Regulations for Designation of Markets and Dominance in the Telecom Sector

Based on the Telecommunications and Information Technology Act issued by Royal Decree No. (M/106) dated 02/11/1443 AH, and it’s Bylaw, and based on the regulatory tasks assigned to CST under its Ordinance, and taking into account the needs and regulation of the communications and information technology markets in the Kingdom, and in accordance with the development of the communications markets in the Kingdom and the experiences of other countries;. CST issues this document with the aim of developing the communications and information technology sector in a way that leads to raising the efficiency of its services and developing its infrastructure, enhancing the competitiveness of the communications and information technology sector and the companies operating in it, ensuring the continuity and effectiveness of the level of competition in it, and encouraging them in the provision of telecommunication Services with best quality and appropriate prices.

The terms and expressions identified herein shall have the same meanings stipulated in the Act and the Bylaw unless the context requires otherwise. Furthermore, the following words and expressions shall have the meanings assigned thereto:

2-1. “Act”: The Telecommunications and Information Technology Act.

2-2. “Bylaw”: The Implementing Regulations of the Telecommunications and Information Technology Act.

2-3.  “Classification Decision”: A decision issued by CST to designate and classify Telecommunications Markets under dominance or with service providers who have Significant Market Power, classify one or more service providers as having Significant Market Power or dominating this market or markets, and set ex-ante regulation necessary to be applied to the Dominant Service Provider in order to limit dominance practices before they occur (Ex-ante).

2-4. “Dominance”: Dominance is a capacity for acting independently in a market that is a result of the circumstances of the market and the position in the market of one or more service providers.

2-5. “Dominant Service Provider”: The service provider classified as Dominant Service Provider in the Classification Decision issued by CST pursuant to the standards outlined in Article (‎‎4) hereof.

2-6. Market definition, designation and dominance report “MDDD Report”: A periodic report that analyzes competition in telecommunications service markets, identifies markets subject to control, and proposes Regulatory Requirements in accordance with the criteria outlined in Articles (4, 5, 6, and 7) of these regulations.

2-7. “Regulatory Requirements Following the Occurrence of an Incident (Ex-post)”: Regulatory actions applied to the service provider if it commits an anti-competitive behavior.

2-8. “Regulatory Requirements to Limit Dominance Practices Before They Occur (Ex-ante)”: The specific requirements imposed by CST on a Dominant Service Provider in a specific Telecommunications Market to avoid, prevent, or nullify the effect of dominance and other anti-competitive practices; and to protect users in this market as described in Article (‎7) hereof.

2-9. “Significant Market Power” The ability to restrict output, raise prices, reduce quality, or otherwise act, to a significant extent, independently of competitive market forces.

2-10.  “Telecommunications Market”: All services provided through the telecommunications networks of licensed service providers (including infrastructure providers and services adjacent and ancillary to Telecommunications Markets such as, without limitation, Over-The-Top (OTT), Voice over Internet Protocol (VoIP), the Internet of Things (IoT)).

2-11. “Entity under Common Control": Service providers are deemed to be under common control if one service provider controls another, is controlled by another, or is under common control with another service provider. For the purposes of this definition, control means the ability to influence the actions or decisions of another service provider, whether directly or indirectly, individually or jointly, or where two or more service providers are subject to the same control, in any of the following cases:

2.11.1. Control of a majority of the voting rights in a service provider, pursuant to an agreement with other partners or shareholders.

2.11.2. The right to appoint or remove a majority of the members of the board of directors or the chief executive officer of a service provider.

2.11.3. The ability to exercise effective influence over the decisions of a service provider through contractual arrangements or other arrangements established by the relevant facts and circumstances (including, without limitation, where a service provider is party to a management agreement enabling it to manage another service provider, perform management functions for another service provider, or act as a trustee or administrator of another service provider pursuant to judicial or legal trusteeship arrangements).

3-1. This Regulation covers the ex-ante regulation applied to service providers, whether they have market dominance or the ability to exercise Significant Market Power.

3-2. This Regulation sets out the mechanism for applying the Regulatory Requirements to prevent dominance practices before they occur (Ex-ante), as detailed in the Guiding Ex-ante Regulation Table in Table (A) of the annex. This Regulation does not address the handling of dominance practices after they occur (Ex-post).

4-1. Prior to issuing a designation decision, CST shall prepare a market definition, designation and dominance report and publish it for public consultation in accordance with theAct and the bylaw and the provisions of section 4 of this Regulation.

