Spain: Communications In Spain: Opportunities For Investors

Electronic communications have entered into a new phase. They are no longer an activity drawing strong attention because of the technological novelties and subsequent social changes. But their continued relevance in economic terms given their direct contribution to national welfare does not leave room to discussion: during year 2005, total income was estimated to be more than 40.8 billion euros (9.9% higher than year 2004) with more than 5.6 billion euros invested, which means an increase of 19 % in respect of year 2004 —which, in turn, had a growing rate of only 2.7%—. Its contribution to GDP was of 3.6%.

A similar process has occurred with the legal issues specific to this sector. Regulation is still important, but changes are not as dramatic as they were several years ago and there is a logical decrease in the intensiveness of regulation.

The audiovisual sector shows a move in the opposite direction: it has gained political attention, and 2005 was the year when new operators entered the market and also when Spain saw a clear impulse from the government to new broadcasting technologies, such as terrestrial digital TV. This has been naturally reflected in new pieces of legislation.

Internet continues being a hot topic because of its continued growth, this being mainly due to the extended use of ADSL in Spain. In August 2006 there were 6 million of broadband access lines (92% of them with 1Mb or higher speed rates). This means 13.6% of population served with a broadband access to internet. From a legal point of view, one of the hot issues is whether net neutrality should be regulated or not.

And dealing separately with electronic communications, TV and Internet is more and more a question mark. Operators are investing in next generation networks which allow them to offer television services in addition to voice calls and broadband internet access. In short, convergence may be finally the key and the legal approach to the same is still unclear; for instance, should the launching of fixed/mobile services be subject to limits as it has happened in Italy? Should the entry by an incumbent telecoms operator in the broadcasting markets be limited as in the US or Japan or was the UK abolishment of those rules for BT correct?

We highlight below the main aspects of the Spanish sector, starting by the background legislative framework and the trends of operators in the market.

Law 32/2003, of 3 November 2003, General on Telecommunications (the "GTL") in force since 5 November 2003, implemented in Spain the 2002 EU Regulatory Framework.

The main features of the GTL are that it significantly aims to reduce the regulation applicable to market players – which had made sense at the time of opening the market – whilst increasing users’ protection through universal service duties and quality of services. Still, competition deserves protection, but only in those markets where it is not working correctly, which is achieved through market analysis.

The market analysis leads to determine whether operators with a significant market power ("SMP") exist. Said SMP operators are those who may be subject to specific obligations such as cost-oriented interconnection prices, special access conditions, accounting separation, etc.

An operator will have SMP if, "either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers". This assessment will be carried out by the National Regulatory Authorities. In the case of Spain, the authority in charge is the Telecommunications Market Commission ("TMC").

In 2006, the TMC has adopted regulations imposing certain obligations to those operators being found to have SMP in each of the 18 relevant electronic communications markets previously defined by the EU Commission.

The following table summarizes those regulations, which will be in force for years 2007 and 2008:

Legend:

(1) Price controls

(2) Non discrimination

(3) Ex ante control of anticompetitive effects of commercial offers

(4) Transparency, including the publication of a Reference Offer

(5) Accounting separation

(6) Cost oriented prices

(7) Reasonable prices

The GTL also entailed a simpler licensing regime.

It only requires operators to file a valid notification to the TMC to provide electronic communications services, including mobile communications. The granting of the right to use the radio-electric spectrum is subject to a special licence; and when the offer of the same is below demand such will be granted after a bidding process.

One of the elements of the telecommunications universal service is that all reasonable requests for connection at a fixed location to the public telephone network and for access to publicly available telephone services at a fixed location are met by at least one operator.

According to the new EU regulatory framework implemented by the GTL, the connection provided shall allow end-users "to make and receive local, national and international telephone calls, facsimile communications and data communications, at data rates that are sufficient to permit functional Internet access, taking into account prevailing technologies used by the majority of subscribers and technological feasibility".

