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Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
Mobile Call Termination: Market Review
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Mobile Call Termination: Market Review

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  • 1. Ofcom’s Consultation Mobile Call Termination Market Review BT’s response 25 May 2006 BT would welcome comments on this response. Comments should be addressed to Alun Banner and sent by e-mail to alun.banner@bt.com
  • 2. Ofcom’s Mobile Call Termination Market Review Consultation BT Response Mobile Call Termination: Market Review BT’s response to Ofcom’s Consultation published on 30 March 2006 Executive Summary • Ofcom’s assessment is thorough and the proposed application of price controls justified and proportionate. There is a need for a single price control which applies to voice calls whatever type of network the mobile operators use to terminate a voice call. • Current regulation is costing consumers over £200m each year against cost- based charges. There is especially a need for urgent action to close the loophole whereby charges for using 3G networks are sometimes 2-3 times higher than regulated rates. • Charges from 2007 ought to be brought into line with the costs of terminating voice calls on 2G networks, implying price cuts of at least 10%. These charges should then reduce by the rate of technical progress deemed to exist in mobile networks. • In 2011, when 3G networks may be the predominant form of mobile voice call termination, any further control might be based on the costs of these networks which, by that time, will be known with far more certainty than at present. Mobile Termination Review BT Response 250506.doc Page 2 of 12
  • 3. Ofcom’s Mobile Call Termination Market Review Consultation BT Response Contents Section Paragraph(s) Introduction 1-4 Detriment to consumers 5-9 Impact of new networks 10-18 Charges from 2007 and “X” 19-22 Network externality surcharge 23-25 3G licence fees 26-28 Call termination “pass-through” 29 Conclusions 30 BT’s Responses to Ofcom’s Questions pages 9-12 Introduction 1 The ability and incentive of the mobile network operators to set voice call termination charges at excessive levels, to the detriment of consumers, has been clear since the Monopolies and Mergers Commission (MMC) first investigated this market in 1998. 2 The existing payment arrangements mean that a person wanting to call a mobile phone has no choice but to bear the entire cost of the call which is, in large part, determined by the mobile network operator chosen by the person being called. The mobile customer is likely to be unaware of, or unconcerned about, the costs that callers will have to bear and, on Ofcom’s evidence, is unlikely to have taken such costs into account when choosing a supplier1. Given this situation, the mobile operators are not subject to ‘normal’ economic pressures to reduce their prices as there is no competition in call termination charges. Hence the MMC - and later the Competition Commission - recommended that regulation be imposed to mitigate this source of market power. 3 Oftel’s, and subsequently Ofcom’s, regulatory remedies have sought to constrain the mobile operators’ ability to exploit their market power by the use of price controls of a similar type to those imposed on fixed network operators. However, more recently regulation in the UK has not kept pace with technological changes in the market. Certain mobile network operators, far from accepting the Regulator’s 1 “In Ofcom’s 2005 survey it has been found that when subscribers were asked what are the considerations when making their network choice, only 2% spontaneously said that they considered whether the network was cheaper for others to call them.” - from paragraph 3.33 of Ofcom’s Charge Control Consultation, issued 7 June 2005. Mobile Termination Review BT Response 250506.doc Page 3 of 12
  • 4. Ofcom’s Mobile Call Termination Market Review Consultation BT Response efforts to protect consumers, have instead taken advantage of the latitude they have been given not only to keep their charges well above costs but also to increase the price consumers pay for making calls to mobiles. 4 The two central issues for Ofcom are now to determine the charges which should be permitted from the start of the price cap on 1 April 2007 and the rate these should decline (that is, the ‘X’ in ‘RPI-X’) over the duration of the new price control. BT is pleased to see that Ofcom is now moving in this direction, and in particular that Ofcom proposes to bring the UK into line with practice in other Member States by controlling the termination of voice calls regardless of the type of network. However, price controls which still permit charges to be set at levels significantly in excess of costs will be of little benefit to consumers. Detriment to consumers 5 It is imperative that Ofcom addresses these issues now in order that consumers receive the necessary protection from paying too much for their calls. In Summer 2005, call termination rates from 1 April 2006 were frozen for 12 months, at which time 2G charges were 23% to 28% greater than costs2. Allowing this to persist has cost users of fixed lines circa £100m in excess payments to mobile operators. 