Entrant cannibalism and incumbent power: The effects of technology and regulation on German xDSL markets

This paper examines the German DSL (digital subscriber line) markets. Two sub-markets can be differentiated technologically and economically, the market for ADSL (asymmetric digital subscriber line) and the market for SDSL (symmetric digital subscriber line). When both markets came into being in the late nineties, the national regulatory authority, RegTP (Regulation Authority for Telecommunication and Postal Services), tried to provide conditions enabling competition. In 2002, the ADSL market was dominated by a quasi monopoly of the incumbent (Deutsche Telekom, DTAG), while the SDSL market was highly competitive and entrants cannibalized each other in a price war. This paper describes the technological and economic background in order to explain how regulatory measures and incumbent strategies led to the current situation. The DTAG used pricing and various other obstructive measures to erect a quasi ADSL monopoly and to foster entrant cannibalism among SDSL providers. Due to technological complexity and the monopolistic bottleneck character of local loops, RegTP has not been able to implement effective counter measures. The number of xDSL (ADSL and SDSL) providers in Germany will continue to decrease.