EC Accuses Telefonica Of 'Margin Squeeze'

by Ulrika Lomas, for LawAndTax-News.com, Brussels

24 February 2006

The European Commission announced on Wednesday that it has decided to open formal proceedings against Spanish telecoms operator Telefónica, and has sent a Statement of Objections explaining why it takes the view that Telefónica has been abusing its dominant market position in the form of a so-called ‘margin squeeze’ in the Spanish broadband Internet access markets since 2001.

The sending of a Statement of Objections does not imply that the company concerned is necessarily guilty of breaking EU anti-trust rules. The Commission will adopt a decision on whether or not Telefónica has indeed been abusing a dominant market position in the light of its response to the Statement.

According to the EC, since 2001, the spread between Telefónica’s prices for wholesale broadband access requested from its competitors and the downstream tariffs for broadband Internet access to be paid by consumers has been insufficient to cover Telefónica’s own costs for the supply of such retail services.

This means that Telefónica would have incurred substantial losses if it had had to pay the wholesale tariffs it has been imposing on its competitors, and constitutes a so-called ‘margin squeeze’, as Telefónica leaves new entrants, which need access to a network infrastructure, an insufficient margin to compete for downstream retail subscribers. Telefónica is the only Spanish network operator to have a network with nation-wide coverage.

Retail broadband prices in Spain are high and well above EU average. Additionally, the roll out of alternative infrastructures in Spain is far behind the EU average; although local loop unbundling took off at the end of 2004, its use remains behind of that in most EU countries.

The firm also faced allegations of anti-competitive behaviour in 2003, when it was accused by the Association of Telecommunications Services and Operators (ASTEL) of abusing its dominant position by suggesting to its customers that the standard of service offered by rival telecoms providers would be a great deal lower.

As a result of this unfair marketing campaign, according to ASTEL, many thousands of customers who might otherwise have switched to other services remained with Telefonica, meaning that the company retained its substantial market share, despite liberalisation.

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