Ladies and Gentlemen,
We are now 10 years after the first European postal directive and 2 years after the creation of an independent regulator in France, and there seems to be clear evidence that competition in the French postal market remains negligible.
An overview of the European scene reveals that the move towards competition is generally slow and painful. I observe however with concern that the gap widens between the situation in several other European countries and in the French market, which remains particularly static.
"Progressive market opening" was meant to facilitate business adaptation and to avoid disruptive changes in the market structure. It is crucial that the short time (three years) from now on to 2011 is used to: 1° favour the emergence of competitors 2° and at the same time, drive the adaptation of the incumbent.
1/First, I would like to remind the objectives of the postal market liberalization
- What is the ultimate goal of this policy ?
- How can we guarantee an effective and accessible mail service in this context?
At the very origin of the liberalization process, in the eighties, one finds basically a critical view on the quality and effectiveness of postal services in Europe. Policy makers pushed for the realization of a European single market in order to boost productivity and innovation.
Economic effectiveness is the principal motivation for postal markets opening. This motivation was stronger for the liberalization of the telecommunications sector, where the abolition of monopolies also resulted from intense technological innovation which, at the same time, justified and facilitated the opening to competition. Opening the postal markets to competition was primarily seen as a way to reduce the imperfections which the economic theory associates with a monopoly. In the French case, an official report by senator Larcher in 1997 perfectly illustrated these imperfections :
- Rather vague obligations on the incumbent, whose cost and financing were all but transparent ;
- Tariffs unrelated to costs, leading to potential waste of resources;
- No incentives to economic efficiency, resulting in outdated industrial processes ;
- And finally, poor quality performances.
Theoretically, efficiency could also be obtained by the way of efficient regulatory pressure on the monopoly USO supplier. This is the American model of a USPS under tight control of the "postal rate commission". However, accommodating this model in Europe seemed difficult. For example, USPS is a company whose activity is almost entirely restricted to the monopoly segment. On the contrary, European operators have grown into diversified companies, in which the regulated activity coexists with other commercial operations of all sorts (notably banking services).
Regulating a monopoly is difficult in this context, and I shall add, but it is a personal comment that market pressures will generally prove, in the long run, to be more effective than the pressures from the regulator.
My following point is related to the links between competition and the universal service obligation and its financing
Market liberalization, is also politically justified by the argument that USO are sustainable in a competitive context. This subject was at the center of the last year’s European negotiations and I’d like to elaborate a little more on it.
- We can observe that approximately half of the postal market is "captive": it consists of "single piece mail" traffic, which is hardly affected by competition. Single piece mail is expensive to collect and to process industrially. The challenge for the USO operator is to obtain costcovering tariffs for this traffic; these tariffs can remain geographically averaged, because single piece mail will remain out of reach for competitors (it is not a contestable market). If the USO operator is able to rebalance his tariffs in order to recover its costs, it can then provide the USO under normal economic conditions that are all the more favourable that this traffic generates additional economies of scale.
- On the contrary, the contestable part of the market, the so called "industrial mail", is accessible to competitors under a "cream skeaming" entry model. Delivery costs account for a higher share of the total costs than in the case of single piece mail. It is generally recognized that economies of scale concentrate in the delivery phase of the postal process, and so does the risk of losing those economies in case of a smaller market share. On the other hand, geographic deaveraging (geographic) pricing is possible if it is justified.
Competition thus concentrates on a limited segment of the market: the portion of non urgent industrial mail which is delivered in urban areas. In this market segment, the USO provider which conveys all categories of traffic benefits from its economies of scope whereas competitors who only address a smaller share of the market, benefit from lower costs.
This is basically how the equation of postal competition is written. In a nutshell, if the USO operator can rebalance its tariffs and keep substantial market shares in the more contestable market segments, it will still have a viable economic business model, including the provision of good USO in terms of coverage and quality. In addition, one should keep in mind that on these contestable market segments, the USO provider is not necessarily penalized with regards to its competitors, since it can also introduce geographic deaveraged pricing.
In this context, USO financing is not a real short term issue. The question arises only when alternative operators reach a significant market share. It is normally solved in the long run if the operator is economically efficient.
Naturally, it is legitimate for the State to envisage alternative financing mechanisms, considering the risk that the transition to this situation may be temporarily difficult.