4-2.  CST at its discretion may include a market dynamics analysis in the Market Definition, Designation and Dominance (MDDD) Report to assess the evolution and trends of the relevant markets and the competitive conditions in the market. If included, the market dynamics analysis may consider, among other aspects, an analysis of the changes and trends in the market shares and the Herfindahl-Hirschman Index (HHI) over a reasonable period of time as determined by CST, taking into account the historical and expected developments of the relevant markets.

4-3. CST may at any time, at its discretion or as per a justified request it receives, prepare, review, update or modify the designation and classification methodology or the Market Definition, Designation and Dominance (MDDD) Report in light of evolving market conditions, legal and ex-ante regulation or actual market experience.

4-4.  CST may reject any of the requests submitted to it to prepare, review, or modify the Market Definition, Designation and Dominance (MDDD) Report at its discretion for example, if the submitted request is not serious or is not substantiated, or the specific Telecommunications Markets have not undergone a significant change since the issuance of the last Classification Decision.

4-5. CST must prepare and publish a new Market Definition, Designation and Dominance (MDDD) Report in a period not exceeding five years from the date of issuing the last Classification Decision.

5-1. The Market Definition, Designation and Dominance (MDDD) Report must include CST’s stance on all or some Telecommunications Markets to which CST is considering applying ex-ante regulation. The report may be limited to one or more geographic markets, or one or more telecommunications services.

5-2. CST shall define and designate one or more specific Telecommunications Markets in order to identify which markets would be potential for ex-ante regulation by assessing a set of best practice market standards and methodologies, including the following:

5.2.1. CST will evaluate if the retail markets can be competitive without regulations for the wholesale markets, to determine if the market is suitable for consideration for potential ex-ante regulations.

5.2.2. CST will define the markets based on a product market definition to reflect current trends and potential evolution.

5.2.3. CST will continuously monitor and review the markets’ periodic performance and analyze their trends.

5.2.4. CST will consider the effect of the bundling of the non-telecommunication related services, that may provide a service provider with more power in the market (such as, loyalty programs and partnerships with other companies not operating in the telecommunications industry).

5.2.5. CST will analyze telecommunications services forming one market, the group of users concerned with such services, and the geographic area of this market. These classifications encompass various sub‑markets in both retail and wholesale.

5.2.6. Markets will be built up on the grouping of services and infrastructure they are based on. If new services do not fall within existing markets, no presumption of dominance will apply.

5.2.7. There may be a specific infrastructure provider markets that will be evaluated separately in the product/service; these will be evaluated in the geographic areas defined.

5.2.8. Infrastructure provider markets will be considered as sub-markets for each of the highly defined markets.

5-3. Once the relevant product markets have been identified, CST will assess and define the relevant geographic markets’ dimensions and segmentation and may classify markets at the national level or at the regional level  in order to determine the competitive conditions for each market. CST will define the relevant geographic markets as areas where the concerned entities are engaged in the supply and demand of pertinent products or services, and where the conditions of competition are uniformly consistent. CST will review the geographic market segmentation, adjusting to technological changes and market developments that may affect the spatial layout of telecommunication infrastructures and the availability and substitutability of products or services.

5-4. The market section in the Market Definition, Designation and Dominance (MDDD) Report may identify and prioritize key markets that play a pivotal role in the broader national developmental objectives and have a strategic importance to the Kingdom.

5-5. CST may, at the time of analyzing a specific Telecommunications Market or markets that may be subject to ex-ante regulation, take the following into consideration:

5.5.1. Substitution on the demand side, in order to determine the availability of alternative telecommunications services to the telecommunications services under consideration that telecommunications services users can use.

5.5.2. Substitution on the supply side, in order to determine the availability of alternative telecommunications services to the telecommunications services under consideration that telecommunications services providers can offer.

5.5.3. Any aiding alternatives CST considers as factors affecting designating the market, including the evaluation of the smallest group of services and the smallest geographic area, within the limits of which the service provider can maintain an increase in prices for a non-temporary period (SSNIP Test). In most cases, an increase of five per cent (5%) is deemed a notable increase in prices, and a period of one year or less is deemed a temporary period.

6-1. There may be single dominance or joint dominance in a market. CST will apply the standards and tests described in the Market Analysis of Dominance Criteria set out in Appendix 1 hereof when classifying a telecommunications service provider as a Dominant Service Provider in a specific Telecommunications Market or markets in the Market Definition, Designation and Dominance (MDDD) Report.

