China: Is China's AML showing its teeth to the large state-owned enterprises in China?

China Law Insight
Last Updated: 26 September 2011
Article by Susan Ning, Liu Jia and Sun Yiming

Most recently, the hottest topic on China's Anti-monopoly Law (AML) is a piece of news spread on the internet, indicating that China Telecom, one of China's largest state-owned telecommunications operator is under antitrust investigation conducted by relevant competition authority for its suspected abusive of dominance in broadband market. If were found guilty, China Telecom will face fines according to the AML. Although there is no formal response from China Telecom or the relevant competition authorities, the news is also quoted by Xinhuanet.com, which is an authoritative website run by government.

This article outlines details to do with China Telecom's conduct and examines whether or to what extent such conduct would be considered as abuse of dominance and thus would be considered in breach the AML in China.

Fact

From the news and other public available sources, we understand that the antitrust investigation may focus on whether China Telecom abuse its dominance in broadband market by charging other broadband access competitors the price for using its broadband backbone network much higher than the prices that China Telecom charge for the other internet operators, for the purpose of squeezing out the other operators in broadband access network service.

  • China Telecom's position in the broadband backbone network service and broadband access network service

The broadband backbone network refers to the principal data routes among cities, countries and even continents. In this segment, there are only two nationwide Duopolists, i.e. China Telecom and China Unicom. In fact, rather than competing with each other, China Telecom monopolizes in the broadband backbone network service in the South China, while China Network monopolizes in the North China.

Within the cities and other small areas, broadband access network are built to approach the broadband end-users such as families and enterprises. China Telecom and China Unicom also are big players in providing the broadband access network service, where some other operators including Great Wall Broadband, China Railcom, China Mobile, China Unicom and etc are active in as well. Given that all of these broadband access operators have to connect to the broadband backbone network, they are thus heavily dependant on the main broadband backbone network operators, i.e. China Telecom in the South China, and China Unicom in the North China. Especially that, under "Measures for inter-network settlement at Internet Exchange Center"(hereinafter referred to as "Settlement Measures") promulgated by Ministry of Information Technology and Telecommunications ("MIIT"), these operators are required to pay access fees to China Telecom and China Unicom. Moreover, the highest price of access fees that China Telecom and China Unicom can charge is also provided in the Settlement Measures.

  • China Telecom's alleged abusive conducts

As alleged in the news report as well as some other articles, China Telecom may have charged its direct competitors in the broadband access network service--an access fee that is three times to even a dozen times higher than other types of access users such as Internet Content Provider. By forcing its rivals to pay much higher broadband access costs, China telecom may thus better expand its own business in providing broadband access network service.

In practice, to avoid the hefty broadband access costs, the other broadband access operators usually buy bandwidth from third parties (such as some Internet Content Providers), as the cost is much lower than directly buying from China Telecom.

  • The said antitrust investigation

The investigation is said to be triggered by an August 2010 internal circular in which China Telecom required its provincial branches to root out and prevent the third parties' resale of bandwidth to other broadband access network operators by means of refusing to trade with the third parties and to let them use the broadband backbone network. The measures employed by China Telecom is so called "sweep". The sweep was reported to adversely affect a wide range of broadband access network operators including many state-owned operators, and as a result affected thousands of internet end-customers.

According to some public available sources, the antitrust investigation by "relevant authorities" has already started in the first half of 2011. The relevant authorities have carried out many rounds of inquiries and evidences collection with China Telecom. A number of access operators, research institutions and experts were also asked for verification. Up to the aforesaid news, based on the investigation, the authorities have drawn a preliminary conclusion that the conducts of China Telecom as mentioned above can be found as abuse of dominance. But there are no responses from any government authorities to this so far.

Comments

Since involving some large state-owned enterprises in traditionally highly concentrated industry, although the information needs to be further verified, this news still attracted lots of attention – is this meaning that the competition authorities are ready and eager to show the teeth to the large state-owned enterprises?

  • Whether the abuse of dominance can be found?

Assuming China Telecom's accused conducts truly existed here, we consider that, such behaviors are likely to be caught by Article 17(1) or Article 17 (6) of AML. Article 17(1) provides that dominant operators shall not abuse the dominance by charging unfairly high or low prices. Article 17(6) provides that dominant operator shall not abuse the dominance by "implementing differential treatment for terms of transaction such as transaction price for similar trading counterparts without a valid reason".

