CCP issues show cause notice to PTCL

June 19, 2012

TAHIR AMIN

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ISLAMABAD: The Competition Commission of Pakistan (CCP) has issued show cause notice to Pakistan Telecommunication Company Limited (PTCL) for prima facie, preventing, restricting, reducing and distorting competition in the market for provision of broadband services through Digital Subscriber Line ('DSL') technology while the PTCL maintains that the complaint is based on a misunderstanding of competition law, the purpose of which is not to punish market leaders but to enhance economic efficiency and protect consumers.

A copy of the enquiry report available with Business Recorder revealed that a formal complaint was filed by Mircronet Broadband (Private) Limited, LinkDotNet Telecom Limited and Nexlinx (Private) Limited, alleging that PTCL has abused its dominant position in the market for provision of DSL services by being involved in the practice of predatory pricing and refusal to deal. The Commission initiated an enquiry and appointed Shaista Bano (Director) and Mehreen Ibrahim (Deputy Director) as enquiry officers to conduct a detailed enquiry. The enquiry report was completed and submitted by the enquiry officers on June 4, 2012.

In view of the importance of the broadband DSL sector in the development of the country, it is proposed that proceedings under Section 30 may be initiated against the PTCL for prima facie violation of Section 3(1) read with Section 3 (2) of the Competition Act, 2010.

According to the enquiry report, the relevant product market has been divided into the upstream market for access to the copper infrastructure and the downstream market for the provision of broadband services through DSL technology. The relevant geographic market for both products has been determined to be the whole of Pakistan.

The PTCL having a nation wide copper infrastructure holds a dominant position in the upstream market for access to copper infrastructure, which is an essential input for the downstream market. Based on the findings of cost analysis conducted by the enquiry officers, PTCL being a vertically integrated incumbent, through its pricing for access to its copper infrastructure, has reduced and squeezed the margins in the downstream retail DSL market to an extent that an equally efficient competitor cannot operate profitably.

The findings of the enquiry report revealed that this margin squeezed by PTCL through low retail prices has gradually reduced the profit margins of the other retail operators which as per their financial statements are incurring losses. Furthermore, importantly since PTCL's entry in the DSL retail market, the number of total service providers has reduced from 11 to 6 and no new player has entered the market - an indication that the competition is reduced in the relevant market.

The enquiry report stated that generally lower tariffs in the retail market would be regarded as beneficial for customers, however, in this case lower retail tariffs have led to competitors being driven out of the market and may in the long run lead to the creation of a monopolistic situation. This would leave the consumers at the mercy of one super dominant player who will be able at its free will to exploit the consumers.

PTCL is a dominant player in the upstream market for provision of access to country wide copper infrastructure, which is an essential input for the undertakings operating in the market of providing DSL based broad band services. Based on the findings of cost analysis it appears that the margins in the DSL retail market due to PTCL's pricing for the access to its copper network are insufficient for an efficient competitor to operate profitably.

The analysis of financial statements of DSL operators appears to confirm that as a result of such low prices the profit margins of DSL operators have gradually reduced and now they are operating under huge losses. Many of the players in the DSL retail market have exited the market. The cost analysis of PTCL's DSL operations shows that it has been able to record profits despite offering very low retail prices and having very low margins.

PTCL being a vertically integrated company, its DSL business does not incur/record some of the expenses such as co-location charges, copper pair rent, additional overheads etc that other operators have to bear. Additionally, the offers like double the speed without additional cost, upgrading of package etc are impossible for the competitors of PTCL to match. Resultantly, prima facie, DSL operators are losing market shares and incurring huge operational losses and if this continues, it may lead to exclusion of further competitors and thus monopolising the relevant market by PTCL.

Apparently the lower tariffs are beneficial for the customers and are a good way to penetrate in a growing market for DSL based broadband services. However, such low tariffs and low margins are making this market unattractive for further investment, research and development. This may result in competitors leaving the market and creating a monopolistic situation in the long run, thus leaving the customers at the mercy of a super dominant player who will be at its free will to exploit customers. This also has the effect of preventing new undertakings from entering the DSL market, it added.