Transfer of radio frequencies can be an effective means of increasing efficient use of spectrum, as long as there are sufficient safeguards in place to protect the public interest and sound competition.

The Government is drafting legislation, expected for 2006 but unlikely to be enacted before this year end, that will permit the creation of a secondary market where those operators holding rights over the spectrum could trade them.

The players in this sector are Telefónica Móviles (47%), Orange/Amena (24%), Vodafone (29%) and Xfera.

The moves have reflected a step towards concentration: in Spain the French Orange (France Telecom) acquired Amena; Telefónica bought the English O2, for $ 31.3 billion. And the Spanish regulator has paid attention to this business. One of the most relevant decisions adopted by the TMC in 2006 was the assessment of the market of wholesale access and call origination in mobile networks. The TMC found that the three mobile operators providing services (Xfera is the fourth operate with a licence to operate a mobile network but it has still not commercially launched its services) have SMP in their respective markets. As a remedy, the TMC imposed them to grant network access to third parties at a reasonable price.

This is encouraging the entry of new players into the mobile market, which is expected during December 2006. The so called Mobile Virtual Networks Operators ("MVNOs") will provide mobile services using the radio access networks of their competitors. MVNOs were authorised to operate in Spain in 2002 under a Ministerial Order; however, that regulation was insufficient to support MVNOs in their negotiation of the necessary access agreements. Now, the obligation to grant access at reasonable prices, as it was imposed by the TMC, has proved to be effective in the successful negotiation of the relevant agreements.

In addition, the TMC has also required the three current mobile operators to reduce their interconnection prices for calls terminating in their networks (between 41% and 47% in the following three years).

Competition in the mobile market will also be improved in 2006, when Xfera —the fourth operator awarded with a licence to operate a 3G mobile network in 2000— starts the provision of services. Xfera's project was stopped in 2002 due to the fall in the expectations associated to the 3G technology. However, it kept a minimal presence in order to maintain its licence in force. Now, controlled by the Nordic operator TeliaSonera, it has committed to provide mobile services before the end of 2006.

In August 2006, more than 6 million users had a broadband access to internet. This means 13.6% of population served with a broadband access to internet; however, penetration of broadband in Spain is still below the EU average (in 2005, it represented 12.8% for the EU25 and 14.5% for the EU15).

Broadband markets are expanding in Spain. ADSL technology is the most common form of broadband access (more than 4.5 million lines) but cable operators also have a good market share (more than 1.3 million lines). New forms of broadband access, such as wireless (Wifi, Wimax) or Power Line Communications will likely have a strong impact in the market in the following years.

The future of broadband access will also depend on the path followed by regulatory authorities as regards another hot topic: network neutrality. This applies to the ability of the telecom carriers to discriminate as regards the use and quality of their broadband services and the interconnection to other broadband networks. In short, service and content providers such as Google, Yahoo or Microsoft try to impede telecom operators' ability to charge different prices for certain uses of their networks. Even though such a regulation has not been adopted in the US despite the intense lobbying carried out, the debate has not ended. The European Commission, which published a draft of its new regulatory framework in June 2006, seems to embrace an obligation to open next generation networks to rivals.

The EU regulatory framework is not only applicable to telecommunications, but also to TV and radio broadcasting networks which, in fact, are already contemplated in the existing GTL. Nevertheless, electronic communications legislation does not apply to contents distributed through these networks.

Regulation of broadcasting in Spain is included in different legal instruments, which lack the desired coherence for their easy understanding. The industry has claimed for many years that broadcasting should be ruled by a General Media Law. The Government committed to its submission to the Parliament before January 2006 in the Law 10/2005, dated June 14, 2005, on Urgent Measures for the Promotion of TDT, the Liberalization of Cable TV and Support of Pluralism. However, no draft of such a Law has been issued to date.

