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The European Commission has fined Telefonica, the Spanish incumbent telecoms company and owner of O2, a record US$152 million ($194 million) over its wholesale broadband pricing, prompting a furious response from the company.
The fine is a record for the telecoms sector and the second largest ever imposed
by EU regulators, beaten only by the US$497 million ($635 million) penalty dished out to Microsoft for abusing its market position.
It dwarfs previous penalties of tens of millions of euros imposed on Deutsche Telekom and France Telecom's Wanadoo unit in 2003 over similar issues.
Telefonica has been accused of abusing its market position in Spain by charging its competitors in the broadband sector excessive fees for its wholesale product compared to its own retail prices.
EU regulators have said that this stifled competition, as Telefonica's rivals in the broadband market were not able to make a sufficient margin when reselling high-speed internet services to consumers.
Neelie Kroes, the European Union competition commissioner, said: "Telefonica's conduct harmed Spanish consumers, Spanish businesses and the Spanish economy as a whole, and by extension Europe's economy."
Kroes defended the size of the fine, arguing that previous financial sanctions imposed over market abuse were not sufficient to act as a deterrent to other European companies.
She said that small businesses and consumers in Spain paid around 20 per cent more than the EU average for high-speed internet and that Telefonica could have "ended this abuse" when the inquiry began in late 2003 after a complaint from Wanadoo.
Kroes has taken a tough stance over anti-competitive issues since she took over as EU competition commissioner in 2004.
She said the fine imposed on the Spanish telecoms provider should act as a warning to other incumbent or dominant players in industries such as energy and telecommunications.
"I will not allow dominant companies to set prices that undermine telecoms liberalisation."
Telefonica said it would immediately appeal the European Commission's ruling.
It will file an appeal with the European Court of Justice over the coming days.
In a strongly worded statement, Telefonica said the decision to fine the company was "wholly unjustified and disproportionate".
The company argues that it has complied with the regulation imposed by CMT, the Spanish regulator, and that competition in the broadband market has been increasing.
"Telefonica finds itself squeezed between two regulators which are at odds with each other," it said.
Mark James, an analyst with Collins Stewart, said the fine was "anomalous" given that wholesale prices were set by the Spanish regulator, not by Telefonica.
- INDEPENDENT