There are only three fully-fledged mobile operators operating in the domestic telecommunications services market. According to Lukáš Nezpévák, a partner at Sokol Novák tdpA, the question of whether this is sufficient competition has been raised many times in the past, especially in connection with international price comparisons in which the Czech Republic did not fare well. “Dual control – by the Office for the Protection of Competition and the Czech Telecommunications Office – sets up sufficient mechanisms for effective protection of competition, which will ultimately be felt as an advantage by customers,” adds Martin Doleček, an equity partner at the law firm.

In any case, the entry of another major player into the market would help the competition. It has not happened yet, despite the efforts of the state. During the last major watershed in 2020, when the auction of frequencies for 5G networks was held, the CTO set the conditions in such a way as to support the entry of new competition. “That in itself was a significant public intervention in the market environment,” Doleček notes. At the same time, he adds that the often discussed significant reduction in the prices of telecommunications services is being delayed by the higher investments that the new operator would have to make due to all the regulations.

Telecommunications in the Czech Republic is dominated by three large players, but there are also many smaller providers on the market. Are there any specific competition rules for operators?

Martin Doleček: The area of providing telecommunications services is subject to both general competition law and sectoral regulation contained in the Electronic Communications Act, compliance with which is supervised by the Czech Telecommunications Office (CTO). In this respect, telecommunications service providers are de facto subject to dual supervision, namely supervision carried out by the Office for the Protection of Competition (OPC) and supervision carried out by the CTO. In this context, the latter has specific authorizations and tools enshrined in the legal framework contained in the Electronic Communications Act, including in relation to so-called undertakings with significant market power.

Competition regulation is then applied in this context both through instruments specifically designed in relation to undertakings with significant market power and through indirect instruments, for example in connection with the allocation of radio frequencies as a specific commodity necessary for full-fledged operation in the field of providing telecommunications services.

How does this manifest itself?

Lukáš Nezpévák: There are only three full-fledged mobile operators operating on the telecommunications services market, and therefore, in connection with the implementation of frequency auctions, the CTO usually tries to set their conditions in such a way as to either allow the entry of a new full-fledged mobile operator, or at least for existing mobile operators to allow the entry of alternative telecommunications service providers through access to wholesale services.

How is it assessed in practice whether an operator is abusing its dominant position?

LN: Abuse of a dominant position falls within the scope of general protection of competition, which is carried out by the OPC. The Office usually assesses this issue on an ad hoc basis. It must first define the relevant market and then examine whether the undertaking concerned has a dominant position on this market, which is assessed in particular according to the level of market share, access to infrastructure and barriers to entry.

It then assesses whether the operator's specific actions constitute an abuse of dominance – for example, in the form of price predation, margin squeeze, discriminatory conduct, refusal of access to essential infrastructure or tying. The key consideration is whether such conduct has a negative impact on competition, i.e. whether it prevents effective competition or harms consumers. In such a procedure, the Office relies on established Czech and European decision-making practice, as shown, for example, by the Telefónica cases or the assessment of access of virtual operators to mobile networks.

When can a regulatory authority intervene in the telecommunications services market?

MD: Intervention in the telecommunications services market can essentially be of two types. The first is related to the previous issue of abuse of dominant position and the general protection of competition carried out by the OPC. With the exception of assessing mergers between competitors, the Office usually intervenes only in response to the disruption or threat of disruption of competition as a result of concluding a prohibited agreement or abuse of dominant position, and thus intervenes in competition by imposing a sanction for specific conduct by which competition was disrupted or threatened.

The second form of intervention is sectoral regulation carried out by the Czech Telecommunications Office, which, on the contrary, has a rather preventive character based, among other things, on the obligation of the CTO to conduct regular market analyses and, on their basis, apply the tools enshrined in the Electronic Communications Act.

What tools are these?

MD: A typical example is a situation where the CTO, based on its analysis, finds that there is no effective competition in the market, for example due to the existence of an undertaking with significant market power. Intervention is considered in particular if the market is not able to ensure a competitive environment on its own and there is a risk that competition could be distorted or end users could be harmed. In such a case, the CTO may impose so-called ex ante regulatory measures, such as the obligation to provide network access, price regulation, transparency or non-discrimination. Intervention is always subject to a prior market analysis and the finding that corrective measures under the general competition rules would not be sufficient to protect competition and consumers.