In short, an overview of the regulation applicable to broadcasting is as follows:

A concession granted by the Government is required to broadcast terrestrial television or radio programmes in Spain. Since 1988 terrestrial television broadcasting is provided by the Spanish Government (who operates two channels), by the autonomous communities (under a concession to be granted within the territorial scope of each of them) and by private entities (public tenders were called in 1998 for the award of three private concessions; the last concession was granted in November 2005). Licences to broadcast radio programmes are limited to local geographic scopes although broadcasters may associate in wider chains subject to certain requirements.

Since 1995 the provision of television services within territorial areas of a strictly local nature is permitted. The services are provided either by the municipality itself or by private entities after granting of the corresponding administrative concession. During 2004 and 2005, certain municipalities and Autonomous Communities granted licences to broadcast digital terrestrial television. This process continued during 2006.

It is also important to point out that cross ownership amongst national TV stations is allowed if it represents less than 5% of the share capital. Cross ownership between national and local TVs is subject to the same limit provided that the relevant local TV stations do not reach coverage of more than 25% of the national population.

As opposed to the terrestrial television regime commented above, which requires the granting of an administrative concession, satellite TV and cable TV operators only require an authorisation that can be easily obtained by submitting certain information to the relevant authority.

In the last years, TV in Spain has been gaining financial momentum with three of the biggest players —Sogecable, Antena 3 and Tele 5— listed in 1999, 2003 and 2004 respectively. Also, the Vocento group, who owns 13% of the share capital of Tele 5 and also operates Net TV, a digital terrestrial television channel, has recently announced an Initial Public Offering of up to 20% of its share capital during October 2006.

The concentration trend continues in the sector. Sometimes this happens in Spain as a reflection of international moves (Alcatel/Lucent, Nokia/Siemens) or shows the consolidation and international clutches of big players (Telefónica/O2).

The last national mergers have taken place in the broadband market. Telefónica acquired a controlling interest in Iberbanda (2006), one of the three licensees to operate wireless broadband networks using the LMDS technology. This transaction entitles Telefónica to provide broadband services in those rural areas where the access through ADSL technology is more expensive than with wireless means. The potential of LMDS networks was also shown by the entry of the US giant Clearwire, who acquired BASA (another licensee) in December 2005.

Not to forget that in 2005, a breaking deal in the industry provoked, at the same time: i) the entry of France Telecom in the mobile market by purchasing Auna’s mobile subsidiary (Amena); ii) and the consolidation of Ono, the biggest cable operator, by purchasing the network of its competitor Auna.

The sale of Auna (conceived as the second global Spanish operator) consolidated three global players in Spain: Telefónica, the incumbent; Ono/Auna, with a cable network covering almost the entire Spanish territory; and France Telecom, operating both fixed and mobile networks. Vodafone is also a big player only present in the Spanish mobile market. Mobile services are experiencing great growing rates each year (in 2004, penetration of mobile services surpassed that of fixed services) and 2006 will be the year when UMTS services are marketed to the public even by a growing number of players (see Section 2.1 above on MVNOs).

Spain meets good conditions to attract investments in the communications sector. The evolution of the same in the last years proves so, as it is one of the areas of a biggest growth in the economy and where the main Spanish and foreign business groups are present.

During year 2006, Spanish regulation has ended the adaptation to EU guidelines. Also a new piece of regulation for the audiovisual sector is expected to consolidate the impulse recently given by the Spanish government.

Given the size of the markets and the investment needs of the different business, the consolidation process of companies to reach the necessary size and financial capability will continue happening.

And the rules face again the challenges of this rapidly changing sector: the convergence of activities and application of limitations to enter into new business by the former incumbent operators; the appearance of new transmission means for contents, which delete the boundary of traditional broadcasting services and rules applicable to the same; the need to harmonise treatment amongst different countries, given the international reach of many players; and the approach towards Internet, through net neutrality or other measures ensuring that innovation continues.

Perhaps the term "flexibility" is a key one for any regulatory approach to those issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.