6 In addition, the decision not to control voice calls on 3G networks has allowed operators with 3G networks to exploit the lack of regulation of 3G voice call termination charges. For example, H3G can actually afford to offer its customers payments based on the volume of incoming calls that they receive – in effect, returning to its customers some of the excess charges which it levies on other customers of other networks. This clearly distorts competition and the lack of regulation is facilitating a quite unjustified distribution of resources to H3G subscribers from anyone who wishes to call them. 7 This is not the only problem caused by a lack of price controls on the bottleneck services of 3G networks. As shown in the Market Review Consultation, one mobile operator’s charges for call termination on its 3G network are circa 250% of the level which applies to its (price controlled) 2G voice call termination. Given that the price controls already allow a large margin over costs, this means that the charge is around three times higher than 2G costs for exactly the same service. This practice alone already costs consumers another £40m per annum in addition to the £100m mentioned earlier. 8 As Ofcom recognises in paragraph 5.12 of the Consultation, fixed-only consumers are always adversely affected by excessive termination charges. According to Ofcom’s January 2006 survey, 32% of this group (which, one imagines, may include some of the older and poorer members of the community) call mobile phones at least once a week. 2 See page 30 et seq. in Ofcom’s June 2005 Explanatory Statement on wholesale mobile voice call termination markets (charge control conditions) at http://www.ofcom.org.uk/consult/condocs/wholesale/wholesale.pdf Mobile Termination Review BT Response 250506.doc Page 4 of 12
  • 5. Ofcom’s Mobile Call Termination Market Review Consultation BT Response 9 Ofcom should therefore now move decisively to impose fit-for-purpose controls on the mobile operators to protect fixed-line customers from exploitation now and in the foreseeable future. Impact of new networks 10 We think it is unique for charges to increase in an industry in which costs are generally declining due to the rapid advances brought about by technological progress. Yet, this is what has been happening as voice calls migrate from terminating on 2G networks to 3G networks. This alone should indicate to Ofcom that the regulations put in place in 2005 need urgent revision. 11 The 3G networks are primarily being rolled out to provide data services, on which mobile networks may well make good returns, and not voice services for which 2G networks are perfectly adequate. Consumers who demand nothing more than a straightforward voice call – the quality of which Ofcom says in paragraph 1.10 of the Market Review consultation is indistinguishable on either network – should not be expected to pay a price vastly in excess of its costs simply to subsidise the new 3G data services of the mobile operators. Fixed operators are also rolling out new networks, but it has not been suggested that these will lead to higher charges for voice calls – that is, that voice call termination charges will be increased as a result of changes in technology. 12 Indeed, Ofcom notes in its consultation document on Next Generation Networks that pricing of interconnection services delivered over new technology should not exceed pricing of services delivered over existing technology: “we propose that BT’s charges for regulated products delivered over 21CN should be set on the basis of efficiently incurred costs...This means, for example, that if BT… made it more costly to provide SMP products, it would end up bearing these additional costs itself.” 3 13 To an extent, this conclusion is supported by the modelling carried out by Analysys regarding the cost of termination of voice services on a 3G-only network relative to the costs of termination of voice services on a 2G-only network or on a combined 2G/ 3G network. While the model is still in draft form and currently includes direct network costs only, the costs support BT’s view that terminating a voice call on a 3G platform may cost significantly less than on a 2G platform. 14 Accordingly, BT expects a consistent principle to be applied to the regulation of mobile networks as taken towards fixed networks. We do not expect to see Ofcom applying a differential treatment of 2G and 3G mobile networks in terms of price controls for voice call termination, or for 3G networks to be given a more generous treatment than that for 2G services. Consumers should therefore not be expected to pay more for terminating a voice call on a 3G network than on a 2G network, or 3 Paragraph 1.18 of “Next Generation Networks: Further Consultation” issued 30 June 2005 at http://www.ofcom.org.uk/consult/condocs/nxgnfc/. Mobile Termination Review BT Response 250506.doc Page 5 of 12
