Author: | Published: 2 Feb 2000
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By Dr Natalie Lubben of Wilmer Cutler & Pickering

The telecommunications sector in Germany was fully liberalized effective January 1 1998, when Deutsche Telekom, the country's incumbent, lost its remaining monopoly, the provision of voice telephony services. Liberalization has led to increased investment: turnover in German telecommunications markets exceeded euro50 billion (DM 100 billion) in 1998, and is expected to again reach this amount in 1999. Some 600 operators were licensed to provide telecommunications services by the end of September 1999, 230 of these for voice telephony services, and 300 for the provision of fixed telecommunications infrastructure. In addition to these licensed operators, more than 1,200 providers of telecommunications services not subject to licensing requirements were registered with the regulatory authority in September 1999.

Liberalization of voice telephony services has also dramatically reduced prices: rates decreased more than 80% from January 1998 to mid-1999. According to published figures, the cost of peak time long distance calls fell from about euro0.30 per minute on 1 January 1998 to about euro0.046 per minute by June 1999. Deutsche Telekom has suffered from a dramatic loss of market share in long distance services. The new competitors won 35% of long distance call volumes by mid 1999. However, large-scale new entry into the local market has not yet occurred. Whether the regulator's decisions concerning prices for access to Deutsche Telekom's local loop, and the award of frequencies for wireless local loops, will help break Deutsche Telekom's overwhelming market share in the local market, remains an open question. The German internet and online services market also has been booming over the last few years. Turnover in internet services in Germany increased from euro1.35 billion in 1997 to approximately euro2.2 billion in 1999, and is expected to grow to more than euro7.5 billion in 2004. Internet traffic generated by German websites (.de domains) is the third largest in the world. Meanwhile, German law is trying to keep pace with the brave new world of the internet. In August 1997, an initial package of measures was adopted, including statutes concerning digital signatures, responsibility for internet content, and applicable data protection measures. In the meantime, an increasing number of court rulings have shed some light on specific internet issues such as the status of domain names and criminal responsibility of ISP managers. The German government recently announced proposed legislation to regulate e-commerce contracts, following, and to some extent leading, legal developments on the European level.

The Telecommunications Regulatory Framework

The 1996 Telecommunications Act (Telekommuni-kationsgesetz or TKG), which entered into force on 1 August 1997, introduced a new telecoms regulatory structure that eliminated most of the monopoly rights of Deutsche Telekom and brought about a radical shift in German telecommunications policy. The TKG is deregulatory in its approach, subjecting to licensing only public voice telephony and the operation of physical infrastructure (including mobile and satellite radio frequencies) for the provision of services to the public. All other services are open to provision by anyone without special licenses subject only to notification requirements, and there are no foreign ownership restrictions on telecoms operators. The regulatory authority may restrict the number of licenses only for services involving use of the radio spectrum and, even then, only to the extent that available spectrum is limited. Frequency allocations must be made through auctions or, where the authority decides an auction would not be suitable in light of regulatory goals, awarded after a beauty contest.

The Regulatory Authority for Telecommunications and Posts (RegTP)

The regulatory authority with responsibility for both telecoms and postal regulation (RegTP) was established in January 1998. It is headed by a board consisting of one president and two vice-presidents. The board is appointed by the Federal government based on proposals of an advisory council consisting of members of both houses of the German parliament. When the Kohl government appointed the board in 1997, it appointed members with strong political allegiances, rather than following the UK model of choosing people from outside the political scene. Notwithstanding these political ties, the regulatory authority retains some independence because neither the RegTP's board nor the advisory council to the RegTP has a direct say in most of the day-to-day applications of the TKG. Such decisions are taken by panels that have been modeled on the independent decision-making panels of the German Federal Cartel Office and can be directly appealed to the courts.

Interconnection Regime

The most significant decisions concerning the liberalization of telecommunications markets in Germany have revolved around interconnection. The first such decision, taken by the Ministry for Postal Services and Telecommunications on September 12, 1997 before the RegTP was formed, set the basic charges for call termination and origination in Deutsche Telekom's network at an average of euro0.014 per minute. Although the European Interconnection Directive 97/33/EC, as amended, requires publication of a complete interconnection offer by incumbents such as Deutsche Telekom, RegTP has refrained from imposing such a requirement. Instead, the regulator has made binding for all of Deutsche Telekom's offers the call termination and conveyances charges, together with a few other rates for so-called optional and additional interconnection services offered by Deutsche Telekom.

