High Court nails Telecom for blocking broadband competition

Telecom has been found guilty of anti-competitive behaviour for using its substantial power to prevent and deter competition in the business-to-business high-speed data transmission market, the High Court at Auckland has found.

High-speed data transmission services allow businesses to transmit large amounts of data between different offices, or to other businesses, using private networks.

Telecom [NZX: TEL] would not immediately say if it would appeal. The company is currently conducting a detailed review of today's judgment.

The High Court at Auckland found Telecom breached section 36 of the Commerce Act in a judgment by Justice Rodney Hansen and former Otago University professor Martin Richardson.

$10 million fine
Telecom now faces a fine of up to $10 million. The level of penalty has been put aside for separate consideration by the court. Telecom has 20 days to appeal.

The company said it was "disappointed" with the decision.

High tailing it
The commission's case was based on its claim Telecom had breached the Section 36 of the Commerce Act, which prohibits companies with a substantial degree of market power from taking advantage of that power for an anti-competitive purpose between 2001 and 2004. The watchdog estimates

The commission’s case focused on Telecom’s wholesale pricing of data ‘tails’, which are parts of the connection to a customer that Telecom’s competitors must acquire from Telecom where their networks do not reach the customer.

The commission issued its proceedings in March 2004.

During the period of the relevant conduct, the market for high-speed data transmission services was worth an estimated $120 million per year.

The court found from 2001 to 2004, Telecom leveraged its position to charge downstream competitors disproportionately high prices for wholesale access to its network, preventing them from offering retail end-to-end high-speed data services on a competitive basis (after 2004, regulated pricing kicked in).

The court found that Telecom’s wholesale prices for access often exceeded its retail prices for the service, and that Telecom’s pricing was also directed to deterring existing or potential competition in the national wholesale market for backbone transmission services.

In particular, the court found Telecom’s wholesale data tail pricing to competitors was consistent with its strategy to deny competitors access at prices that would permit the rivals to utilise and develop their own networks for the purpose of data transmission.

One for one
In terms of long-running legal stoushes, the Commerce Commissiona and Telecom are now 1-1, with Telecom prevailing in the latest round of the now 10-year-old 0867 dial-up spat.

“We are pleased to see the Commerce Commission has had a favourable decision from the High Court on this matter. We are concerned about the time taken to reach the decision however," said Scott Bartlett, chief executive of Orcon.

"This instance and the 0867 case have taken years to be resolved, and in the intervening period the damage done to Telecom’s competitors and consumers is difficult to repair."

High-speed data transmission
In a statement this morning, the Commerce Commission said that many businesses, for example banks, operate from multiple sites within New Zealand (and often overseas) and need to regularly and securely transmit large volumes of data between these sites and/or establish a permanent private network amongst them. To meet this need, telecommunications companies offer such businesses a variety of high-speed data transmission services.

On or about 1 December 1998, the commission said, Telecom introduced new pricing for its retail high-speed data transmission services (termed Streamline), and in March 1999 Telecom introduced new wholesale pricing (termed carrier data pricing or CDP). Through CDP, Telecom provided and continues to provide, the other competing telecommunication service providers two wholesale data service options:

a) the ability to resell Telecom’s retail high-speed data transmission services (both dedicated and switched). Through CDP, Telecom offers other telecommunications service providers its retail end-to-end high-speed data transmission services for re-sale; or

b) access to dedicated data tails in Telecom’s network in order to supplement the other telecommunications service providers’ own network and, thereby, provide retail high-speed data transmission services.

The Commission alleged that the manner in which the service option in (b) above was provided, and the way in which it was priced had the effect that in almost all circumstances the price charged by Telecom for access to data tails required by other telecommunication service providers in order to supplement their own network:

a) exceeded the price charged by Telecom to the telecommunication service provider for an end-to-end data service when provided for re-sale;

b) exceeded the comparable retail price charged by Telecom for provision of comparable data services;

c) exceeded the price Telecom charged itself for access to the data tails; and

d) exceeded the sum of Telecom’s direct incremental cost and opportunity cost of supplying access to the data tails.

Since 26 May 2001, section 36 of the Commerce Act prohibits persons who have a substantial degree of market power in a market from taking advantage of that position for anti-competitive purposes, including preventing or deterring competitive conduct by others. Prior to 26 May 2001, the prohibition under the Commerce Act was the use of a dominant position for an anti-competitive purpose.

The Commission alleged that Telecom was dominant and had a substantial degree of market power. While alternative network infrastructure had been developed in selected areas, Telecom still owned and operated the only nationwide telecommunications network in New Zealand.

Downstream competition
Commerce Commission chairman Mark Berry said or today's result: “The commission is pleased with the court’s decision, which confirms that dominant firms must price essential inputs to a competitor in a downstream market so as to enable efficient competitors to compete.

“The court has confirmed the application of economic models that are used to determine a contravention of the Commerce Act in access pricing cases," Mr Berry said.