Another form of intervention in the telecommunications services market are the aforementioned auctions of radio frequency allocations, through the conditions of which the CTO can regulate who can apply for such allocations and in what way, or under what conditions, they can subsequently use these allocations.

How often does this happen in the Czech Republic?

LN: The CTO is legally obliged to conduct periodic analyses of the telecommunications services market, therefore the application of regulatory instruments foreseen by the Electronic Communications Act occurs on a regular basis. Similarly, interventions, or at least investigations by the OPC in the telecommunications services market, are not exceptional.

Any market always tends towards consolidation when players merge, because, as economic theory says, from a company's perspective, the most interesting market structure is a monopoly. How intense has the merger of companies on the domestic market been in recent years?

LN: As already mentioned, there are three fully-fledged mobile operators in the Czech Republic, namely O2, T-Mobile and Vodafone, which steadily control most of the market. Therefore, when competitors merge in the field of telecommunications services, this usually happens through acquisitions of smaller players or alternative telecommunications service providers, or through various forms of cooperation between competitors with the aim of achieving economies of scale, for example in connection with investments in modern technologies.

Can you give some interesting examples?

MD: Key events in recent years include Vodafone's acquisition of UPC Czech Republic in 2019, which allowed Vodafone to expand its fixed-line operations and offer converged services. Last year, the European Commission approved the acquisition of PPF Group's telecommunications assets in Bulgaria, Hungary, Serbia and Slovakia by a company from the United Arab Emirates, with the Czech part of PPF Group's business remaining outside of this transaction.

What impact does antitrust regulation have on market consolidation?

LN: Key, because it determines the boundaries of mergers and cooperation between competitors so that competition is not distorted. In the Czech Republic, the aforementioned OPC is responsible for this area, which examines whether a planned concentration, for example the merger of two mobile operators, will significantly restrict effective competition, in particular by creating or strengthening a dominant position.

In this context, it is possible to mention, for example, that in 2013 the European Commission banned the merger of mobile operators Telefónica UK (O2) and Hutchison 3G UK precisely because of concerns about the restriction of competition. A similar logic would apply in the Czech Republic, where the consolidation between O2, T-Mobile and Vodafone would face very strict assessment. In this context, it is possible to mention the network sharing agreement between O2 and T-Mobile, which was the subject of an investigation by the European Commission.

In some cases, mergers of smaller competitors, for example in the fixed network sector, are permitted because they increase investment capacity and improve services without seriously impacting competition.

Can you describe your experience in assessing the impact of mergers and acquisitions on market competition?

MD: It is a complex and often very technical activity that goes beyond formal market share calculations. The key starting point is the definition of the relevant market, both in terms of product and geographic. It is then assessed whether the concentration will lead to the creation or strengthening of a dominant position or whether it would significantly impede effective competition, including in the case of a joint dominant position of several entities, i.e. the so-called collective dominance.

In practice, indicators such as HHI (Herfindahl-Hirschman Index) are often monitored to quantify the degree of concentration, but also so-called competitive pressures – for example, whether there are sufficiently strong competitors on the market who can correct the newly created entity, or whether there are barriers to entry for new players. Market dynamics are also important, as in stable markets with high barriers to entry the scope for regulatory intervention is significantly greater than in rapidly developing segments.

Our experience shows that for larger transactions, it is common for the OPC to consult with market stakeholders, such as competitors, business partners or customers, and often impose structural or behavioural conditions that must be met for the merger to be approved, typically the sale of part of the assets, the opening of infrastructure, or commitments regarding price and quality of services.

In the past, there has been a lot of passion across Europe about building 5G networks and excluding some hardware providers from this strategic investment. What is the situation in the Czech Republic with the regulation of new technologies and to what extent has the introduction of 5G affected public law rules?

MD: In the Czech Republic, the deployment of 5G networks was indeed influenced not only by technological and investment aspects, but also by regulatory and security rules, which were based on both the European and national frameworks. Public law rules played a significant role in two areas in particular: regulation of access to the frequency spectrum and security requirements for technology suppliers.