Because the RegTP's approval of these interconnection charges expires by the end of 1999, Deutsche Telekom is currently seeking to conclude new interconnection agreements with its rivals. In September 1999, Deutsche Telekom filed a new interconnection agreement with Mannesmann Arcor. If approved, the agreement would basically perpetuate until January 2001 the current system of distance-based charges (local, 50km, 200 km, more than 200 km tariffs), rather than introducing a cost-based system. It is unclear whether the decision-making panel will approve the proposed interconnection charges for the year 2000. It may challenge the cost calculation provided by Deutsche Telekom, or simply refer to benchmarks as the old Ministry for Postal Services and Telecommunications did in 1997. The RegTP can require the incumbent to supply data behind its cost calculation and may, for the first time, apply a cost model developed by a scientific institute for interconnection charges. The cost model follows an element-based bottom-up approach and determines the forward-looking long run average incremental cost of the network infrastructure.

Network Operator Qualification — Right to Interconnect

Another significant decision of the RegTP concerning the interconnection regime determined who qualifies as a public network operator entitled to request interconnection. In 1998, the RegTP initiated a hearing on this issue in reaction to complaints by Deutsche Telekom that the initial 1997 determination of interconnection tariffs had led to the development of numerous new long-distance providers which engaged in regulatory arbitrage between the high tariff rates for end-users and the relatively low interconnection charges. Although this arbitrage put immense pressure on prices, it led both Deutsche Telekom and other facilities-based operators to question whether operators with little or no infrastructure should have the right to interconnect. Deutsche Telekom, in particular, suggested that operators with few points of interconnection generate unforeseeably high volumes of long-distance traffic, thereby causing capacity problems in Deutsche Telekom's network. Nonetheless, in its December 1998 determination, the RegTP resisted the call to set a high threshold for new entrants to qualify as network operators and decided that providers operating at least one switch and three transmission lines qualified. In addition, the RegTP made clear that it intended to stick to the interconnection rates as decided in 1997, except to the extent that Deutsche Telekom bore unforeseen additional costs such as in the case of so called atypical traffic.

As a consequence, Deutsche Telekom terminated all existing interconnection agreements and requested that its interconnection partners agree to extend their networks if a specified intensity of network traffic were reached at the points of interconnection. In addition, Deutsche Telekom instigated a minimum traffic volume requirement and introduced a minimum lease of 24 months for interconnection circuits. Following the complaints of a number of smaller operators, the RegTP in May 1999 upheld in principle the interconnection regime set in 1997, but decided that the so-called migration obligation may constitute a legitimate tool to reduce atypical traffic. However, it denied the use of minimum traffic guarantees instituted by Deutsche Telekom, and held that the right to request interconnection is not dependent on the amount of traffic. The required minimum three transmission lines must end in three different prefix regions, which may exclude some of the regional operators from interconnection rights. The minimum lease for interconnection circuits was reduced from 24 to 12 months.

Indirect access

The TKG requires Deutsche Telekom to provide indirect (or equal) access from its local networks to the long-distance networks of its competitors. Customers can request permanent pre-selection or access the alternative networks on a call-by-call basis by dialing a five-digit prefix. In addition, the local access provider, in most cases Deutsche Telekom, is required under the Customer Protection Ordinance to provide a single bill to the end customer showing both calls over the local network and over long-distance networks. On this basis, Deutsche Telekom had — after some pressure from the RegTP — concluded collection agreements with its competitors in 1998, under which it would bill and collect charges from end customers accessing other long-distance networks on a call-by-call basis. Recently, Deutsche Telekom has taken the position that the requirement to provide a single bill does not extend to the collection of the charges. But the president of the RegTP has publicly stated that the single bill requirement does in fact include collection.

Charges for network access of internet providers

In June 1999, the RegTP fixed the rate for access to Deutsche Telekom's internet platform at euro0.013/min. This rate does not include the use of the internet platform (ie, content) because those rates are not subject to regulation under the TKG. The RegTP's action is based on adjustments to Deutsche Telekom's tariffs, which unlawfully failed to grant discounts in a non-discriminatory manner to third parties as Deutsche Telekom did with its affiliates and based its prices on an inflated number of access points (PoP). Deutsche Telekom must make these services available at the regulatory price to all third parties, as well as its subsidiary T-Online.

Direct access and wireless local loops

The RegTP has made significant decisions in the hopes of providing entrants with access to local loop facilities, which have been almost the exclusive domain of Deutsche Telekom. The regulator finally set the prices for physical access to the main distribution frame (the last mile to the end customer) in February 1999 and awarded frequencies for 262 coverage areas in August 1999 for wireless local loop (WLL) access. However, neither decision may lead to a serious challenge to Deutsche Telekom's dominance on the local level because the price set for direct access exceeds Deutsche Telekom's retail line subscription charge, and WLL access remains costly.

