András Tóth: The Promotion and Protection of Investments in the European Competition Law and the Electronic Communication Regulation (IJ, 2008/1., (23.), 39-44. o.)

1. Introduction

The issue of investment protection has got into the centre of scientific interest in the course of the review of the electronic communication regulatory framework in 2006. According to a study[1] prepared by the Commission 25% of the respondents believed that the regulation encouraged investments and 18% of them thought that the uncertainty in the regulation set back investments. These numbers show that the majority of the market players in practice do not recognize the actual relationship between regulation and incentives for investments, despite the fact that they often use the arguments related to this.

Protection of investments has become a hot issue in competition law with the Microsoft case[2] where the interest to keep up the development of a whole sector has come into conflict with the protection of individual innovations,

This article intends to give an overview of how electronic communication and competition laws handle the question of investments.

2. Promotion and protection of investments in the European electronic communication regulation

One of the main principles of the European regulatory model for electronic communication besides technology neutrality, proportionality, and internal market is the promotion and the protection of investments.[3]

The European electronic communication regulation is based on the static efficiency "competition on networks" model meaning that it aims to achieve the competitive outputs by intra modal or access competition in short time. However, the long-term "aim of the new regulatory framework is ultimately to achieve a situation where there is full infrastructure competition (i.e. inter modal) between a number of different infrastructures. This can occur within or between platforms. Regulation mandating access to existing networks serves as a transitional measure to ensure services competition and consumer choice until such time as sufficient infrastructural competition exists."[4]

The long-term aim of the regulation could only be achieved by strong efforts to make investments. At the same time, short-term access competition may seem to undermine this aim since it creates the typical free riding problem and discourages newcomers to make investments into infrastructure.[5] This, therefore, requires a system within the regulatory framework that in parallel ensures promotion and protection of investments in infrastructure as well.

According to de Streel the three criteria test already contains an investment safeguard, namely the second criterion that relates to dynamic considerations.[6] However, such a safeguard may not be able to provide sufficient legal certainty for investors.

2.1. Investment protection within the regulatory framework

The requirement of the protection of investments arises from the regulation on undertakings with significant market power (SMP). In high-tech markets innovation may be twofold: on the one hand it promotes competition (i.e. the competition key drivers), on the other hand, it creates monopolistic position which might be a starting point for anti-competitive effects.[7] The reasons of this can be found in the specific features of the high-tech market such as the lock-in and network effects, the winner-takes-all strategy and the low marginal costs.

Investments can lead to both first-mover-advantages and the mere strengthening of monopolistic position. Protection shall be

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addressed only in case of the former.[8] Recital 27 of framework directive[9] notes that in emerging markets where the de facto market leader is likely to have a substantial market share should not be subject to inappropriate ex-ante regulation. There are several reasons against the regulation in this regard, even in the scenario where a first mover enjoys substantial market shares.[10] First, high market shares of the first mover are contestable because there are low entry barriers.[11] Second, even if there is market power regulators should forbear because the first mover should be able to recoup its investment risk and its incentives to invest should be preserved.[12] Third, premature imposition of ex-ante regulation may unduly influence the competitive conditions in that market.[13] Therefore, leveraging of market power from an established market into an emerging market shall be dealt with by competition law.[14]

Although the regulatory framework does not define what emerging market is potentially it is meant to be a market where there is insufficient information to carry out the necessary market definition procedures and the three criteria test as to whether the market is susceptible to ex-ante regulation or not.[15] The ERG notes that such markets will normally not be selected for regulation because it is not possible to assess the three criteria test as there is a high degree of demand uncertainty and entrants to the market bear higher risk. The emerging market differs from the regulated one, i.e. it is not part of any existing one.[16] Similarly ERG defines emerging market as distinct from a market that is already susceptible to ex ante regulation from both a demand and a supply side perspective.[17]

Due to the undefined concept of emerging market the amendment of the German telecommunication act in 2007 incorporates a new Section 9a according to which the inclusion of a new market into the market regulation shall generally take place only if facts justify the assumption that otherwise the development of a sustainably competition-oriented market would be durably impeded. The Commission has launched an infringement procedure against Germany arguing that the amendment gives regulatory holiday only to Deutsche Telekom, i.e. the incumbent would be exempted from regulation which could stifle competition and therefore violate the community law.. "In the Commission's view, the German law jeopardizes the competitive position of Deutsche Telekom's existing competitors and makes it much harder for new competitors to enter German markets. It also attempts to influence the German regulatory authority in charge of electronic communications on whether or not to grant competitors' access to the new VDSL-network currently being built by Deutsche Telekom. The new law therefore interferes with the authority's discretion in defining and analyzing markets under EU rules. It is a legislative response to Bundesnetzagentur's decision in September 2006 to address Deutsche Telekom's significant market power in the German wholesale broadband market."[18]

It is useful to distinguish between retail and wholesale emerging markets. The relationship between emerging market and its regulation is illustrated in the table below: