EUROPEAN COMMISSION Brussels, 31-VIII-2006 SG-Greffe (2006) D/204909 Bundesnetzagentur (BNetzA) Tulpenfeld 4 D-53113 Bonn Germany For the attention of: Mr Matthias Kurth Präsident der Bundesnetzagentur Fax: +49.228.146904 Dear Mr Kurth, Subject: Case DE/2006/0469: Wholesale broadcasting transmission services Article 7(3) of Directive 2002/21/EC 1 : No comments I. PROCEDURE On 31 July 2006, the Commission registered a notification by the German national regulatory authority, Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen ( BNetzA ) relating to the market for broadcasting transmission services, to deliver broadcast content to end users in Germany (Market 18 in the Recommendation on relevant markets) 2. The national consultation started on 22 February 2006 and ended on 5 April 2006 3. 1 Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (the Framework Directive ), OJ L 108, 24.4.2002, p. 33. 2 Commission Recommendation 2003/311/EC of 11 February 2003 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services (the Recommendation ), OJ L 114, 8.5.2003, p. 45. 3 In accordance with Article 6 of Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services ( the Framework Directive ). Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11.
On 8 August 2006, the Commission services sent a request for information to BNetzA. The reply was received on 14 August 2006. Pursuant to Article 7(3) of the Framework Directive, national regulatory authorities ( NRAs ) and the Commission may make comments on notified draft measures to the NRA concerned. II. DESCRIPTION OF THE DRAFT MEASURE The notification concerns market definitions and SMP-findings only; the imposition of regulatory obligations on the basis of these findings will be the subject of a further notification by BNetzA. II.1 Market definition In the German market for TV and radio, end-users mainly use cable 4 (55% of all connections) or satellite (40% of all connections) to receive the radio and television signal. Analogue terrestrial TV has virtually ceased to exist as an alternative access platform (around 1% and further declining) whilst digital terrestrial television (DVB-T) has not yet reached critical mass (around 3% of all connections). Both television via ADSL ( IPTV ) and UMTS account for less than 1% of all connections and are considered by BNetzA as still nascent alternative platforms for the delivery of the television signal. BNetzA has split the market defined in the Recommendation into 7 different product markets, as follows: 1) cable operators feeding broadcast signals into their networks; 2) cable operators delivering broadcast signals to network level 4 ( L4 ) clusters 5, with a further refinement on the basis of the importance of the cluster; 3) provision of satellite transponder capacity for the transmission of broadcast signals to content providers; 4) provision of terrestrial transmission facilities for broadcasting analogue television signals to content providers; 5) provision of terrestrial transmission facilities for broadcasting digital television signals to content providers; 6) provision of terrestrial transmission facilities for broadcasting analogue VHF radio signals to content providers; 7) provision of terrestrial transmission facilities for broadcasting digital radio signals to content and telecommunication service providers; 4 The three main cable companies that took over the former Deutsche Telekom AG cable monopoly account for the vast majority for cable connections, with Kabel Deutschland GmbH (KDG) accounting for 9.719.000 household connections, Kabel Baden-Württemberg (KBW) accounting for 2.310.491 household connections, and Unity Media GmbH (UM) through its affiliates Iesy Hessen, Ish NRW and Tele Columbus - accounting for 7.913.392 household connections. 5 BNetzA identifies 4 network layers, whereby network layer 3 feeds the signal into a broadband cable network, from where it is (i) delivered directly to the end-user, (ii) supplied to L4 operators such as TeleColumbus, Primacom and EWT that further connect to clusters of end-users or (iii) supplied to housing associations (supplied either at a point of delivery or through a L4 network). 2
The fact that the cable networks market has been further refined into input markets (feeding of content - both analogue and digital - into the cable network) on the one hand and signal delivery markets on the other hand points at a particular characteristic of the German cable market, whereby L4 operators located further down in the cable network hierarchy purchase the signal from the cable company in order to supply it to the end-user. BNetzA distinguishes two sub-markets for signal delivery on the basis of the importance of the enduser clusters (clusters comprising less than 500 homes on the one hand and clusters comprising more than 500 homes on the other hand). Further to comments in the public consultation, BNetzA considers that the operators of large clusters can easily switch to an alternative signal delivery platform. For smaller clusters, such demand substitutability is not evident, which justifies the definition of separate markets according to BNetzA. The markets for input services follow the area covered by the operator s network. As a result, there are seven cable input markets (corresponding to the cable network areas of the three main cable operators KDG, KBW and UM and the smaller networks of Ewt, Kabelfernsehen München, NetCologne and PrimaCom) which BNetzA designates as being susceptible to ex ante regulation. Also for signal delivery, BNetzA considers that the area covered by the operator s network constitutes the relevant geographic market. BNetzA