FIRST DRAFT OF COMPETITION RULES FOR 4C INDUSTRIES

01/01/2002

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With the advance of communications networks and digital technology, convergence in the de-velopment of communications, broadcasting and information technology is the trend for the future. The gradual liberalization, relaxation of statutory constraints and removal of controls will give rise to greater cross-sector operation and competition within and the "4C" industries, i.e., telecommu-nications, cable TV, computer networks and e-commerce. To ensure fair competition in these sectors, on 16 November 2001 the Fair Trade Commission (FTC) released an initial draft of the Guidelines for Fair Competition in Cross-Sector Operations in the 4C Industries. The finalized guidelines are expected to be for-mally announced and come into force early 2002.

Cross-sector operations in the 4C industries generally fall into two categories: cross-ownership, and joint provision. Cross-ownership refers to an enterprise gaining entry into a different but related market sector by means of merger, acquisition, or new branch operations, for example when a telecommunica-tions operator gains access to the cable TV market through a merger with a cable TV op-erator. Joint provision refers to an enterprise using its existing basic networks, services, technology or operational expertise to provide services originally belonging to another market segment, for example when a telecommunica-tions operator uses its telecommunications net-work to provide video-on-demand services, or when a cable TV operator uses its cable network to provide cable telephony services or cable modem broadband access services.

Cross-ownership and joint provision in the 4C sectors will gradually blur the boundaries be-tween these related markets. This is conducive to greater competition and increased consumer choice in all these markets, but it may also lead to excessive concentration of economic power or inappropriate leverage of market power, with the attendant risk of market competition being re-stricted or technological development being impeded. If such activities also contravene the provisions of the Fair Trade Law (FTL) regard-ing business combinations or concerted action, or its provisions concerning abuse of monopoly power or acts of unfair competition, there is a need for the FTC to intervene.

As currently drafted, the guidelines comprise six chapters. Chapter 1 briefly outlines how the FTL regulatory framework relates to cross-sector op-erations and market competition in the 4C sec-tors. Chapter 2 defines the purpose and intended scope of the guidelines. Chapter 3 describes the regulatory framework for competition in the 4C industries. It analyses the relationship between sector-specific regulations for the 4C industries and general competition rules, the coordination between the regulatory authorities for the spe-cific industries and the competition law regula-tors, and the regulatory principles to be jointly adhered to when planning competition policy or devising rules to regulate competitive acts. Chapter 4 delimits the markets and analyses competition within them. It explains the concept of related markets in competition law, how a market is defined, and the methods used to assess market share and market power. Chapter 5 covers abuse of dominant market position, and gives examples of ways in which joint provision in the 4C industries might constitute such abuse. Chapter 6 covers other actions in restraint of competition, and explains how cross-ownership in the 4C industries may fall foul of the FTL's provisions concerning business combinations and concerted action.

Where joint provision in the 4C industries con-stitutes abuse of dominant market position, it is likely to contravene Articles 10 or 19 of the FTL, violation of which can be penalized with ad-ministrative fines up to a maximum of NT$25 million. Ways in which joint provision may constitute abuse of dominant market position are as follows:

Abuse of an essential facility

An essential facility is one that meets the fol-lowing criteria:

It is controlled by a monopoly enterprise;

Competitors cannot replicate it in the short term in an economically rational way;

Competitors that are unable to use the facility will be unable to compete with the entity that controls the facility; and

The controlling entity is able to make the fa-cility available for use by competitors.

In future, where an enterprise has control over an essential facility, such as a telecommunications operator with local subscriber lines, a cable TV operator with a transmission and distribution network, or a digital TV operator with condi-tional access services or access control services, if without legitimate grounds it denies or inter-rupts access to the facility to a competitor, or treats its competitors unequally in providing ac-cess to the facility, such as to restrain competi-tion, this may violate FTL Article 10.

Improper leverage of market power

If without legitimate grounds a 4C enterprise that is engaged in joint provision uses methods such as tie-in or bundling to expand its market share in the new service, thereby exploiting its existing market power in the market for the new service, this may violate FTL Articles 10 or 11 if it has the effect of restraining market competition. Examples would include a telecommunications operator providing telephony services in com-bination with ADSL broadband access services, or a cable TV operator providing cable TV signal services in combination with cable modem broadband access services.

Predatory pricing

Pricing meeting the following three conditions qualifies as predatory:

An enterprise prices a product or service below its average variable cost, or its average in-cremental (when joint cost accounts for a high proportion of total cost);

The enterprise attempts to use pricing to ob-struct or exclude competitors; and

The enterprise has the ability to recover losses incurred and to raise prices to monopoly levels after obstructing or excluding competitors.

If a 4C enterprise with monopoly status and en-gaged in cross-sector operations practices predatory pricing with the intention of obstruct-ing or excluding specific market competitors, this may violate FTL Article 10.

Undue cross-subsidies

An enterprise may be found to be practicing undue cross-subsidization under the following circumstances:

Services provided by the enterprise show a long-term imbalance of profit and loss; or

Company-internal transactions between dif-ferent divisions of the enterprise are con-ducted at unreasonable prices or levels of re-muneration.

If without justifiable reasons a 4C enterprise uses surplus revenue from a monopoly business to subsidize a competitive area of business, or uses surplus revenue from regulated business to sub-sidize an area of deregulated business, this may violate FTL Article 10.

Raising rivals' costs

If in order to exclude downstream market com-petitors, an enterprise that has control of a factor of production (such as network interconnection or circuit leasing services provided by a tele-communications enterprise) makes improper decisions as to the pricing of the factor of pro-duction in question, as a means to increasing the operating costs of competitors and thereby forcing them to withdraw from the market, this may violate FTL Article 10.

Examples of cross-ownership activities by 4C enterprises that may violate FTL provisions on business combinations and concerted action are as follows:

Business combinations

If 4C enterprises wish to establish cross-ownership by means of mergers, cross in-vestments, joint ventures or strategic alliances, and the arrangements meet any of the definitions of a business combination set out in FTL Article 6, and also meet the thresholds defined in Article 11, the enterprises must apply to the FTC for approval.

Concerted action

Actions by 4C enterprises that may constitute concerted action include:

Joint pricing;

Restricting output or dividing markets;

Concerted actions involving the exchange of competition-sensitive information;

Joint action against another party;

Joint research and development and joint definition of technical and quality standards; and

Strategic alliance activities. A strategic alli-ance is defined as a vertical cross-sector alli-ance intended to integrate business procedures, monetary flows, logistics, and information flows. Because participating enterprises come from different sectors and are not in competi-tion with each other, such alliances do not normally qualify as "concerted action." However, business-to-business (B2B) and business-to-consumer (B2C) web sites apply a business model of providing a trading plat-form for use by multiple enterprises. If such a site enables enterprises that supply goods or services of the same type to collectively quote prices, perform advertising and marketing, and trade in a uniform manner on the same web site, this may be held to be concerted ac-tion. This can be compared with the situation that would apply in the non-virtual world if different enterprises were to commission the same management consultancy company to operate on their behalf.