As all the abuse of dominance cases, the relevant market is the first thing to be indentified, and then the dominant position needs to be confirmed as well. In relation to Article 17(1), the key issue need to be proved is the unfairness of the high access fee, which, for example, can be drawn from the fact that the access fee is too much higher than China Telecom's relevant costs. In relation to Article 17 (6), although China Telecom may charge broadband access operators and other types of access users at different levels, it is still left to be argued that whether the broadband access operators and the other types of access users are similar trading counterparts. We believe that the testification of "similar trading counterparts" is much more than complicated.

To defend itself from the both accuses, China Telecom may argue that the highest access fee it charges its rivals is still complied with the price cap provided in the Settlement Measures and, in other word, the price charged by China Telecom to other broadband access operators is still complied with the government guidance price in this regard.

This would be a very similar situation compared to the famous Deutsche Telecom case, in which Deutsche Telekom charged a higher access fee in wholesale level than in retail level to force its competitors to charge their end-user higher price (so-called "margin squeeze"). This was found to be an abusive conduct by European Commission in 2003 and confirmed by the European Court in 2008 (Case T-271/03), and the defendant's similar argument was not accepted by the European Court. The Court pointed out that Deutsche Telekom's compliance with the industrial regulation does not absolve it from responsibility under competition law. Besides, we also noticed that, according to the news report, it is China Telecom's sweep (rather than the higher price charged) that triggered the possible investigation. We consider that such sweep itself may also be suspicious in violating Article 17 (3) which prohibits the dominant operators from refusing to transact with trading counterparts without a valid reason. The disputable point in this scenario is that, whether China Telecom has any valid reasons to root out the resale of brandwithsince such resale does not violate any laws or regulations. Nevertheless, it is clear to seen that the key point of issue here is the higher price charged by China Telecom to the other broadband access operators.

  • Who are the investigation authorities and what are the possible results?

In the respect of the possible investigation authorities, although no public sources have given any specific names, since the conducts under said antitrust investigation (not include the sweep1 ) are price-related, the proper investigation authority shall be National Development and Reform Commission ("NDRC").

According to Article 47 of the AML, once an operator was found guilty for abusing dominance, the anti-monopoly enforcement agency, who in this case is possibly NDRC, shall order the operator to stop the illegal act, confiscate its illegal income and impose a fine of 1% to 10% of the sales amount of the preceding year. If such penalties were to imposed, it will not only be the first anti-monopoly fines imposed on state-own enterprises but also will involve a huge sum of money, given that, according to the mid-term report published by China Telecom, the revenue related with broadband access service of the first half of 2011 is almost 30 billion RMB. Furthermore, if fines would be imposed here, it is also interested to see how the "illegal income" and specific amount of fines would be determined, by considering the nature, extent and continuing time of the illegal acts according to Article 49 of the AML.

  • Will the fine be imposed to China Telecom.

Overall, we think it would be an encouraging improvement if NDRC pay much attention on the China Telecom case. Taking a broad view, early this June, the European Commission imposed a fine on a Polish Telecommunications company for abusing its dominant position on the Polish broadband market. We notice that this Polish case as well as the aforesaid Deutsche Telekom case shares many similarities with China Telecom's, from which NDRC might also can get some inspirations, though we doubt that whether the Chinese competition authorities would go such far as the European Commission and Court.

On the other hand, the stakeholders in the industry seem to hold a negative view on the antitrust investigation and the possible fines, and consider this issue may be settled by leaving it unsettled. Some of them believe that the issue in the spotlight can only be addressed by revising the Settlement Measures which provides a too high price cap for the access fee or by reconstructing the whole broadband industry. MIIT who is responsible for updating the Settlement Measures and regulating the industry may also be expected to adopt some measures to solve out the issue. This brings us to the common problem that how the anti-monopoly enforcements and industrial regulations will cooperate with each other when antitrust problems come forth.

We will keep eyes on this case and follow up if the competition authorities will finally start out the tickets.

1 The State Administration for Industry & Commerce ("SAIC") is in charge of the non-price related abuse of dominance.

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