Presence of high and non-transitory barriers to entry

At the outset, there are no legal, administrative or regulatory barriers to entry into the retail market for leased lines.

With regard to structural barriers, according to the Recommendation, it is important to examine "indicators of barriers to entry in the absence of regulation, (including the extent of sunk costs), market structure, market performance and market dynamics, including indicators such as market shares and trends, market prices and trends, and the extent and coverage of competing networks or infrastructures. ".

In the previous market analysis, ICP-ANACOM concluded that the high and persistent market share of the companies of Grupo PT, together with the barriers to entry associated with network expansion and the vertical integration of these companies, would constitute an indicator that Grupo PT's retail dominance would persist into the future. On the other hand, ICP-ANACOM considered that regulation at wholesale level was not, in itself, sufficient to address potential market failures, i.e. not sufficient to meet the regulatory objectives in this area.

Indeed, in 2004, only Grupo PT was present in the retail market for analogue leased lines, so its market share was of course 100%. In terms of digital leased lines, Grupo PT's market share at the end of the same year was about 93% in terms of revenue ¹ in the market of lines up to 2 Mbps, lines covered by the minimum set. Grupo PT's share in the 64 Kbps and n×64 Kbps components exceeded this value (around 97%), while this was not the case for lines of 2 Mbps and above (but these were already outside the relevant market ²), where the share fell to about 81%. This has also indicated a willingness to enter the market, fundamentally in terms of lines of greater capacity, especially those associated with longer distances, which allow greater profitability from the outset.

These high market shares of Grupo PT have been declining over the period under analysis (2006 to 2008).

With respect to analogue lines, although Grupo PT's share remains around 100%, two operators entered this segment of the retail market in 2007. Meanwhile, there is a clear migration from analogue lines to low-speed digital lines, with the volume of analogue circuits at retail declining 16.1% between 2006 and 2008.

In terms of digital leased lines (up to 2 Mbps, exclusive), the overall volume and revenue of these lines has seen a sharp decline in recent years (of 47.1% and 23.7% respectively from 2006 to 2008). The market share of Grupo PT ³ in these lines, which, as at the end of 2008, was 87.3% in terms of revenue and 90.8% in terms of volume, has reported declines of 6%.

At first glance, this decline in the market share of Grupo PT appears to represent a minor reduction, but this does not take account of developments seen in the segments of 2 Mbps line (and higher capacity, but which are not currently regulated), where revenue and volume, unlike in the case of analogue and low capacity digital circuits, has increased significantly and in which regard it should be noted that the market shares of Grupo PT in these two "segments" (2 Mbps and higher capacity) fell, at the end of 2008, to values of 70.3% and 39.7% in terms of volume, for segments of 2 Mbps and higher capacities respectively ⁴.

Additionally, it is noted that since 2005, various new operators have entered the retail market, particularly in the segments of capacity equal to or exceeding 2 Mbps. This has brought a new dynamic to this market, especially in those segments considered most profitable, reflected in a significant increase in the market share of the new operators with respect to this same segment. There are therefore no insurmountable barriers to entry, as found above, with respect to analogue lines.

As such, given:

• the entry of new providers into the retail market (including the entry of two operators into the analogue lines segment in 2007);
  
  
• the continued decline in the volume of analogue and lower-capacity digital lines and in corresponding income;
  
  
• the trend of migration from analogue lines to low-speed digital lines, as well as to higher-capacity circuits (e.g., greater than 2 Mbps); and
  
  
• the significant market shares (especially in volume) already achieved by new operators in the segment of 2 Mbps and, crucially, with capacity exceeding 2 Mbps,

it is reasonable to affirm that barriers to entry into the retail market for leased lines are no longer (so) high. Looking to the future, it is likely that these trends will be confirmed and even accentuated.

The main barriers to entry identified by ICP-ANACOM in the previous market analysis were associated with Grupo PT's control of the network supporting the leased lines service. Sunk costs, which in the case of leased lines are extremely high, were and still are an important structural barrier to entry ⁵. Indeed, it is not economically viable for new entrants to replicate PTC's entire access network, but the significant economies of scale and scope associated with this network should also be taken into account. Additionally, Grupo PT is composed of vertically integrated operators with a presence at wholesale level and in the retail market. If there was difficulty in acquiring inputs from the wholesale market or in obtaining these inputs at a competitive price, the barriers to entry at retail level could become more pronounced.

All these barriers were considered in previous market analysis of 2005, as being high and non-transitory, whereas, at that time, it was not deemed likely that they would be diminished within a reasonable period of time.

It is likely that this finding could be maintained in the future, were it not for the substantial structural changes which have occurred in the markets, especially in terms of the networks and technology (e.g. Ethernet) since, overall, despite a decline, Grupo PT's market share remains high, above 80% for the entire leased lines retail market.

However, in accordance with the Guidelines, the present analysis should be conducted on the assumption that the retail market is not subject to ex ante regulation, whereas the possible regulation of related wholesale markets is considered.

