The High Court has found that Telecom (Telecom Corporation of New Zealand and Telecom New Zealand Limited) used its substantial market power to prevent and deter competition in markets involving high-speed data transmission. The Commerce Commission claimed that Telecom contravened section 36 of the Commerce Act, which prohibits firms with a substantial degree of market power from taking advantage of that power for an anti-competitive purpose.

High-speed data transmission services allow businesses to transmit information in digital form between sites across established private networks or to other businesses. The Commission's case focused on Telecom's wholesale pricing of data 'tails', which are parts of the connection to a customer that Telecom's competitors must acquire from Telecom where their networks do not reach the customer. The Commission issued its proceedings in March 2004. During the period of the relevant conduct, the market for high-speed data transmission services was worth an estimated $120 million per year.

In its judgment, publicly issued today, the High Court in Auckland determined that from 2001 to 2004 Telecom leveraged its position to charge downstream competitors disproportionately high prices for wholesale access to its network, preventing them from offering retail end-to-end high-speed data services on a competitive basis. The Court found that Telecom's wholesale prices for access often exceeded its retail prices for the service, and that Telecom's pricing was also directed to deterring existing or potential competition in the national wholesale market for backbone transmission services. In particular, the Court found that Telecom's wholesale data tail pricing to competitors was consistent with its strategy to deny competitors access at prices that would permit the rivals to utilise and develop their own networks for the purpose of data transmission.

"The Commission is pleased with the Court's decision, which confirms that dominant firms must price essential inputs to a competitor in a downstream market so as to enable efficient competitors to compete," said Commerce Commission Chair Dr Mark Berry. "The Court has confirmed the application of economic models that are used to determine a contravention of the Commerce Act in access pricing cases."

"Today's judgment is a timely reminder that the Commerce Act prohibits those with substantial market power from taking advantage of their position for anti-competitive purposes. This important prohibition can apply even in regulated industries, to the extent that such firms are not constrained by the regulatory regime in question," said Dr Berry.

The imposition of a penalty against Telecom was reserved by the Court for separate consideration. Telecom has 20 working days in which to appeal the decision. The High Court's judgment is available on the Commission's website www.comcom.govt.nz under Litigation Register.

Background

Many businesses, for example banks, operate from multiple sites within New Zealand (and often overseas) and need to regularly and securely transmit large volumes of data between these sites and/or establish a permanent private network amongst them. To meet this need, telecommunications companies offer such businesses a variety of high-speed data transmission services.

On or about 1 December 1998, Telecom introduced new pricing for its retail high-speed data transmission services (termed Streamline), and in March 1999 Telecom introduced new wholesale pricing (termed carrier data pricing (CDP)). Through CDP, Telecom provided and continues to provide, the other competing telecommunication service providers two wholesale data service options:

a) the ability to resell Telecom's retail high-speed data transmission services (both dedicated and switched). Through CDP, Telecom offers other telecommunications service providers its retail end-to-end high-speed data transmission services for re-sale; or

b) access to dedicated data tails in Telecom's network in order to supplement the other telecommunications service providers' own network and, thereby, provide retail high-speed data transmission services.

The Commission alleged that the manner in which the service option in (b) above was provided, and the way in which it was priced had the effect that in almost all circumstances the price charged by Telecom for access to data tails required by other telecommunication service providers in order to supplement their own network:

a) exceeded the price charged by Telecom to the telecommunication service provider for an end-to-end data service when provided for re-sale;

b) exceeded the comparable retail price charged by Telecom for provision of comparable data services;

c) exceeded the price Telecom charged itself for access to the data tails; and

d) exceeded the sum of Telecom's direct incremental cost and opportunity cost of supplying access to the data tails.

Since 26 May 2001, section 36 of the Commerce Act prohibits persons who have a substantial degree of market power in a market from taking advantage of that position for anti-competitive purposes, including preventing or deterring competitive conduct by others. Prior to 26 May 2001, the prohibition under the Commerce Act was the use of a dominant position for an anti-competitive purpose.

The Commission alleged that Telecom was dominant and had a substantial degree of market power. While alternative network infrastructure had been developed in selected areas, Telecom still owned and operated the only nationwide telecommunications network in New Zealand.

A firm that contravenes section 36 of the Commerce Act may be ordered to pay pecuniary penalties pursuant to section 80, which provides that any penalty must not, in respect of each act or omission, exceed the greater of:

(i) $10,000,000; or

(ii) either

(A) if it can be readily ascertained and if the Court is satisfied that the contravention occurred in the course of producing a commercial gain, 3 times the value of any commercial gain resulting from the contravention; or

(B) if the commercial gain cannot be readily ascertained, 10 per cent of the turnover of the body corporate and all of its interconnected bodies corporate (if any).