ISSUE

Germany has fallen far behind the United States and the Nordic countries in terms of Internet penetration. The main reasons are the comparatively high local call charges and the incumbent operators’ local access market dominance. Although the 1998 telecommunications liberalization delivered positive results in terms of prices and services, and encouraged competitors to enter the German markets, obstacles remain towards gaining competitive traction in Germany, particularly in the local market. Deutsche Telekom, the former state-owned incumbent, has sought to retain its market share by pursuing a number of anticompetitive practices. In addition, the regulatory climate has been protecting Deutsche Telekom. The consequences for the German economy are the following:  

-         Relatively high local call charges resulting in high Internet access rates on a metered basis  

-         Low Internet penetration, largely due to the high Internet access charges  

-         Lower economic growth rates as a consequence of the country's inability to embrace the Internet, e-commerce and related developments  

-         Lack of competitiveness of German business firms in the global marketplace due to higher production costs  

-         Uneven distribution of tariff reductions leading to a situation were certain consumer groups have not yet benefited from increased competition  

-         Overall costs to society and significant market inefficiencies as a result of Deutsche Telekom’s anticompetitive practices  

-         Obstacles to new market entrants, efficient investment, and employment growth  

-         Strains in the trade relations with other countries.  

These issues require immediate action if Germany doesn’t want to be left behind in today’s fast emerging market developments.

SCENARIO  

For the purpose of this project, I will assume the role of a consultant advising a fictitious German telecommunications association, the “Coalition of Communication Users” (CCU), representing residential users, small and medium-size businesses and consumer and business groups. The association has tasked me with the development of a strategy to lower local phone and Internet access charges and to increase the efficiency of the German telecommunications services, especially with regards to increased customer choice.

EXECUTIVE SUMMARY

Three years after the complete liberalization of the German telecommunications market, serious shortcomings continue to exist. Internet access charges and local call charges in Germany remain comparatively high, hindering the development of the ‘new economy’ based on the Internet, e-commerce, and other developments. This is largely due to the overwhelming market share of the former incumbent. Deutsche Telekom continues to have a share of almost 80 percent in the fixed line network market and a de-facto monopoly in the local market. The firm has even succeeded in capturing nearly the entire emergent DSL market. New market entrants contend that problems in gaining competitive traction in Germany are a result of the numerous anti-competitive practices of the incumbent, a weak regulator, and a generally protective political climate.  

German consumers and the overall economy pay the price for the incumbent’s monopolistic share in the local network market in form of comparatively high local call and Internet access charges and significant market inefficiencies. The high Internet access rates translate into higher production costs for German business and decrease Germany’s international competitiveness. Foreign and domestic investment is hampered and new employment opportunities remain unrealized. The situation leads to strains in the trade relations with other countries, especially the US.  

This report demonstrates that:  

Ø       Deutsche Telekom must abandon its anticompetitive behavior and adhere with the measures set forth by the regulatory regime. This will establish functioning competition in all market segments, and enable Germany to move quickly to an information-based economy and reap the full benefits that such an economy has to offer.  

Ø       An alternative network to the incumbents fixed line network must be in place to determine the ‘real’ costs of the leased line, local call and Internet access charges.  

Ø       The government should commit itself to the scheduled divestment from its holdings in Deutsche Telekom to resolve the conflict of interest arising though the government’s role as a policy maker for the telecommunications market and shareholder at Deutsche Telekom.   

Ø       The German government and the Bundestag must investigate the regulatory climate in Germany in order to determine whether changes to the current framework are needed to introduce meaningful competition, and to lower the Internet access charges.  

Ø       The efficiency and independence of the regulator must be reestablished, and legal commitments laid out in the Telecommunications Act must be enforced more rigorously, in order to create a transparent and predictable investment environment.  

Collectively, these measures should lead to more transparency and predictability in the German telecommunications market, encourage foreign and domestic investment, and ultimately lead to lower prices in the local call and Internet access market, benefiting the economy as a whole. The measures should also ease trade constraints with the US and other countries interested in entering the German market.   

To put the above measures into practice, the following strategic steps will need to be taken:  

Domestic strategy

1)       Judicial

-         Initiate a class action against Deutsche Telekom on the grounds that Telekom’s anticompetitive practices are limiting competition in the fixed network market, resulting in higher prices for consumers.  

