On April 11, 2022,[1] the TAR Lazio annulled an ICA decision finding that Telecom Italia S.p.A. (“Tim”) had infringed Article 102 TFEU for allegedly abusing its dominant position in the market for Short Message Service (“SMS”) termination (the “Decision”).[2] The Court followed the same reasoning as that set out in its September 2021 judgment, in which it overturned the €5.7 million fine imposed by the ICA on Vodafone Italia S.p.A. (“Vodafone”) in a parallel decision.[3]

Following a complaint filed in April 2016 by Ubiquity S.r.l. (“Ubiquity”), the ICA had opened separate proceedings for alleged abuses of dominance by Tim and Vodafone. In particular, Ubiquity (now Kaleyra S.p.A.) claimed that Tim and Vodafone were applying excessive tariffs in the upstream market for SMS termination on their respective networks, thus hindering the ability of rivals to provide services in the downstream market for bulk SMS services (i.e., packages of messages sold to companies that want to send large amounts of messages to their customers). In December 2017, the ICA decided that Tim and Vodafone had abused their respective dominant positions under Article 102 TFEU.

In particular, the ICA alleged that Tim – together with its subsidiary Telecom Italia Sparkle S.p.A. – had put in place an internal-external technical and economic discrimination, resulting in a margin squeeze for equally efficient competitors in the Italian downstream market for bulk SMS services.

The companies submitted separate applications to the TAR Lazio for annulment of the ICA decisions. Tim challenged, inter alia, the ICA’s assessment of the contested conduct’s effects in the downstream market, with particular reference to the final retail price that could be charged by a competitor that was as efficient as the dominant undertaking.

In its ruling, the TAR Lazio found that the ICA had not adequately demonstrated the existence of a margin squeeze and had incorrectly applied the ‘as-efficient competitor test’, because it had failed to properly calculate the threshold price for SMS termination services.

The TAR Lazio held that the ICA was wrong in taking into account only the costs incurred by Tim when using its own network. Indeed, as clarified by the CJEU, even if the general approach in margin squeeze cases requires competition authorities to refer to prices and costs of the dominant undertaking in the upstream market, in some cases competition authorities should instead refer to prices and costs borne by the undertakings active in the downstream market in order to verify the existence of a margin squeeze.[4] This alternative approach is needed when the competitive conditions of the market at issue require a different approach than the as efficient competitor test. The TAR Lazio stated that this was the case in the upstream market for SMS termination, where three dominant operators competed with each other, thus requiring theuse of an alternative criterion to the as efficient competitor test. Indeed, Tim bears higher costs when buying termination services from its competitors: dominant undertakings charge higher prices to the other dominant players for termination services on their network, while they charge lower prices to operators that, being equipped with a numbering infrastructure, purchase from the dominant operators only the right to terminate on the network (so-called “D43 operators”). The higher costs that Tim bears if compared to D43 operators is not due to the fact that Tim is not an as efficient competitor, but it is rather a strategy of the other dominant players aimed at avoiding to provide any advantage to competitors in the upstream market.

Therefore, in order to demonstrate the existence of a margin squeeze, the ICA was required to (i) analyze the wholesale price offered by Tim to D43 operators; and (ii) take into account the prices offered by companies that buy the termination services in order to sell them as bulk SMS packages (so-called “aggregators”). Aggregators are indeed intermediaries that do not purchase SMS termination in the same downstream market as the final customers. Ignoring the prices and costs incurred by aggregators and D43 operators, as well as their role in the market, was considered a methodological error which invalidated the whole test applied by the ICA.

Finally, the TAR Lazio found that the ICA had failed to demonstrate the anticompetitive effects of the conduct, as it had wrongly treated the alleged margin squeeze as a restriction by object, an approach which was not considered coherent with EU and national case-law.

For all these reasons, the TAR Lazio upheld Tim’s application and annulled the ICA’s decision in its entirety.

[1] TAR Lazio, Judgment of April 11, 2022, No. 4333.

[2] ICA, Decision of December 13, 2017, No. 26902, Case A500B – Telecom Italia-SMS informativi aziendali.

[3] ICA, Decision of December 13, 2017, No. 26901, Case A550A – Vodafone-SMS informativi aziendali, and TAR Lazio, Judgment of September 15, 2021, No. 9803 (see Cleary Gottlieb, Italian Competition Law Newsletter, September 2021, available at https://www.clearygottlieb.com/-/media/files/italian-comp-reports/ italian-competition-law-newsletter—september-2021.pdf).

[4] See CJEU, Case C-52/09, TeliaSonera Sverige [2011] ECR 527.