In this context, the ERG considers that, for example, an obligation of wholesale access could reduce or even eliminate barriers in the downstream retail market:

• control of infrastructure which is not easily replicable: alternative operators can access and use specific resources of the dominant operator's network according to reasonable and non discriminatory conditions;
  
  
• technological advantage or superiority: alternative operators have access to technologies used by the dominant operator and can compete using the same technological advantages;
  
  
• vertical integration: the provision of regulated wholesale products makes it possible for alternative operators to gradually develop their own networks, supporting themselves (as a complement) on the network of the dominant operator.

According to the ERG, an obligation of cost orientation of wholesale prices, in conjunction with the obligation of access, may further contribute to the reduction of barriers to entry in the downstream retail market, allowing operators to acquire the necessary wholesale inputs which enable them to compete at the same level as the dominant retail provider.

Finally, it may be useful, also according to the ERG, to examine the actual impact of the wholesale obligations in terms of the entry of downstream operators, i.e., whether such obligations are effective in the elimination of market failure.

As mentioned above, in the previous analysis ICP-ANACOM concluded that Grupo PT had SMP in the identified relevant markets and therefore imposed the following obligations on this undertaking: i) access and use of specific network resources, ii) non-discrimination in access and interconnection and in the respective provision of relevant information, iii) transparency in disclosure of information; iv) separation of accounts for specific activities related to access and/or interconnection; v) price control and cost accounting and vi) financial reporting.

In 2005, in compliance with these obligations, PTC published the wholesale leased lines reference offer - LLRO - covering the entire national territory and analogue and digital technologies, comprising, in this case, speeds from 64 Kbps to 2 Mbps, 34 Mbps and 155 Mbps. This offer is actively used by most operators and service providers, including operators acting in the leased lines retail market.

Under the LLRO, operators have "guaranteed" access, on a non-discriminatory basis, throughout the national territory to wholesale inputs at cost-oriented prices according to well defined time periods and with a determined quality of service. This allows them, in addition to building their own networks, to engage in the resale of leased lines in the retail market, benefiting from the ubiquity of the PTC network, without, for example, having to invest heavily in alternative network infrastructure. Alternative operators are also able to profit from the infrastructure in their possession using the lease of partial lines, accessible through co-location in PTC exchanges, where they can share space and features already available for other service, including access to local loops and network interconnection.

Furthermore, ICP-ANACOM considers that it is possible and even necessary to improve various aspects of the current regulated wholesale offer, and plans to promote its alteration following the present market analysis so that it has a greater impact on retail markets - especially with the inclusion of Ethernet circuits in the LLRO. This matter is discussed in detail in Chapter 6, but note should be made at this stage that the imposition of price control obligations, particularly in terms of cost orientation, enables alternative operators to benefit from Grupo PT's economies of scale and scope.

Nevertheless, it should be pointed out that alternative operators have developed their optical fibre networks, including though the use of dark fibre (for example, of utilities), and deploying network access point/nodes in major cities. Since there is alternative transport infrastructure on routes linking these network nodes, it can be affirmed that, on those same routes, there are no barriers to entry, even if there were no regulated wholesale offer. This issue will be detailed further in the following Chapter.

In conclusion, in line with the position stated by the EC, where operators in the retail market are able to maintain a ubiquitous offering using the regulated wholesale offer of leased lines, in particular to complement their own infrastructure, the barriers to entry are no longer high.

The wholesale markets and the obligations imposed on the SMP operator are discussed in later sections, but, for the purpose of this test, ICP-ANACOM considers that the effective imposition, where appropriate, of such wholesale obligations is sufficient to reduce the high and non-transitory barriers to entry into the leased lines retail market.

In light of the above analysis, ICP-ANACOM considers that the obligations imposed on Grupo PT, as presently enshrined in the wholesale reference offer and in its implementation, effectively enables the entry and expansion of operators at retail level, as well as increased competition in this market, especially with respect to lines of 2 Mbps and of greater capacity, with the latter of these now also part of the product market.

Accordingly, ICP-ANACOM considers that the retail market for leased lines fails to meet the first criterion for defining a relevant market susceptible to ex ante regulation.

Since the three criteria are cumulative, the fact that the first is not met automatically implies the overall failure of the test and the corresponding exclusion of the retail market from all relevant markets for purposes of ex ante regulation. Nevertheless, there will a brief analysis will be conducted with regard to the two remaining criteria, as indeed has been the practice of other regulators.

 
¹ And approximately 96% in terms of the volume of lines.
² Taking into account the limited volume and revenue, at retail level, derived from higher-capacity lines (greater than 2 Mbps), these were excluded from the relevant market in this decision, and no longer belonged to the minimum set of leased lines defined at EU level.
³ Since 2005, only one company of Grupo PT, PT Prime, has been present in the retail market for leased lines.
⁴ And to 87.2% and 34.2%, in terms of revenue from lines, of 2 Mbps and above this capacity, respectively.
⁵ A potential entrant will want to bear such investment costs if these are likely to be recovered, along with the costs of production, as a result of the revenues achieved. The incumbent operator (who has already made its investments) can there exploit this asymmetry signalling to the potential entrant that if it decides to initiate an activity in this market, prices will be too low to cover sunk costs. As such, entry is discouraged.