6-2.  CST may carry out reviews of the market to ensure that ex-ante regulation remains appropriate and proportionate in the light of changing market conditions. CST may, in its discretion and at any time, classify and designate a market or a Dominant Service Provider, and issue relevant ex-ante regulation, by way of a CST decision if urgent correction of market trends is required without the need to update the Market Definition, Designation and Dominance (MDDD) Report, provided CST publishes its decision for public consultation in accordance with the Bylaw.

6-3. CST shall assess the market position and conduct of the service provider, including its entities under Common Control, to evaluate the following, but not limited to

6.3.1.  The Dominant Service Provider shall not use another entity of its group to carry out activities that would otherwise classify the provider as dominant.

6.3.2. Multiple service providers can hold a dominant position if they have structural or other connections, such as entities under Common Control or joint ventures, or if they coordinate their actions in a manner that creates joint dominance.

6.3.3. Markets where another Entity under common control is providing services can be analyzed to ensure that they are carrying out activities and complying with conditions which would typically be the responsibility of the Dominant Service Provider.

6-4. CST will prepare a comprehensive study to determine the extent to which Significant Market Power or a Dominant Service Provider exists in a specific Telecommunications Market or markets pursuant to Article (‎6) hereof. CST may take into consideration, upon determining the market or markets that may be subject to ex-ante regulation, the following standards:

6.4.1. Whether the Telecommunications Market under consideration is subject to high and permanent entry barriers.

6.4.2. Whether the Telecommunications Market under consideration is naturally moving over the short or medium term, and is competitive enough to protect the users’ interests, without regulatory intervention.

6.4.3. Whether applying the regulation for handling dominance practices after they occur (Ex-post) in the Telecommunications Market is sufficient to not apply ex-ante regulation to limit dominance practices before they occur in order to reduce the effects expected to appear as a result of dominance.

7-1.  If CST classifies one or more service providers as a Dominant Service Provider in one or more wholesale Telecommunications Markets, CST may take into consideration the sufficiency of applying ex-ante regulation in the wholesale Telecommunications Market to reduce the expected implications of dominating related retail markets.

7-2. CST may, in addition to the ex-ante regulation stated in the Bylaw, require the Dominant Service Provider and/or its entities under Common Control in a specific Telecommunications Market or markets to fulfill one or more of the following requirements:

7.2.1. Obtain CST’s approval for the prices of services prior to their enforcement, as well as informing all of its customers of them.

7.2.2. Publishing the reference offer for wholesale services.

7.2.3. Providing the ability to access physical facilities, if technically possible, with fair and reasonable terms and conditions and appropriate prices.

7.2.4. Providing separate accounts for costs and revenue related to its services.

7.2.5. Establishing a cost-based pricing approach for the provision of retail and wholesale services, ensuring the price covers all costs associated with the provision of the product or service, and a profit margin deemed reasonable by CST

7.2.6. Establishing a reciprocity-based pricing approach with another Service Provider

7.2.7. Any other ex-ante regulation CST deems appropriate to apply.

7-3. CST shall provide detailed information about the ex-ante regulation within the Market Definition, Designation and Dominance (MDDD) Report in order to allow the relevant service providers to fully understand the ex-ante regulation, including, without limitation, their specific provisions, how to comply with them, the pricing and non-pricing remedies, and their relevant market and duration.

7-4. CST may impose additional highly specialized ex-ante regulation for a specific service provider or a specific market to optimize the outcomes of the ex-ante regulation to limit dominance practices before they occur. This may include, without limitation, tailored solutions for network access, prevention of discrimination, creating specific reference offers, publication of the reference offers, implementing pricing and non-pricing ex-ante regulation, requiring quality of service information, requiring financial reporting, or requiring pricing transparency exclusively for certain products.

7-5.  In case the ex-ante regulation is not sufficient to avoid possible damage arising from dominance or Significant Market Power, CST has the right to ask the Dominant Service Provider and/or its entities under Common Control to implement effective structural separation between business units (for example, separating parts related to infrastructure, which is deemed one of the parts that cannot be economically repeated with effectiveness, into a separate business unit). The Dominant Service Provider and/or its entities under Common Control shall operate such unit independently of its business units for retail and other business units, in order to ensure equality between all these units and other similar units of other telecommunications services providers, with the aim of ensuring their equal access to information and services.

7-6. Any ex-ante remedies imposed by CST under these Regulations must be proportionate, objectively justified and suitable to address the competitive issues identified in the MDDD Report.

