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EU Fines Telefonica 151 Million Euros for Unfair Internet Prices

EU regulators fined Spain's Telefonica 151 million euros ($205 million) on Wednesday, claiming the company unfairly squeezed rivals by setting wholesale Internet prices too high to allow them turn a profit.

"Telefonica weakened its competitors, making their continued presence and growth difficult," the European Commission said. "Competitors were forced to make losses if they wanted to match Telefonica's retail prices."

It said Telefonica's national and regional wholesale prices from 2001 to 2006 were set at a level that held back the rollout of broadband Internet in Spain. As a result, the EU said consumers there use the Internet less and pay a fifth more than other western Europeans.

"When consumers and businesses are harmed in such a major market, the entire economy suffers," said EU Competition Commissioner Neelie Kroes. "I will not allow dominant companies to set prices that undermine telecoms liberalization."

Telefonica -- Spain's former national monopoly -- argues that the Spanish market is healthy because new companies entered and its own market share dropped 10 percentage points to just over half today.

The fine is far higher than other antitrust fines on telecom companies in similar cases, such as a 12.6 million euros ($17 million) penalty on Deutsche Telekom or a 10 million euro ($13 million) fine against France Telecom's internet arm Wanadoo.

The EU defended the high level of the fine, saying Telefonica's actions warranted a severe sanction due to their "gravity and duration" and because it had prevented new companies offering broadband in Spain.

Most broadband connections in Spain are offered over fixed telephone lines on a network controlled by Telefonica, so rivals have to buy wholesale access either at the local, regional or national level. The EU did not focus on the local level or view cable TV operators as significant competition to fixed line access.

It said the difference between Telefonica's retail and wholesale prices from September 2001 to December 2006 did not allow competitors enough margin to cover costs.

"This means that a competing provider of broadband that was just as efficient as Telefonica was faced with the choice of either exiting the market or incurring losses," the Commission said. "Telefonica's business plan and cost accounts show that the company could not have been unaware that it was engaging in a margin squeeze."

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