Deutche Telekom

1) Describe the market for telephony services prior to the enactment of the 1996 Telecommunication Act in Germany. Why is it unlikely that DT would face new competition in the market for retail fixed-line telecommunication services prior to 1996?

Deutsche Telekom operates and owns the fixed telephone network in Germany. Prior to 1996, the German State was the sole owner of DT and provided all the resources for building its fixed telephone network. Being a legal monopoly, DT had been the only provider of retail fixed-line communication services before 1996. The company was unlikely to face any competition at that time due to its extensive nationwide coverage. Any potential competitors had to overcome the economies of scale experience by DT, as well as invest large amounts of money for developing a network infrastructure in order to provide retail telecom services. All of the aforementioned factors created a major barrier for entry and made any competition highly unprofitable.

2) In what forms could local-level wholesale access to DT's fixed-telephone network take? Describe the price structure for wholesale access to this network. Describe how DT's wholesale prices were regulated.

Local-level access to DT's fixed-telephone network could take two different forms: line-sharing and unbundled access to a local loop. In the first case, competitors were required to pay fees to DT for the shared use of local loops. This type of wholesale access allowed DT, as an incumbent firm, to use the same line for its own telephony services, as well as permit a competitor to offer a new service (such as high-speed Internet) via the same line.

As for full unbundled access, it permitted a new market entrant to completely gain control over certain local loops. In this case competitors did not need to use the incumbent's switching facilities anymore for they had their own loops.

In accordance with German law, wholesale access prices must have a cost basis and should be authorized first by the regulation authority. DT is also not allowed to change those prices for different entrants or give any special discounts. In 1998 Deutsche Telekom's application to charge EUR 309.84 for opening a new connection and EUR 135.49 for taking over an existing line was approved by the regulatory authority. However, the proposed monthly charge of EUR 14.7 for unbundled local loop access was not accepted; the regulatory authority set the price to EUR 10.56, requiring DT to provide more detailed and accurate cost calculations.

After several years, in 2003, DT was authorized to change the monthly fee of EUR 11.80 for the unbundled access, but in the meantime, the company had to reduce its one-time chargers to EUR 81.12 for a new connection, and EUR 70.56 for taking over an existing line.