As per PTCL's reply, the complaint incorrectly defines DSL as a service in the market, when it is merely one technology for provision of Broadband Internet Access. Therefore, it cannot be said that consumers cannot interchange or substitute the DSL technology for other technologies. The complaint does not touch upon the homogeneity of the conditions of competition in the geographic market, which has been presumed to be the entire territory of Pakistan without considering that barriers to entry and exit vary from region to region.

The PTCL maintains that the market definition makes it impossible to determine market shares and market power for the purpose of assessing dominance. The failure to determine the relevant market in the complaint in accordance with the Act renders cognisance of the matter and holding of enquiry without jurisdiction, lawful authority and of no legal effect. The complaint fails to demonstrate the ability of PTCL to behave independently of competitors, customers, consumers and suppliers and dominance cannot be presumed as PTCL's share does not exceed 40% for provision of any service. The DSL operators, the PTCL claims, misunderstands the concept of predatory pricing which is clear as the allegations have not been substantiated by any legal argument. In order to allege predatory pricing, certain criteria needs to be fulfilled which includes:

The PTCL argues that an alleged predator must be offering services below an appropriate measure of cost. Case law suggests that appropriate measure is either prices below average variable costs or simply when the difference in cost between the cost of manufacturing and price charged to consumers is excessive. DSL operators have not shown that prices of PTCL are below appropriate measure of cost and in fact several ISP's are offering services at rates substantially lower than PTCL, the company argued.

In failing to define the relevant market, DSL operators have failed to recognise that unlike them PTCL provides various other services other than broadband services and provides the same all over Pakistan which the DSL operators failed to due to lack of feasibility, the PTCL further contends.

Due to the definition of 'interconnection' provided under regulation 2 of the Pakistan Telecommunication Rules, 2000, PTCL and the DSL operators cannot be said to be interconnected as there is no interdependency between the customers of both parties, PTCL maintained.

It is incorrect that the DSL operators are solely dependent upon PTCL for infrastructure as Nayatel provides broadband services through use of optical fiber technology (FTTH) instead of depending upon PTCL's copper lines, the PTCL further states. The DSL agreements as alleged by the DSL operators are not one sided but have been thoroughly negotiated over the span of 2 years between PTCL and the ISP's and PTCL has acted in accordance with PTA's determinations and amendments.

The DSL operators should be aware that laying of unrestricted and unlimited installation of independent fiber optic cables is harmful to PTCL and DSL operators as provides opportunity for selling unauthorised bandwidth to third parties and/or grey operators and hence misuse of facilities. PTCL had increased the lease line tariff in view of inflation but these were revoked vide PTCL letter No DD (Tariff) 064/2005/DPLC dated July 8, 2008.

The PTCL denies violation of applicable law and PTA determinations. Also PTCL submitted that the DSL operators cannot blame PTCL for upgrading its technologies when they have themselves failed to do so. The shift from copper infrastructure which is an older technology is for the benefit of the customers and customers have an option to choose the new numbers given upon shift from copper to optic fiber. In some cases there is an automatic change of numbers, but the customer has option to use that number or forgo the service.

The PTCL further denied that it has intentionally or illegally ever created problems for DSL Operators at PTCL's installation and collocation at exchange. PTCL accommodates all operators provided the PTCL exchange has space. The PTCL denies that it has forcefully disconnected customers of other DSL operators and only provides services on request of customers. PTCL also stated that it has offered the ISPs to work in partnership with PTCL for its white label DSL broadband services on revenue sharing basis under which PTCL will provide end to network infrastructure and resources and DSL operators will provide marketing, sales, provision and installation of customer premises equipment, billing and revenue collection and after sales support services. The allegations of DSL operators that PTCL is providing 4MB package at PKR 1999 and 10MB at 9999 and putting negative impact on competitors in the market is absolutely false and frivolous, PTCL added.