designates signal delivery over the cable networks of KBW (Baden-Württemberg), UM (Hesse and North-Rhine/Westphalia) and KDG (the remaining part of Germany) as markets being susceptible to ex ante regulation, both for signal delivery to clusters comprising less than 500 homes and signal delivery to clusters comprising more than 500 homes. BNetzA proposes to exclude the remaining television related markets from further market analysis. With regard to analogue terrestrial TV, BNetzA considers that the market has effectively ceased to exist as the market switches to digital. DVB-T is not defined as a relevant market susceptible to ex ante regulation either. Whilst DVB-T is still in the process of being rolled out, its viability as a genuine alternative to cable and satellite is increasingly questioned and private broadcasters seem increasingly reluctant to invest in the digital terrestrial platform. Uptake is not likely to increase significantly during the period of the review. BNetzA therefore concludes that ex-ante regulation is not necessary on the terrestrial television markets. However, BNetzA will monitor the development of digital terrestrial transmission and assess the need for intervention accordingly. BNetzA considers the satellite television transmission market to be significantly wider in scope than the territory of Germany (comprising at least other German speaking areas such as Austria). As BNetzA is not in a position to analyse and regulate such supranational markets, transmission of broadcast signals by satellite is not further examined. With regard to radio, BNetzA defines a national market for the provision of terrestrial transmission facilities used for broadcasting analogue VHF radio signal. The market is considered to be nation-wide in scope and as being susceptible to ex ante regulation. This is not the case for digital terrestrial radio transmission. As the adoption of digital radio by endusers is very limited and further uptake is not likely to increase significantly during the period of the review BNetzA finds that this market is not susceptible to ex ante regulation. II.2 Finding of significant market power ( SMP ) The criteria considered by BNetzA in its market analyses include: i) market shares, ii) market barriers (control over an infrastructure difficult to duplicate) iii) absence of 3
countervailing buyer power, (iv) actual and potential competition, as well as v) easy or privileged access to financial resources and capital markets. The three main cable companies, KDG, KBW and UM, are designated by BNetzA as having SMP on both the input market and the market for signal delivery to clusters comprising less than 500 homes for the reasons set out below 6. T-systems business services GmbH ( T- Systems ) is designated by BNetzA as having SMP on the analogue terrestrial radio transmission market. The markets for input of content into the cable network The cable companies KDG, KWB and UM have a monopoly for distributing TV signals to their retail customers in their respective areas. As a result of these natural monopolies, there is no effective competition on the market 7. BNetzA considers that barriers to entry are high as there is no scope for duplicating the ubiquitous cable networks already in place. Hence, cable networks are not threatened by self-supply of broadcasters. As cable accounts for 55% of the connections to the television signal (stable over the last 8 years), there is a certain level of dependency of broadcasters on the three main cable companies. As stated in the public consultation, the cable companies concerned consider that such finding of SMP is not justified as (i) cable and satellite are regarded by the consumer as interchangeable and (ii) must-carry rules and the strong countervailing power of broadcasters make the market tend towards effective competition, which rules out the need for ex-ante regulation. However, demand and supply substitution conditions between cable and satellite depend on the limited feasibility of switching between these platforms, which makes that a hypothetical monopolist on one platform may not necessarily be constrained by the activities of operators of other platforms. At the retail level, because of the costs related to installing the satellite capture equipment 8, end-users show a limited willingness to turn to satellite as a competing platform, and this affects the level of effective substitutability of competing platforms at the wholesale level. For broadcasters as content providers, substitutability between cable and satellite transmission also remains un-established. Public service broadcasters are obliged to ensure that they reach all consumers of television services, if possible via all transmission means available. On the basis of this legal principle, public service broadcasters cannot just switch from one transmission means to another. Commercial broadcasters on their side generally have an economic interest to reach all TV viewers in order to maximise the publicity income. 6 On the markets for signal delivery to clusters comprising more than 500 homes, BNetzA does not find SMP for any of the cable operators seen that these clusters are sufficiently large for a Level 4 customer to switch from upstream cable operators to satellite network operators for signal delivery. 7 The smaller cable companies Ewt, Kabelfernsehen München, NetCologne and PrimaCom are not designated by BNetzA as having SMP, as for these players the countervailing power of the broadcasters is considered to limit their market power. As opposed to the three main cable operators, the smaller operators do not charge feed-in fees for transmitting the broadcasters content. 8 Satellite television requires the viewer to install a satellite dish and receiver at his own expense. Also, the acquisition of satellite dishes may be prohibited on aesthetic grounds by the landlord, the owners' association or local town planning regulations, which will limit the degree of substitutability between cable and satellite. 4
