CN12 - Italian court annuls Vodafone Italia margin squeeze fine
13 October 2021
On 15 September 2021, the Italian administrative court of first instance ("TAR Lazio") upheld the appeal brought by Vodafone Italia S.p.A. ("Vodafone") against the decision of the Italian Competition Authority ("ICA") of 13 December 2017 in case A500(A).
The TAR Lazio found that the ICA had incorrectly applied the "as efficient competitor test". As a result of that error, the ICA erroneously established the existence of a margin squeeze in the bulk SMS market. Therefore, the TAR Lazio annulled the ICA's €5.7m fine.
Key takeaways
- In margin squeeze cases, the ICA is required to apply the "as-efficient competitor test".
- When applying the "as-efficient competitor" test, the ICA is required:
- to identify the competitors of the dominant company; and
- to calculate the price that would allow an as efficient competitor to recoup its costs and generate a profit margin.
The ICA's investigation
On 13 December 2017, the ICA found that Vodafone had abused its dominant position in the wholesale market for SMS termination on its own network, by charging the so called "D43 Operators" (i.e., undertakings active in the downstream bulk SMS retail market) prices that were higher than those Vodafone charged to its own divisions active in the bulk SMS retail market.
According to the ICA, Vodafone's conduct resulted in a margin squeeze to the detriment of as-efficient competitors active in the provision of bulk SMS services, which are "packages" of SMS services purchased by large companies, such as banks, insurance companies, supermarkets, etc., for marketing communications to their customers, to be sent via mobile network operators ("MNOs").
The TAR Lazio's ruling
On 15 September 2021, the TAR Lazio annulled the ICA's decision on various grounds.
First, the court found that the ICA had incorrectly applied the "as efficient competitor" test. In particular, the court ruled that the ICA was required to assess whether Vodafone's retail divisions could profitably compete if they had to pay the same wholesale price Vodafone charged third parties for the purchase of a specific input which, in this case, was the right to deliver an SMS on Vodafone's network. When calculating the price of that input, the TAR considered that the ICA incorrectly took into account only the wholesale price charged by Vodafone to the D43 operators, which excludes the price paid to Vodafone for that input by other types of purchasers, such as aggregators, which purchase SMS termination services from MNOs and the D43 Operators for resale. In fact, the ICA had wrongly considered that aggregators were final customers, similar to banks and other large corporate clients. However, the ICA should have treated aggregators as competitors.
Second, the ICA did not demonstrate that the final product (bulk SMS) was only affected by the input provided by Vodafone. This was a necessary element of the test to determine whether the price charged by Vodafone was capable of excluding the D43 operators from the downstream market. In fact, each bulk SMS is generally made up not only of messages to be dispatched on the Vodafone network, but also of messages to be dispatched on the networks operated by the other two MNOs active in Italy (TIM and Wind Tre). The price of the right to terminate an SMS on Vodafone's network therefore represented only a portion of the cost incurred by Vodafone's competitors active on the bulk SMS retail market. Therefore, according to the TAR Lazio, there was no evidence that the prices charged by Vodafone alone were capable of squeezing its competitors' margins on the retail market.
Finally, the ICA did not carry out any assessment of the anticompetitive effects of the conduct. In order to establish whether a margin squeeze is abusive, it is necessary to provide evidence of:
- the anticompetitive intent of the dominant vertically integrated operator; and
- the reasons why, based on a market analysis, as-efficient competitors run the risk of being excluded from the market as a result of the margin squeeze.
Comments
This ruling clarifies the approach that the ICA should follow when assessing whether conduct amounts to a margin squeeze and how to apply the "as-efficient competitor test".
In particular, the TAR Lazio has confirmed that the correct application of the "as efficient competitor" test requires clear identification of the competitors that risk being excluded from the market, and an assessment of the anticompetitive effects of the margin squeeze.
With thanks to Cecilia Borelli of Ashurst for her contribution.