I have now finished this brief history point. According to the European directive adopted in February, full market opening is now scheduled for 2011. I would like to provide you with ARCEP’s vision on the state of preparation of the French postal market.
2/ Now to the situation on the French market.
In a few words, I will say that :
- on the delivery market, there are neither competitors nor competition ;
- and on the mail preparation market, there are competitors – mail houses and consolidators - but they don’t have any real market power.
The delivery operators
Of course, ARCEP delivered licences to companies which offer local or national mail service today. But at this stage, market observation shows that under current legislation, competitors similar to Swedish Citymail, Dutch Sandd, German PIN or TNT, Spanish Unipost have little chance to breakeven on the French market.
Please let me note that all over Europe, the emergence of these competitors seems to have been rather slow and difficult. The situation observed today in Germany gives a clear illustration of this uncertainty. I note however that the alternative operators in this country, PIN and TNT, have made substantial turnovers respectively of 272 and 200 million€ in 2007.
But compared to the situation in these countries, the French market is characterized by the narrowness of the segment opened to competition. That is my next point.
In theory, the share of the French market opened to competition is not negligible: in monetary terms, the monopoly market amounts to 6,2 billion€, to be compared with a total of approximately 11 billions€ for the postal market including mail, periodicals, B and C to C parcels and registered mail.
In opposition to this legal vision of the monopoly, the economic reality shows a far smaller "contestable" segment, mainly industrial mail delivered in urban areas, and this only for those mail pieces which exceed 50g.
ARCEP estimate that alternative operators have to reach a market share close to 20% on this contestable segment - already very limited - to cover only their delivery costs. One should keep in mind that even in those countries where the liberalized segment is significantly higher the alternative operators reach breakeven with a lower share (10% for the new operators of the Netherlands, 8% for Citymail).
Actually, the true monopoly extends far beyond the legal monopoly, thanks to the economies of scale provided by the universal service, and covers notably :
- mail over 50g, which accounts for only 16% of postal volumes;
- registered mail or C to C parcels, which represents limited volumes but correspond to significant markets in value.
Most probably, alternative operators cannot find sufficient volumes to achieve economies of scale necessary to compete with the USO provider. It is a problem relatively specific to the French market: indeed, in the majority of other countries, the operators have or had the opportunity to gain access to a more substantial market during the transition to full market opening:
- in a majority of the European countries, advertising mail has been fully liberalized ;
- in Germany, "added value services" gave access to part of the traffic below 50g ;
- in Spain, local delivery is opened to competition.
I shall add that French operators also had to overcome specific obstacles, such as accessing the letter-boxes: in our country indeed, more and more urban buildings opt for full time closing.
As a consequence, the principal competitor to La Poste for addressed mail, ADREXO, has decided to step back, which is not a good news for the French market.
My last point, before concluding, is about "upstream" competition – mail consolidation - which is important for large business mailers
It is interesting to compare the respective situations of the English and French markets.
France has a historical anteriority to the United Kingdom in this market. In France, 200 companies concentrate mail and presort it according to industrial standards. We estimate that 60% of bulk mail is processed by theses companies.
What ARCEP observes nevertheless, is that these companies have limited market power. They operate under a "subcontractor status" to La Poste which only leaves them with limited commercial freedom. This is the reason for my statement a moment ago, that there were competitors but no competition.
In the United Kingdom on the contrary, consolidation seems to develop rapidly, thanks to more favourable conditions, which avoid discrimination between end customers and consolidators. We consider this situation with great interest.
Under current market conditions, the French market will reach 2011 without a gradual evolution from a quasi monopoly situation to full market opening.
That was not the will of the European or National legislator, since the opening was desired "step by step" and the regulator was created in 2005 to accompany this movement. It is not either the situation encountered in foreign markets. I think that market opening under strict "weight/price limits" monopoly conditions does not provide competitors with sufficient economic space to emerge on the market.
ARCEP considers that its mission is of a transitory nature, in other words that its role may end when the transition from monopoly to competition is over. During this critical period of time, regulation becomes lighter as competition emerges.
With regard to USO financing, one of the responsibilities for the regulator may be to activate a compensation mechanism. As I said before, I consider that policy makers are fully legitimate to envisage such a mechanism. But implementing a USO compensation scheme can only be the consequence of the emergence of effective competition.
If can make a bit of understatement, this it is not the most urgent question on our agenda today.
I thank you for your attention