8-1.  CST maintains effective and transparent interactions with service providers throughout the development of the Market Definition, Designation and Dominance (MDDD) Report, in accordance with the principles of due process and non-discrimination. CST shall inform service providers of the main objectives, criteria and indicators of the Market Definition, Designation and Dominance (MDDD) Report, and invite them to provide relevant information, data, views or comments that may contribute to the Market Definition, Designation and Dominance (MDDD) Report’s accuracy, completeness and validity. CST shall publish the report with the aim of requesting public consultation from other stakeholders and will take into consideration all key points (if applicable) raised by the service providers in the report.

1.           Overview

1-1.        Upon classifying a telecommunications service provider as a Dominant Service Provider, CST will apply the standards and tests described in Ar-ticle (Fifteen) of the Act and Article (Fifty-one) of the Bylaw, as well as one or more of the other criteria or standards of the market based on CST’s judgement described below.

2.           Criteria for Single Dominance

2-1.        Without limiting its ability to consider other factors and criteria to de-termine whether single dominance exists in a market, CST will have re-gard to the application of the following non-exhaustive criteria:

2-1-1.    Significant market power: whether the service provider, unilateral-ly, or through agreement with other service providers, has the abil-ity to exercise Significant Market Power in any market in which it provides services pursuant to its license.

2-1-2.    Volume level of market shares: whether the service provider, as indicated by revenue or the number of subscribers or other rele-vant statistics has a significant market share.

2-1-3.    Market share evolution: whether the service provider has signifi-cantly improved its market share of telecommunications services over time.

2-1-4.    Price changes: the level of change in the prices of telecommuni-cations services of the service provider during the last MDDD pe-riod.

2-1-5.    Unusual earnings: the ability of the telecommunications service provider to achieve unusual earnings.

2-1-6.    Easy or privileged access to capital markets/financial resources: financial resources of the telecommunications service provider and the ability to obtain funding that enables the service provider to finance its investments, expansion, or innovation, or to engage in predatory or exclusionary practices, without facing significant constraints or risks.

2-1-7.    The technological advantages and superiority: the ability of the telecommunications service provider to benefit from technolo-gies that competitors cannot benefit from.

2-1-8.    Preferential contracts: the ability of the telecommunications ser-vice provider to obtain contracts with preferential nature or that are long-term to provide relevant services to key users.

2-1-9.    The overall size of the service provider: in terms of its market share, revenues, assets, or other measures of economic strength, relative to its competitors and the overall market.

2-1-10.  The control of infrastructure not easily duplicated: such as essen-tial facilities, networks, platforms, or technologies, that give the service provider a competitive advantage or create barriers to en-try or expansion for other service providers.

2-1-11.  The network effects: the positive feedback effects that arise when the value or utility of a product or service increases with the num-ber or size of its users or customers, and that may create or rein-force market power or lock-in effects.

2-1-12.  The absence of or low countervailing buying power: the ability of customers or consumers to exert pressure on the service provider by switching to alternative suppliers, negotiating better terms and conditions, or sponsoring the entry or expansion of other service providers.

2-1-13.  The economies of scale: the cost advantages that enable the ser-vice provider to achieve and retain a position of advantage and possibly of dominance in a market.

2-1-14.  The economies of scope: when the range of businesses and oper-ations of an enterprise allow it to spread its fixed common and overhead costs across the full range of its services.

2-1-15.  Vertical integration: measured based on the control or influence of the service provider over different stages of the production or distribution chain that may give it a competitive advantage or create barriers to entry or expansion for other service providers, or affect the access to inputs, customers, or markets.

2-1-16.  Highly developed distribution and sales network: may give the service provider a competitive advantage or create barriers to en-try or expansion for other service providers, or affect the access to customers or markets.

2-1-17.  Absence of potential competition:  Indicated by the inadequate presence of legitimate or substantial competitive pressure from potential or existing market entrants

2-1-18.  Barriers to expansion: assessed by the obstacles or difficulties faced by the service provider’s competitors to increase their out-put, capacity, or market share.

2-1-19.  Ease of market entry: evaluated based on the feasibility and cost of entering the relevant market by new service providers.

2-1-20.  Excess pricing and profitability: measured by the profitability of the service provider in the relevant market compared to the profitability that might be expected in the market if it was com-petitive.

2-1-21.  Lack of active competition on non-price factors: Non-price com-petition refers to differentiation between products and providers. Differentiation may be both vertical (differences in quality) and horizontal (differences in terms of the extent that customers fully perceive the differences that providers are promoting).