  • 6. Ofcom’s Mobile Call Termination Market Review Consultation BT Response expect average charges (the “blended” rate) to go up. In all cases, consumers have absolutely no choice over termination and must therefore receive protection. 15 We also believe that Ofcom should incentivise mobile operators to minimise the costs of voice call termination and that this again suggests permitted charges should be no higher than those on 2G networks and that there should be a single control for 2G and 3G voice calls. This case is made convincingly by Ofcom in paragraph 7.55 of the Market Review consultation: “Such an approach, [a single approach to apply to 2G and 3G voice call termination] in contrast to the options above, should incentivise operators to invest in and migrate traffic to the most cost effective technology, thereby introducing the appropriate congruence of profit maximising and cost minimising outcomes.” 16 We therefore find Ofcom’s apparent belief, as reported in paragraph 7.60 of the consultation document, that the cost of supplying voice call termination using 3G might be above the cost of using 2G very perplexing. There needs to be a distinction between networks and capabilities. The only reason 3G networks involve higher total costs than 2G is that they have far more capabilities and functionality than 2G networks. We do not expect costs for existing 2G capabilities on the 3G network to be any higher than the 2G costs. Any model which suggests otherwise must have misallocated the extra costs for the new capabilities and functionality, to voice calls. This ought to be a basic test of the reasonableness of any cost model. 17 Ofcom must not lose sight of the wood for the trees in the complexity of the modelling it has had undertaken by Analysys. Permitting higher charges for voice call termination will mean that the additional costs of new networks, which deliver a vastly enhanced bandwidth and data capability, are being loaded on to fixed customers wanting only to make a voice call. This is inequitable. The extra costs of 3G networks should be allocated to the new services which the networks are designed to provide - not from fixed-line customers. It is not reasonable to expect consumers to incur increasing charges to receive the same basic telephony service. 18 It is worth noting that a single price control would leave the choice of network up to the mobile operators. This would provide the mobile operators with the choice of investing in 3G (to market and sell new data services) or to continue to rely on their 2G networks (for which call termination charges will cover costs). Regulation should let the mobile operators decide what to do and not introduce any bias into their decision. Charges from 2007 and “X” 19 It is also the case that 3G costs simply cannot be modelled with any degree of accuracy at this time. Ofcom can only produce a very broad range of what 3G costs might be like in the period from 2007 to 2011. There are numerous imponderables in any such exercise, but first and foremost of these is the huge uncertainty about network usage and hence the economies of scale and scope that Mobile Termination Review BT Response 250506.doc Page 6 of 12
  • 7. Ofcom’s Mobile Call Termination Market Review Consultation BT Response will be possible. Any estimates which show 3G costs to be above those of 2G must be suspect for the reasons given above. 20 We therefore suggest that instead, Ofcom uses its established costs model for 2G networks with the assumption that all calls continue to be terminated in such a way. It would also massively simplify the modelling exercise. Ofcom reported in summer 20054 that the costs of terminating a 2G voice call are approximately 4.6ppm to 4.9ppm (depending on the type of network). The new price controls, when they commence, should start from around such a level. 21 The second central price control issue is at what rate charges should decline through the duration of the new price control. This is, BT accepts, a difficult question as it turns on the rate of technical progress which needs to be assumed for the duration of the price control. (The X in RPI-X is centred on the rate of cost savings – which essentially relies on efficiency improvement – which the regulated supplier can be expected to make.) For example, if it were to be assumed that technical progress occurs no faster than in the economy as a whole then X ought to be set at 0, assuming charges are in line with costs at the outset, so that prices remain constant in real terms. 22 However, telecommunications has a far higher rate of technical progress than that in the economy as a whole, due in large part to the declining price of equipment. Consumers making voice calls to mobiles should benefit from these cost reductions. Ofcom therefore needs to consider what rate of technical progress is appropriate for mobile suppliers between 2007 and 2011. One proxy for this is the rate of technical progress that has recently been achieved for ICT-intensive sectors. Network externality surcharge – a £75m tax on consumers 23 There is now a clear case for Ofcom to cease the externality surcharge in the new controls. This is not discussed anywhere in the Market Review consultation, an omission which BT finds puzzling as it is effectively a tax which costs fixed-line consumers in the region of £75m pa. This has essentially been allowed by Ofcom to encourage mobile take-up. Such a tax on users is not extended to any other communication service to which similar “network effects” apply. It is, for example, also the case that broadband services have externality effects but there is no subsidy for broadband connections. 