From a regulatory perspective, the CTO played a key role, having auctioned frequencies in the 700 megahertz and 3.4–3.6 gigahertz bands specifically intended for building 5G networks in 2020. The auction conditions were set to encourage the entry of a new player and strengthen competition, which in itself was a significant public intervention in the market environment.

Perhaps the security requirements had an even more significant impact?

LN: In response to the European “5G toolbox” and EU recommendations, member states have started to assess “high-risk suppliers”. In the Czech context, this meant that the National Office for Cyber and Information Security (NÚKIB) identified Huawei and ZTE technology as risky in 2018, still in connection with 4G/5G infrastructure. Although this is not a ban in the legal sense, the state has sent a strong signal to both public institutions and operators to take security aspects into account when selecting suppliers.

As a result, some operators changed their planned suppliers, which affected the costs, timelines, and strategic direction of 5G investments. At the same time, the state indirectly influenced the shape of the market environment and opened up space for European or North American technology suppliers such as Ericsson or Nokia.

In September last year, the NÚKIB issued another warning. It identified the transfer of system and user data to the People's Republic of China and its territories as a threat to cybersecurity, as well as the remote management of technical assets carried out from these territories, which was directly reflected in the requirements of public procurement authorities in the field of electronic communications, to which not only operators but all providers of supplies and services in this area must currently respond.

What must a new market player meet from a technology regulation perspective?

MD: A whole range of requirements that vary depending on whether it concerns the provision of services, the construction of infrastructure, or the use of radio spectrum. In general, it can be said that the legal framework in this area is strongly influenced by European directives, but the specific application is the responsibility of national authorities, in particular the CTO and NÚKIB.

Another big topic today is the moderation of content that is spread over the internet. What can telecommunications operators do in this regard and what must they do?

MD: Telecommunications operators in the Czech Republic have a specific role in content moderation on the Internet, which is defined in particular by legal regulations on electronic communications, personal data protection, but also laws aimed at combating illegal content. Mobile operators can implement technologies for filtering or blocking access to certain websites or services if they have a legal basis for doing so, for example, based on a court decision or a call from state authorities.

Operators who are information society service providers under the Act on Certain Information Society Services implementing the European Directive on e-commerce are obliged to take reasonable measures to limit the dissemination of illegal content if they have been informed of this by a competent authority or court. On the other hand, although they have the possibility to block content, they must respect the principle of net neutrality, which means that they may not discriminate against traffic based on content, origin or destination unless they have a legitimate reason to do so. Finally, mobile operators must also respect the rules of the GDPR and other legal standards for the protection of user privacy when moderating and processing data.

How does Czech law deal with the issue of disconnecting users from the internet due to violations of the law?

LN: As follows from the previous question, national regulation in the Czech Republic is based on moderating, or rather blocking, specific content that contradicts generally binding legal regulations, both under the aforementioned Act on Certain Information Society Services and, for example, under the Act on Gambling. Based on this, internet access providers are obliged to prevent access to websites listed on the list of unauthorized internet games maintained by the Ministry of Finance of the Czech Republic.

In the past, regulation allowing disconnection of users from the Internet, for example in connection with sharing specific illegal content, was discussed, however, this was not introduced into the Czech legal system. In specific situations, specific devices connected to the electronic communications network may be blocked or disconnected, for example in a situation where these devices do not meet the conditions for their operation, or in connection with the performance of actions within the framework of criminal proceedings.

If we take the domestic rules for the very dynamic telecommunications sector as a whole, what do you consider to be the greatest advantage and what, on the contrary, the greatest weakness?

LN: I believe that Czech legislation, which places great emphasis on the security of telecommunications networks, sets clearly defined boundaries within which it is possible to operate. This allows mobile operators to plan long-term investments in a predictable environment.

MD: Also, the dual control, both by the OPC and the CTO, sets up sufficient mechanisms to effectively protect competition on the Czech market, which will ultimately be felt as an advantage by customers and end users. From the perspective of consumers, the weakness of the current legislation, or rather the protective mechanisms on the electronic communications market, can be considered, for example, the necessary higher entry costs that a potential new operator must incur in order to comply with all regulatory measures. The often discussed significant reduction in the prices of mobile operator services is being delayed precisely by this higher entry investment.

Source: ieuro.cz