-         Support a lawsuit that is currently being prepared by several new market entrants against the regulator’s decision on the Teilnehmeranschlussleitung.  

2)       Legislative

-         A bill shall be drafted laying out the timelines for the progressive divestment of the Federal Government from its holdings in Deutsche Telekom.  

-         A bill shall be drafted requiring the complete divestment of Deutsche Telekom from its legacy cable network.

3)       Procedural

-         Establish a parliamentary inquiry “enquete” commission to investigate whether changes to Germany’s regulatory arrangements are necessary to ensure cost-efficient, timely, and innovative telecommunications services on an ongoing, fair and equitable basis to all existing and potential users, and if so what those changes should be. Special attention should be paid to the independence, neutrality, and efficiency of the German regulator.  

-         Reevaluate of charges for access to the local loop by the Regulatory Authority.  

-         Ensure that revised regulation on the licensing fees is cost-oriented and closer to the European average.  

European Strategy  

1)       Judicial

-         File a lawsuit under the European court system on the grounds that several legal requirements laid by the Directives of the EU, such as the requirements to segregate its accounts, are not carried out by Deutsche Telekom.  

2)       Legislative 

-         Recommend to the Commission a best practice price for access to the local loop.

International Strategy  

1)       Procedural

-         Encourage the United States Trade Representative to step up its diplomatic efforts in Germany to build support for the proposed legislative and procedural steps.  

In the course of building support and initiating legal action, negotiations will be pursued with Deutsche Telekom and other stakeholders. German business and residential telecommunications users must have access to a variety of efficient, cheap and technologically advanced services, offering excellent and timely customer service. New market entrants must be able to plan effectively their business strategies in a transparent and predictable environment with a strong regulator and a pro-competitive government. Although these seem to be evident, the federal government takes care to protect Deutsche Telekom’s market share and establish a leading position for the company in new market segments.  

This is due to the following reasons:  

§                     The current government’s traditional political base is amongst labor unions. Labor has repeatedly advocated a relaxation of the regulatory regime and blamed the job losses at Deutsche Telekom on market liberalization. The ruling coalition is therefore careful in taking bold steps to promote more competition against Deutsche Telekom.  

§                     Due to its all-time high budget deficit, the Finance Ministry is reluctant to take a pro-competitive stance. Measures taken to improve the competitive situation could possibly lead to a decrease in the value of the government holding in Deutsche Telekom and hence affect the federal budget.

§                     The public offering of Deutsche Telekom was a great success and many Germans, encouraged by the federal government, invested in the stock market for the first time. The share price has since plummeted and the federal government feels responsible to protect the stock against further downturns.  

§                     The regulator seems to lack understanding on how seemingly minor irritations by Deutsche Telekom have a large impact on the competitors. In addition, the regulator appears to lack authority since several requirements laid out by the regulatory regime have not been properly enforced to date.  

§                     The German government fears that competition would permit companies to skim off profitable business and urban customers while leaving the incumbent insufficient resources to provide equally good service to unprofitable sectors.  

To overcome these concerns, increase market competitiveness and lower the local call and Internet access charges for all users, I recommend that the CCU take the following actions:  

Ø                   The coalition shall build support amongst residential and business users, and consumer and business associations, including international associations for a more efficient and competitive telecommunications market, including lower Internet access and local call charges.  

Ø                   The CCU shall call for the establishment of a Committee of Academics to further investigate the competitive situation in Germany. The Committee shall issue a report isolating steps that have to be taken by the government to embrace the online economy.  

Ø                   A legislative strategy should be developed to convince the Bundestag to adopt a number of measures, including:  

1)       The proposed legislation on (A) the complete divestment of Deutsche Telekom from its legacy cable network, and (B) the divestment of the federal government from its holdings in Deutsche Telekom.   

2)       The establishment of a parliamentary inquiry commission.  

3)       The reevaluation of charges for access to the local loop by the regulator. 

4)       Ensuring that the new licensing fees are closer to the European average. 