24 The subsidy also has the effect of distorting competition by artificially promoting the use of mobile platforms (which receive the subsidy) over those of fixed networks (which provide the subsidy). This makes the subsidy inconsistent with the EU Directives which promote technological neutrality. BT does not know of any other country where fixed users are expected to subsidise mobile operators in such a 4 Figures 4.1 & 4.2 in Ofcom’s June 2005 Explanatory Statement on wholesale mobile voice call termination markets (charge control conditions) at http://www.ofcom.org.uk/consult/condocs/wholesale/wholesale.pdf Mobile Termination Review BT Response 250506.doc Page 7 of 12
  • 8. Ofcom’s Mobile Call Termination Market Review Consultation BT Response manner. By encouraging the use of higher-cost platforms in preference to lower- cost ones, the surcharge also promotes an inefficient allocation of resources. 25 Finally, removal of the surcharge would end the anomalous situation whereby BT is required to finance USO-related schemes aimed at increasing and maintaining marginal subscribers to its network, whereas mobile operators are provided with a subsidy from BT’s customers for the same purpose. 3G licence fees 26 Ofcom raises a potentially significant issue within one of the Annexes of the consultation document – whether to include in voice call termination charges an allowance for the 3G licence fees following the spectrum auctions in 2000. BT believes this is an important policy issue that needs to be addressed in its own right, rather than as part of the cost modelling exercise. 27 BT does not consider that fixed-line customers ought to be asked to pay or contribute to these licence fees. This is because it would effectively mean that fixed-line customers would be paying towards 3G licences. This cannot be justified and Ofcom should ensure that 3G investments are not funded in this way. Mobile operators acquired 3G licences to provide new data services, not to provide voice calls for which 2G networks are perfectly adequate. Consumers of simple voice services should not pay for the 3G spectrum costs anymore than they should pay for the extra functionality and capabilities of 3G networks. 28 It would indeed be quite peculiar for spectrum to be auctioned off by a regulatory agency only for the winning bidders to be allowed to include the cost of the spectrum in full in their regulatory asset base. Under such circumstances we do not understand how the efficiency properties of auctions could possibly operate as the winning bidders would know they could cover their bids in regulated charges. Call termination “pass-through” 29 Finally, BT has offered to extend the commitment we have made in the past to pass on any further reductions in mobile call termination rates to our customers. Competition in the provision of fixed-line services should, in any case, mean that lower call termination charges will continue to be of direct benefit to fixed users. Conclusions 30 Bringing mobile call termination charges into line with costs would save customers over £200m each year but still provide mobile operators with the right incentives to build and market new data services based on 3G networks. It will also end the anomalous treatment of fixed and mobile networks and allow the two forms of electronic communications service to compete against each other on a more equal basis. Mobile Termination Review BT Response 250506.doc Page 8 of 12
  • 9. Ofcom’s Mobile Call Termination Market Review Consultation BT Response BT’s Responses to Ofcom’s Questions Question 1: Do respondents agree with Ofcom’s view that there are separate markets for wholesale mobile voice call termination on the networks of Vodafone, O2, T-Mobile, Orange and H3G? Question 2: Do respondents agree with Ofcom’s view that, given the market definition proposed in Section 3, above Vodafone, O2, T-Mobile, Orange and H3G each have prima facie SMP in the respective market for wholesale mobile voice call termination on their network(s)? There is no doubt that, given current technology and charging arrangements, there are separate markets for wholesale voice call termination on each mobile network. As we said in response to Ofcom’s consultations last year5, we do not consider there to be separate markets for 2G and 3G voice call termination. We agree that each Mobile Network Operator (MNO) continues to have 100% market share in its respective market and that there is therefore prima facie SMP in each case. Question 3: Do you feel that Ofcom has understated the benefits to consumers of a mandated move to an RPP charging regime? Ofcom is particularly interested in hearing from consumer groups. BT has long been of the view that a move to Receiving Party Pays (RPP) is the only realistic way to remove the