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Song Networks A/S

24. april 2004

3/1120-0100-0557/MHA/SEK The Council meeting 24 April 2004

March 8, 2002, Song Networks A/S - provider of fixed line telephony for business customers - filed a complaint against TDC and SONOFON to the Danish Competition Authority regarding illegal cross subsidisation in connection with the termination of calls in TDC’s and SONOFON’s mobile networks. TDC and SONOFON are the leading providers of mobile telephony as well as fixed line telephony to business users in Denmark.

Subsequently, Song Networks specified the complaint to include excessive prices for mobile termination, collusive behaviour in connection with mobile termination charges, cross subsidisation/margin squeeze between wholesale and retail divisions and illegal bonus systems in TDC’s service provision agreements for mobile services.

The case concerns several markets. The relevant geographical markets are Denmark. TDC is dominant on 3 of the four relevant product markets, namely the retail market for telephony solutions including fixed line telephony for business users, the wholesale market for mobile termination in TDC’s network, and the wholesale market for service provision of mobile services. SONOFON is dominant on the wholesale market for mobile termination in SONOFON’s mobile network.

The Competition Authority dismissed the complaints about excessive pricing and collusive behaviour referring to article 14 in the Danish Competition Act. With regard to the third item of complaint the competition authority conducted an investigation into whether TDC and SONOFON practiced illegal margin squeeze in 2003 by selling end-user products with an insufficient retail margin to business users while charging high prices for the underlying wholesale products, including mobile termination.

The Competition Authority didn’t find that SONOFON had abused its dominant position to practice illegal margin squeeze because SONOFON’s mobile termination charges only constituted a negligible part of average costs for a service provider and SONOFON thus couldn’t influence the retail market significantly.

The Competition Authority found however that TDC abused its dominance to practice illegal margin squeeze between the wholesale and retail markets in 2003. The margin squeeze took place in connection with the end user product PlusNet Mobil where parts of the product where sold at retail prices below the wholesale prices.

The PlusNet Mobile product combines fixed and mobile telephony and was introduced on the retail market in the second half of 2002. SONOFON markets a similar product (Multiplan) and these integrated products have experienced significant increases in market shares over a short period of time. Therefore, it was judged that Song Networks has to be able to compete with these products in order to survive on the retail market and the investigation regarding TDC’s alleged margin squeeze practice thus revolves solely around the PlusNet Mobile product.

The Competition Authority based it’s conclusions on the fact that TDC’s wholesale charges for mobile termination and service provision of mobile services were high and had a significant effect on the relevant retail market, and on the fact that TDC sold 6 call types (constituting parts of the PlusNet Mobil - product specifically calls from fixed to mobile) with a retail deficit (retail price lower the wholesale price). This implies a significant risk at the retail level because the demand for these calls can increase and erode the result of the PlusNet Mobile product as a whole. However, because TDC is active on both the retail market and the wholesale markets and enjoys revenue from the wholesale products, TDC as a group does not run the same risk as companies only active on the retail market. TDC’s pricing of the PlusNet Mobile product worked to the detriment of non-integrated companies like Song Networks and therefore this practise constituted a case of margin squeeze.

The rate of return of the PlusNet Mobile product i 2003 was lower than for TDC as a whole and was deemed insufficient to cover the total costs of the product including a normal return plus the significant risk premium reflecting the additional risk from selling specific call types with a retail deficit. Furthermore, TDC went beyond the so called “meeting the competition defence” argument by selling one of the non-profitable call types (fixed to mobile (off net)) at lover retail prices than its nearest competitor, SONOFON.

Therefore, The Competition Authority found that TDC abused it dominance to practice illegal cross subsidisation/margin squeeze in connection with TDC’s supply on the relevant retail market in 2003, cf. article 11, section 1 in the Danish competition act.

On the other hand, the Competition Authority did not find that TDC had practiced predatory pricing by selling its products on the retail market as a whole below the incremental costs.

With regards to the last point of the complaint the Competition Authority found that TDC used bonus systems which were both discriminatory and loyalty creating. The systems progression could not be explained by differences in costs or other objective factors and consequently, because TDC enjoys dominance on the wholesale market for service provision of mobile services, its bonus systems constitute an abuse of dominance covered by the prohibition in the competition acts article 11, section 1.