The support-building effort shall target members of Bundestag from all parliamentary groups, the Cabinet, and the Ministries who have a stake in the issue (economics, finance, and labor). Supportive government agencies, such as the Cartel Office, and the Monopolies Commission, shall be engaged in garnering support amongst government officials. To gain the support of the government, it is vital that the CCU gets the consensus, or at least appeases the opposition, of the labor unions. In addition,  

Ø                   The coalition shall pursue a media strategy which aims at building public support and informs the public about the shortcomings of the competitive environment.  

Ø                   The coalition shall work in conjunction with, and coordinate its efforts with, such domestic and foreign competitor associations as the VATM, Breko, and CompTel.  

Structure of the Document 

The background section gives an overview of the current market shares of the competitors and the incumbent, examines the price development in the different sectors, lays out the challenges of the new market entrants in gaining competitive traction, and gives a description of the main stakeholders. The economic analysis presents the market and structural barriers facing new market entrants, establishes the importance of the interconnection fees, evaluates the economic impact of an increase of competition in the local network market and gives an estimate of the expansion of usage resulting from a given change in Internet access charges. The commercial analysis explores the obstacles faced by the competitors and the intuitional analysis examines the independence and authority of the regulatory body. An overview of the legal provisions is given in the legal analysis. The project also includes an analysis of the substantive policy issues; the political section provides an extensive stakeholder analysis. The analysis section is followed by recommendations, which leads to a comprehensive strategy paper laying out the steps to be taken to put the recommendations into work.

I.                   INTRODUCTION

I.A.              ROLE OF THE TELECOMMUNICATIONS SERVICES SECTOR 

The German economy is struggling with slow economic growth rates, persistently high unemployment, and high government outstanding debt.  A central reason for the stagnant economic performance is the country’s inability to meet the challenges of the communications revolution and to embrace the Internet, e-commerce and other developments. It has long been recognized that the telecommunications industry is of vital importance to the development of the information-based economy. A modern, cost-effective, timely and innovative telecommunications system is widely seen as vital to sustained economic development. The German government and the European Commission have long recognized that the telecommunications services market is a significant catalyst of economic growth.[1] According to the German government, the Internet and new information and communications technologies offer a wide range of possible applications, thus generating opportunities for new products and creating jobs.[2] The federal government recognizes that electronically supported commercial activities offer companies a wide range of opportunities to increase their competitiveness in the global marketplace. Electronic commerce translates into productivity growth and cost savings, and “enables companies to react faster and more flexibly to customer requests and market changes”.[3] This is increasingly important as the global marketplace replaces local or regional markets, and is a crucial factor in the competitiveness of German business firms. The government acknowledges the central role of the telecommunications and infrastructure policy and the importance of a competition-oriented sectoral economic policy, stating as its objective the promotion of competition structures in the telecommunications market. In addition, policies “should support developments that will make using the Internet cheaper, faster, more secure, better and more user-friendly”.[4]  

And yet, Germany continues to lag behind the Nordic countries and the United States in terms of overall Internet use, especially among small and medium-sized firms (see Figure 1 and 2).  

Figure 1: International comparison of percentage of Internet users in selected countries.[5]

Source: Sixth Report on the Implementation of the Telecommunications Regulatory Package, European Commission, December 2000, data collected from national regulatory authorities and Nua Internet surveys, at www.nua.ie.

Figure 2: Number of Internet hosts per 1,000 inhabitants, January 2000.[6]

Source: Sixth Report on the Implementation of the Telecommunications Regulatory Package, European Commission, December 2000, data based on ISC, at www.isc.org and OECD, at www.oecd.org. 

Numerous studies have confirmed the key role of the information and communications technology sector in bringing about the sustained productivity growth experienced by the United States over the past five years.[7] And yet, structural reform of the German product markets, especially those relating to the communications sector, remains insufficient if the country wants to embrace the ‘new economy’ and experience similar growth rates. European countries that have successfully adopted the information society, such as Finland, have been much more successful in fueling economic growth. The three Nordic economies, Sweden, Finland and Norway, were ranked just behind the US at the top of the list by the Economist Intelligence Unit’s “e-business-ready” ratings. While the UK ranks a comfortable 6^th due to its low Internet access charges, Germany lags behind in 13^th. The hierarchy suggests that e-business requires more than simply a large or robust economy, and that the connectivity, or the readiness of the communications infrastructure to handle Internet traffic, is vital.[8]

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