The road to a decision by the RegTP on prices for direct access to the local loop has been marked by a series of disputes between new entrants, Deutsche Telekom, and the regulator. The TKG and its implementing ordinance on special network access require Deutsche Telekom, as the dominant operator, to offer new operators unbundled access to the local loop, which they can then rebundle with their own services to sell to customers. The feasibility of this strategy depends on whether the price for access to the local loop is sufficiently below Deutsche Telekom's retail subscription charge. In March 1998, the RegTP set the charge provisionally at euro10.56 per month (DM 20.65). Deutsche Telekom then filed a proposed rate based on historic costs of euro24.36/month (DM 47.26), even though Deutsche Telekom's actual retail subscription charges amount to euro10.94/month (DM 21.39). Left without an adequate database for determining a cost-based price, the regulator indicated in November 1998 that it intended to set the price at a level slightly above Deutsche Telekom's retail charge for end customers. Upon the intervention of the Secretary of State for Economics, Deutsche Telekom withdrew its application. After an injunction by the Administrative Court of Cologne of 20 January 1999 obliging the RegTP to fix the charge by 8 February 1999, the regulator finally set the price at euro12.99/month (DM 25.40). Although this decision seemingly undercuts the ability of new entrants to offer competitive prices to end-customers since the local loop price is higher than Deutsche Telekom's retail rate, by the end of October 1999, some 55 operators had entered into MDF interconnection agreements with Deutsche Telekom.

Another step toward competition in the local access market has been opening the door to WLL access, which will allow carriers to offer both ISDN and ADSL/broadband services without the need to physically connect to each end customer. In 1998, the RegTP initiated a multiple-step nationwide bidding procedure. The RegTP put frequencies for 262 coverage areas up for sale, with preference being given to those applicants guaranteeing a higher degree of supply for the customers. 32 enterprises have applied for these frequencies, but only 12 of them had been awarded frequencies in late August 1999.

Mobile communications — from GSM to UMTS

Digital mobile communications has been a success story in Germany from its beginning in the early nineties. By the end of 1999, some 21 million customers are expected to have subscribed to cellular networks in Germany. The two GSM 900 networks, Mannesmann Mobilfunk and T-Mobil (Deutsche Telekom's subsidiary), which were licensed in 1990, lead the cellular market each with a share of about 42%. The second generation GSM 1800 networks, E-plus and VIAG Interkom, have been struggling to overcome the disadvantage of having been licensed only in 1993 and 1997 respectively. Moreover, with the October 1999 award of a 2x10 MHz frequency package in the GSM 1800 band to the incumbent GSM 900 networks, E-plus and VIAG Interkom have also lost the marketing advantage that had been conferred by their more advanced technology.

The mobile telephony market will be further transformed by the arrival of the third generation Universal Mobile Telecommunications System ("UMTS"). UMTS may provide an excellent example of the convergence of different regulatory fields because it does not entail a fixed standard, but allows for free "integrated networking", ie, a combination of all kinds of telecommunications, broadcasting, and internet services. The Presidential Chamber of the RegTP decided in May 1999 that it would grant UMTS licenses by way of an auction procedure. According to a draft decision by the RegTP published in October 1999 specifying the proposed rules for the auction, the RegTP intends to sell five UMTS licenses and five frequency blocks in early 2000. The licensees will have to provide coverage of at least 25% of the population by the end of 2003, and 50% of the population by the end of 2005. No special rights to obtain roaming from the GSM operators will be part of the UMTS licensing framework. Under these conditions it seems as if the UMTS licenses will be particularly attractive for existing GSM operators — both German and foreign — to migrate their networks to the next generation of mobile services. The GSM operators will be able to build a UMTS network in densely populated areas rather quickly since they already have antennae in place and thereby meet the coverage obligation, while offering standard GSM services in rural areas.

License fees

The regulator's fees for issuing licenses have been under scrutiny in Germany as being too high. The fees reach up to euro5.42 million for a nation-wide infrastructure license on the basis of the Telecommunications License Fee Ordinance of 1997. The Administrative Court of Cologne, in a decision of 25 March 1999, issued a judgment questioning the amount of license fees an operator had to pay, expressing its doubts whether these fees reflected the cost incurred by the RegTP as required by European Licensing Directive 97/13/EC. In particular, the Court regarded RegTP's practice of including in the license fee its forecast of costs for the supervision of the telecommunications market for the next 30 years as being outside the scope of Article 11 of Directive 97/13/EC. Until a final ruling is rendered — the case is currently pending in the High Administrative Court of North Rhine-Westphalia — the RegTP is not expected to issue license fee orders.

