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Telefonica alleged to have abused Czech DSL market with margin squeeze

We were a little shocked to hear that Dial Telecom Group is filing a lawsuit for 4 billion Czech Korunas against Telefonica in the Czech Republic

By PETER WHITE

Published: 7 April, 2011

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We were a little shocked to hear that Dial Telecom Group is filing a lawsuit for 4 billion Czech Korunas against Telefonica in the Czech Republic. Even when we realized that this amounted to barely $233 million or €164 million, we were still a bit surprised and couldn’t quite see how the Czech broadband marketplace size justified it.

The accusation is from the Dial Telecom Group, which bought local ISP Volny from Austria Telekom, and it claims the issue is about the ADSL pricing policy at Telefonica, which Volný says made it impossible to make money on broadband in the Czech Republic.

We’re not sure that anybody has got to the bottom of this yet but what it might be is that back in 2005 Telefonica bought Cesky Telecom, the national incumbent telco there, and this may be about the wholesale or unbundled line rental prices it charged to ISPs at the time. It was unlikely they would have yet been regulated by anything the European Commission had done at that time, and it probably had the power to overcharge and push people out of the ISP business when they were using its lines. The complaint is said to talk about a “margin squeeze,” so this would make sense.

Cesky was renamed with the Telefonica and O2 brands, and cut its pricing during 2006 and beyond to something like $30 a month for broadband, so this cannot be about its consumer prices, and is more likely that its wholesale or unbundled connection price was around the same, with not enough margin to make money.

Anyhow the case has enough merit that the Office for the Protection of Competition in the Czech Republic has confirmed that it also is working on administrative proceedings with the company and has requested some answers from Telefónica O2 Czech Republic over an alleged breach of European competition rules.

It goes on to say that this might be a breach of dominant position, which is quite tough considering that even today Telefónica O2 Czech Republic only has 899,000 ADSL broadband lines, although this is a big step up from the 250,000 or so it inherited all that time ago. Volny says this amounted to a 95% market share at its height and that even today it has 82% DSL market share, even though DSL as a technology only has only a quarter of the market for internet connections.

The Czech Republic back then was known for having very little copper in the ground and out of its 5 million or so homes, not many more than around 1.5 million or so that would have had twisted pair to the home. But since then a lot of fiber has been built out and Volny and the Dial Telecom Group are among those laying it. It added another 100 Kilometers of fiber, it said, this year alone.

This year Volny has been forced to drop the IPTV service it had launched under Austria Telecom, and focus instead purely on broadband. The company says it has hired the international law firm Pierstone to handle its claims, which relate to the years 2004–2010.

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