Vertical Price Squeeze Charge Against Deutsche Telekom

The European Commission defines a price squeeze as “an insufficient spread between a vertically integrated dominant operator’s wholesale and retail charges … especially where other providers are excluded from competition on the downstream market even if they are at least as efficient as the established operator.”[1]  Price squeezes are prohibited by the EC as an anti-competitive practice.  A good example of the application of the prohibition against price squeezes is the Deutsche Telekom case.

In 2003, Deutsche Telekom (DT) was found to have abused its dominant position by committing a price squeeze, contrary to Article 82 of the European Commission Treaty.  DT offered local access services at the retail level to end-users and at the wholesale level on an unbundled basis to competitors.  DT was thus active in both upstream and downstream markets.  Beginning in 1998, DT had been legally obligated to provide competitors with wholesale access to its local loops.  Yet, by 2003, competitors had been unable to develop a significant market share.  In 2003, DT enjoyed a 95% market share and was well-entrenched as the dominant service provider.[2]

In its decision finding that DT had abused its dominant position, the European Commission found that DT charged new entrants higher fees for wholesale access to the local loop than what DT charged its retail subscribers for fixed line subscriptions.  The Commission assessed the margin between DT’s wholesale access prices and the weighted average price of its corresponding retail services for access (analog, ISDN, and ADSL).  Given that wholesale access prices were higher than the weighted average of the corresponding retail prices charged to end-users, the Commission determined that the price margin was insufficient for new entrants to compete with DT.  The Commission concluded that DT’s pricing practices constituted a price squeeze.  The Commission further concluded that DT’s pricing for local access services deterred new competitors from entering the local access market and reduced the choice of telecommunications service providers for consumers and suppressed price competition.

The European Commission rejected DT’s argument that, at the retail level, call charges should be aggregated with subscription charges. The European Commission argued that DT should have rebalanced its tariffs to ensure that all underlying wholesale costs (including those of the local loop) were recovered fully by monthly subscription charges.

The European Commission fined DT €12.6 million for an Article 82 violation.[3] DT appealed this decision to the European Court of First Instance (CFI).

Article 82, European Commission Treaty
Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.
Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

In 2008, the European CFI upheld the European Commission’s 2003 decision in its entirety and rejected all pleas advanced by DT.[4]  The Court upheld the method used by the European Commission to determine that a price squeeze existed.  The Court noted that the Commission correctly relied on the fact that there was an insufficient spread between retail and wholesale prices for local access to establish that DT’s pricing policy was an abuse of dominance; it was not necessary under the circumstances to demonstrate that the retail prices, being lower than wholesale prices, were predatory and abusive.  The European CFI also held that the Commission was correct to base its analysis of DT’s pricing practices on a comparison between wholesale access prices for unbundled local loops and a weighted average of retail prices for all of DT’s end-user access services (analog, ISDN, and ADSL).

The European CFI clarified that the fact that DT’s rates had to be approved by the German regulator did not absolve DT of its responsibility to comply with competition law.  The Court held that DT, as a dominant operator, had a positive obligation to submit applications to adjust its rates as soon as its rates had the effect of impairing genuine, undistorted competition on the common market.

End Notes

[1] Commission Decision of 21 May 2003 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-1/37.451, 37.578, 37.579 Deutsche Telekom AG) [2003] OJ L 263/9, para. 108 [“Deutsche Telekom 2003’], citing Notice on the application of the competition rules to access agreements in the telecommunications sector [1998] OJ C 265/2, para. 118 & 119 [“Access Notice”].

[2] Deutsche Telekom 2003, ibid., para. 208.

[3] Deutsche Telekom 2003, ibid., para. 212.

[4] Deutsche Telekom AG v. Commission of European Communities, [2008] European Court of First Instance, Case T-271/03.

Related Materials

Comparative Approaches to Price Squeezes and Abuse of Dominance

Learn More