2-1-22.  Switching barriers: measured by the costs or difficulties faced by customers or consumers to change their supplier or product, ei-ther in terms of monetary, technical or contractual factors.

2-1-23.  Customers’ ability to access and use information: the availability and quality of the information on the products, services, prices, or terms and conditions offered by the service provider and its com-petitors that impacts the ability of the consumer to compare oth-er services with the one they have.

3.           Criteria for Joint Dominance

3-1.        Dominant position may be held collectively (joint dominance) when two or more legally independent service providers are linked in such a way that they adopt a common policy in relation to the market.

3-2.        There are three necessary conditions to consider joint dominance:

3-2-1.    the market must be sufficiently transparent for each member of the oligopoly to monitor the behavior of other members;

3-2-2.    there must be a clear incentive for individual members of the oli-gopoly not to cheat by departing from any common policy on the market (therefore, there should be adequate deterrents to ensure long-term compliance); and

3-2-3.    The strategy followed by the members of the oligopoly should not be easily disrupted by the actions of existing or future competi-tors, customers, or consumers

3-3.        Without limiting its ability to consider other factors and criteria to de-termine whether joint dominance exists in a market, CST will consider the application of some or all of the following criteria:

3-3-1.    Market concentration: the degree to which the market is domi-nated by a few service providers, which may facilitate collusion or parallelism.

3-3-2.    Transparency: the extent to which the service providers have visi-bility on each other’s prices and quantities, which may reduce un-certainty and increase stability.

3-3-3.    Mature market: the stage of development of the market, which may limit the scope for innovation, differentiation, and entry.

3-3-4.    Stagnant or moderate growth on the demand side: the level of sales activity over time, expressed in volume (rather than price) terms. These are essentially measures of market inertia.

3-3-5.    Low elasticity of demand: the responsiveness of the demand to changes in price.

3-3-6.    Homogenous product: the degree of substitutability and differen-tiation of the products or services offered by the service provid-ers, which may affect the intensity and nature of competition or collusion.

3-3-7.    Similar cost structure: the degree of similarity or asymmetry of the service providers’ costs, which may affect their margins, incen-tives, and ability to collude or deviate from a collusive agreement or tacit understanding.

3-3-8.    Similar market share: the degree of equality or disparity of the service providers’ market shares, which may affect their relative bargaining power, influence, and stability in the market.

3-3-9.    Lack of technical innovation, mature technology: the level of inno-vation and technological change in the market, which may affect the potential for product differentiation, cost reduction, and entry.

3-3-10.  Absence of excess capacity: would tend to make it easier to maintain an anti-competitive agreement, as providers would not have an incentive to break an agreement by using their excess capacity to produce at a lower price, and in so making more profit overall

3-3-11.  High barriers to entry: the obstacles or costs that prevent or dis-courage new entrants or potential competitors from entering or expanding in the market.

3-3-12.  Lack of countervailing buying power: the ability of customers or consumers to exert pressure on the service provider by switching to alternative suppliers, negotiating better terms and conditions, or sponsoring the entry or expansion of other service providers.

3-3-13.  Lack of potential competition: measured by the lack of credible or effective threats of entry or expansion by new or existing service providers.

3-3-14.  Various kinds of informal and other links between the service providers concerned: the existence and nature of any legal, eco-nomic, or personal ties or relationships between the service pro-viders, which may facilitate communication, coordination, or alignment of their behavior in the market.

3-3-15.  Retaliatory mechanisms: such mechanisms can deter action that might break collective agreements. An example of such mecha-nism would be a credible threat of stronger price competition that would impact unequally upon providers. In this example, a provider that would be likely to suffer more than at least some competitors were an agreement to be broken and retaliatory price competition ensued would be less likely to try to break that agreement.

3-3-16.  Lack of or reduced scope for price competition: the degree of price competition or non-price competition in the market, which may affect the service providers’ incentives and ability to collude or compete on other dimensions, such as quality, service, or inno-vation.

3-3-17.  Existence of incentives for tacit collusion: the presence and strength of any factors or conditions that may induce or encour-age the service providers to align their behavior in the market, without the need for explicit communication or agreement, such as repeated interaction, focal points, or price leadership.

3-3-18.  Ability to enforce the terms of a collusive agreement or tacit understanding: the existence and feasibility of any mechanisms or arrangements that the service providers can use to monitor, veri-fy, or enforce compliance with a collusive agreement or tacit un-derstanding.