Telefonica slapped with $205 mil EC fine

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BRUSSELS -- Spanish telecoms giant Telefonica was fined €151 million ($205 million) Wednesday by the European Commission for stunting the Spanish broadband Internet market by stifling competition.

The Commission -- the European Union's antitrust authority -- said Telefonica charged wholesale rates that were almost as much as retail prices, preventing competing Internet providers from making a profit.

EU Competition Commissioner Neelie Kroes said the high fine reflected the fact that the Spanish firm was aware it was breaching EU rules. The fine is the largest ever slapped on a telecoms operator in Europe and the second largest the EC has imposed for abusing market strength after a hitting Microsoft with a €497 million penalty in 2004.

Kroes said Telefonica, Spain's biggest telephone company and former national monopoly, was guilty of "very serious abuse" of its dominance in broadband Internet access. Kroes said the penalty set an important precedent for companies in other industries such as energy, transport and telecom services that have recently been liberalized. "Let me be perfectly clear: I will not allow dominant companies to use their market power to close down markets that the European Union has opened," she said.

Spanish consumers pay 20% more than the average in the 15 countries that were EU members before enlargement in 2004, the EC said. The number of broadband subscribers in Spain is 20% below the average of the 15 nations, it added.

Telefonica controls the fixed line telephone network used for 80% of all ADSL broadband Internet connections. Rivals need to buy wholesale access from Telefonica to offer competing retail services. But Telefonica structured its wholesale and retail prices in such a way that the margin between them did not allow rivals to compete in the market without making losses. "Through this so-called 'margin squeeze,' Telefonica insulated itself from the rigors of competition by making it impossible for alternative broadband suppliers to enter the market on a commercially viable basis," Kroes said.

Telefonica immediately announced it would appeal the decision at the European Court of First Instance, the EU's second-highest court. It described the ruling as "inexplicable," and insisted it had abided with the Spanish regulatory authority, CMT. "Telefonica finds the decision by Brussels to be unjustified and disproportionate, both legally and economically," the company said in a statement.

Telefonica said that the EC's demands contradicted ongoing supervision from the CMT, and this would eventually create wider problems for the telecoms sector. "The legal uncertainty created by this decision will inevitably affect Telefonica's and other operators' ability to launch new products and services," it said.

At the same time, France Telecom, whose unit Orange competes with Telefonica, said it may file a damages claim against the Spanish operator.
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