Multimedia and internet - attempts to regulate a phenomenon

Questions of content liability, intellectual property, copyright, domain name protection and data protection have reached new heights of legal complexity with the development of the internet and comparable technologies. A few of the key issues are discussed below.

The proposed European e-commerce Directive will only bring a few clarifications for the German market because many of its provisions are already implemented in German law. With respect to jurisdiction, the Draft Directive states that e-commerce companies are subject to the laws of the jurisdiction from which they offer their services. As a result, a Germany-based e-commerce company will be safe if it observes German law. However, some uncertainties remain due to the fact that this rule does not apply when consumer protection laws are involved.

Liability of providers for third party contents

In 1997, Germany adopted a regulatory framework for internet and other data services, including the Federal Teleservices Act and the Multimedia Services Treaty of the German states. In these measures, Germany sought to establish a threefold approach to liability for illegal or harmful content under which a service provider is: (i) fully responsible for its own contents; (ii) responsible for third party content only insofar as the provider knew of the content and could block it; and (iii) is not responsible for simply providing access to third party content (access and network providers).

Although this framework seemed reasonable and clear, the new provisions have had little success in clarifying the state of the law. Worldwide attention was paid to the 1998 CompuServe case in which Felix Somm, the managing director of CompuServe Germany, was sentenced to two years imprisonment (suspended on probation) by a local Munich court, because illegal pornographic material could be accessed via German dial-in services provided by CompuServe Germany. The American parent and the German subsidiary were considered to be a single entity and therefore a host service provider that could be liable for third party content. In the meantime, the judgment has been overturned. If the European e-commerce Directive is adopted in its current form, it will further protect internet providers from being held liable for contents offered by third parties if they only provide access to data. This rule would also apply to an internet company that hosts websites of other parties without knowledge of their content.

Another open question is whether using a hyperlink to a web page with illegal or harmful content can lead to criminal responsibility. Up to now, none of the initiated proceedings has led to a conviction. In these circumstances, industry and others have made new efforts to foster self-regulation through filtering systems.

Digital signatures and electronic contracts

In 1997, Germany was among the first countries to adopt a statute concerning digital signatures, setting forth the framework for safe use of digital signatures in commercial transactions, and for the certification of companies willing to provide digital signatures. So far, only a few companies have been certified, and consequently, not much use has been made of digital signatures. The importance of the Digital Signature Act, however, may increase substantially upon adoption of draft legislation of the Ministry of Justice concerning new formal requirements for transactions. Today, two problems occur if contracts are concluded via e-mail or the internet. First, various kinds of contracts or legal declarations under German law must be in writing to be valid and binding. For example, real estate and apartments leases usually must be in written form. Second, in the case of litigation, the burden of proof if a contract was concluded via the internet lies with the company selling goods. But if the purchasing party fails to pay the purchase price, the seller can hardly prove that the buyer actually clicked the agree button.

The draft legislation by the Ministry of Justice, which may be adopted as early as the end of 1999, attempts to solve these problems. First, it would amend the German Civil Code in a way that a new electronic form satisfies the written form requirement. The prerequisites of this electronic form are met if the e-mailed text is signed by the author with a digital signature complying with the German Digital Signature Act. Second, in court it will be presumed that a declaration signed with a digital signature was actually made by the holder of the respective digital signature key, so that the burden of proof in cases of non-payment will lie with the party ordering the goods. Moreover, for certain legal declarations that currently require the written form, it will be sufficient if they are submitted in a so-called text form, which means that a transmission via e-mail — even without a digital signature — will be sufficient. This would apply, eg, to a bank's notification to its customers of the terms and conditions of its overdraft facility. However, for various kinds of contracts, eg, guarantee agreements or legal promises, the written form remains required.

Domain grabbing and DENIC's responsibility

In 1998 and 1999, a number of German regional and local courts held that reserving and using an internet domain that infringes third party rights (eg, the party's duly registered trademark) is prohibited and that the courts have jurisdiction over any such infringement if the domain name can be duly accessed in Germany. The user of a domain that infringes a third party's rights must not only refrain from using the domain but must also abandon all rights related to it. In addition, under a ruling of a local court still under appeal, DENIC e.G., the company assigning ".de" top-level-domains, must transfer an unlawfully reserved domain to the third party, and, in case of negligence, pay damages.

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