes any business customer.

 
¹ Taking, as an example, a leased line consisting of two terminal segments and one 5km trunk segment, it is concluded that, from the outset, digital circuits with a speed equal to or less than 64 Kbps generally have a lower price than an analogue circuit (one of the various types) whose price has risen by 10% - see section 2.1.1.1 of the previous market analysis.
² Even if, for some customers, the option of migration is restricted due to the existence of a range of costs incurred in switching (e.g. replacement of terminal equipment or termination of existing contracts).
³ It is considered that there are suppliers of low-speed digital lines which could switch to supply analogue lines, in the event of a small but significant and non-transitory increase in the pricing of analogue circuits by a hypothetical monopolist, since the additional investment would not be significant, nor would the suppliers incur irrecoverable costs associated with substantive changes in configuration and functionality of their networks, but only one-off investment in network terminal equipment and its installation and configuration.
⁴ In this type of service, the average user is usually interested in asymmetric bandwidths since the need for information in the network-user direction is generally greater than the need to send information. In fact, the majority of commercially available broadband internet access offers are asymmetric.
⁵ Theoretically, an ADSL product, for example of 2048/512 Kbps, could constitute a symmetric product of 512 Kbps. However, this would be a very inefficient way of allocating transmission resources.
⁶ That is, the cable network operators and most smaller alternative operators (no or very small own network) do not offer leased lines.
⁷ Local access with 1024 kbps/1024 kbps and maximum contention of 1:10 (lower rate than that of a leased line, which has a "nil" contention rate i.e., 1:1).
⁸ A further reflection of its weak substitutability is the almost total lack of correspondence between the type of clients that acquire each of these services: primarily residential customers in the case of cable TV distribution networks, ADSL or mobile, and enterprise clients (especially medium and large companies) in the case of leased lines.
⁹ The areas potentially covered by RLAN/BWA offers are limited to certain urban and higher density areas/buildings where there is "line of sight" to the base stations. Limitations in coverage may also affect the quality of service (signal degradation). Leased line services supported using these offers do not therefore constitute an effective alternative to leased lines services for the majority of retail customers, given their limited availability in commercial terms and in terms of territorial coverage.
¹⁰ Even while the definition of leased line supposes a permanent physical link between two points for the exclusive use of the user, with symmetrical transmission speed and capacity to deliver voice and data, there are some solutions such as VPNs or other capacity management services which, from a functional point of view, may be deemed by some end customers as replacements for conventional leased lines for the purpose of certain applications.
¹¹ Even though, for example using FWA, a dedicated and transparent connection which is symmetrical up to 2 Mbps can be guaranteed, for the transport of voice and data traffic with acceptable levels of quality of service, and there are offers in the retail market based on these types of support.
¹² Considering the differences in pricing and perceived flexibility between these two types of solution for the end-user, with clear advantages for more complex data transmission services, there is no incentive for a provider of services based on BWA (FWA), RLAN, VPNs or capacity management to alter its service portfolio as a result of a hypothetical monopolist effecting a small and non-transitory increase in prices with respect to the leased line service.
¹³ See Sonaecom - ''Negócio fixo - dados operacionais''http://www.sonaecom.pt/CEReports2008/pt/our_business/telco_wireline_data.shtml.
¹⁴ The offers of the operators to large companies typically consist of integrated communications solutions for voice, data information systems, Internet, electronic commerce, network outsourcing , among many others. These companies are also more demanding in terms of guarantees of quality of service, given the greater volume and critical nature of the information they transmit.