The second argument of the cable operators against BNetzA s finding of SMP relates to countervailing buyer power. Where a particular content bundle of a broadcaster 9 is popular with viewers, the threat of this content not being available can act to constrain the price a cable company charges to well below the monopoly level, as the absence of such channel from the programming bundle could reduce the overall value of the content offer to consumers and lead to less revenue for the cable operator. Likewise, as there is limited substitutability between platforms, the threat of a significant loss in sales for the content provider through content not being carried can lead to a certain dependency of a broadcaster vis-à-vis the cable company. The question arises whether such a relationship of mutual dependency may put broadcasters and cable companies in a position where they can exercise influence over each other. In addition, must carry obligations are designed to ensure widespread access to the specified channels and services. However, according to additional information provided by BNetzA, the level of buyer power is unbalanced to the benefit of the cable companies. The relationship between the cable company and broadcasters is one of a regional monopolist supplier facing multiple sources of demand. Such is reflected by the relatively high signal feed-in fees charged by the SMP designated cable companies, whilst other cable companies do not charge such fees. Secondly, such feed-in fees are charged without differentiation based on the importance of the channel, whether the channel is public/private or must-carry. Thirdly, whilst cable companies pay broadcasters for their programmes (Weitersendeentgelte), these payments are much smaller than the feed-in fees received. Fourthly, must-carry rules do not govern the level of signal feed-in fees. Finally, with regard to must-carry obligations, whether a channel either public or commercial is must-carry depends on the different Länder (German states). It follows that must-carry rules do not neutralize the market power of the cable operators as they are not homogeneous across Germany for private channels and do not cover all public channels. The cable signal delivery markets Also for signal delivery in the market for the delivery of broadcast signals to network level 4 clusters comprising less than 500 homes, the three main cable companies KDG, KBW and UM have high market shares (above 90% each in their respective coverage areas). The ability for level 4 customers to switch to alternative platforms decreases in line with the importance of the clusters. This makes level 4 operators of small clusters particularly dependent on the cable companies. The market for analogue terrestrial radio transmission T-systems holds a market share of more than 95% for the provision of terrestrial transmission facilities for broadcasting analogue VHF radio signals vis-à-vis the content providers. Apart from the two public service broadcasters, no nationwide radio stations are active in Germany, the remainder being active on a regional or local basis. Whilst the public service broadcasters rely on self-supply in Western Germany, they are dependent on T- systems for broadcasting in the East, and so are the commercial radio stations. T-systems controls the frequencies and the major sites for transmission services. As the analogue radio 9 Apart from public broadcasters ARD group (27% market share on the basis of the number of viewers) and ZDF (13%), two strong media groups, Pro Sieben Sat1 Medien AG (30%) and the RTL group (26%) are active in Germany. Taken together, these channels cover more than 90% of German demand. 5
market is due to switch off in 2015, there is no scope for alternative suppliers to access the market by investing in the duplication of infrastructure. III. NO COMMENT The Commission has examined the notification and the additional information provided by BNetzA and, on the basis of the very particular situation in the German markets, has no comment 10. Pursuant to Article 7(5) of the Framework Directive, BNetzA may adopt the resulting draft measures and, where it does so, shall communicate them to the Commission. The Commission s position on this particular notification is without prejudice to any position it may take vis-à-vis other notified draft measures. Pursuant to Point 12 of Recommendation 2003/561/EC 11 the Commission will publish this document on its website. The Commission does not consider the information contained herein to be confidential. You are invited to inform the Commission 12 within three working days following receipt whether you consider that, in accordance with Community and national rules on business confidentiality, this document contains confidential information which you wish to have deleted prior to such publication. You should give reasons for any such request. Yours faithfully, For the Commission, Philip Lowe Director General 10 Pursuant to Article 7(3) of the Framework Directive. 11 Commission Recommendation 2003/561/EC of 23 July 2003 on notifications, time limits and consultations provided for in Article 7 of Directive 2002/21/EC, OJ L 190, 30.7.2003, p. 13. 12 Your request should be sent either by email: INFSO-COMP-ARTICLE7@ec.europa.eu or by fax: +32.2.298.87.82. 6