bottleneck characteristics of call termination services. We recognise, however, that there appears to be little appetite within the Industry for such a change. We do not have strong views as to the likely reaction of consumers of a move to RPP and this is something on which a clear and comprehensive analysis is required to make a judgement on this issue. Ofcom’s inclination may well be right that with receiving parties having been used to not paying for call termination, a change to the structure of the market may well be unwelcome. How consumers would adapt in time is difficult to gauge. Question 4: Do you agree with Ofcom’s position that a mandated form of technological intervention to address the underlying cause of SMP is not currently feasible, and that the development costs relative to the benefits would be unlikely to pass a cost-benefit analysis? BT agrees that a mandated form of technological intervention is unlikely to be a proportionate response to the call termination bottleneck on mobile networks. It 5 BT's response to Ofcom's two consultations on wholesale mobile voice call termination: the charge control consultation and the future regulation consultation, 17 August 2005 @ http://www.btplc.com/Thegroup/Regulatoryinformation/Consultativeresponses/Ofcom/2005/Mobi lecall/index.htm Mobile Termination Review BT Response 250506.doc Page 9 of 12
  • 10. Ofcom’s Mobile Call Termination Market Review Consultation BT Response would add significantly to mobile operators’ costs which would ultimately have to be passed on to consumers. Instead we believe that consumer protection can be more effectively provided by the judicious use of price controls. Provided that these are set on a basis which is genuinely cost-based (as set out earlier in this response) consumers can enjoy the benefits of prices at or about competitive levels without the need for costly changes to mobile operators’ systems. The proviso concerning the need for cost-based charges is, however, very important. If call termination charges are not cost-based (or if the control permits operators to set charges significantly above cost), then regulation may be a less effective control than a form of technological intervention. In effect, the results of a cost-benefit analysis – whether regulation may be better than a mandated structural change - will depend on the regulatory controls which are within Ofcom’s powers. Proportionate regulation is to be preferred to expensive structural remedies if the regulation is itself effective. Question 5: Do you agree that an attempt to rely on a general obligation that mobile voice call termination charges should be “fair and reasonable” or “cost oriented” would be highly likely to result in a period of commercial and regulatory uncertainty followed by the ad hoc imposition of charge controls in response to individual disputes? Question 6: Do you agree that the direct setting of charge controls is an efficient and proportionate remedy for SMP in the market for wholesale mobile voice call termination? BT has direct experience of just such a vague approach. Up until the late 1990s, the mobile termination market was largely governed by an understanding that charges between interconnecting operators should be ‘fair and reasonable’. This framework, however, effectively broke down under the strain of repeated disputes over what was fair and reasonable, with the mobile operators deciding to charge different termination rates to the two main fixed operators, BT and CWC (Mercury/Cable & Wireless). Following a determination by Oftel under their respective licences that the two main mobile operators should charge the fixed operators the same rates, Vodafone and Cellnet (now O2) equalised such charges at the higher level (rather than the lower level). This led the Director General of Telecommunications to refer the mobile operators to the Monopolies and Mergers Commission in 1998 for a judgement as to whether their charges for call termination operated against the public interest6. One of the main recommendations of that Inquiry, which found that the charges did act against the public interest, was the introduction of controls on Vodafone’s and Cellnet’s termination charges. These controls (as amended by successive regulators and endorsed by a later Competition Commission 6 BT was also referred to the MMC at this time, in relation to its retail retention for calls to mobile; the outcome was a price control on this retention. Mobile Termination Review BT Response 250506.doc Page 10 of 12
  • 11. Ofcom’s Mobile Call Termination Market Review Consultation BT Response judgement) have sought to constrain such charges ever since - with the notable exception of calls to 3G networks, as discussed earlier in this response. BT can therefore confidently predict that the result of a reliance on a general obligation would be a failure precisely along the lines Ofcom describes. Furthermore, if agreement between operators on what constitutes ‘fair and reasonable’ in relation to termination costs was difficult to come by ten years ago, it would be far more difficult today as there are many more operators of both fixed networks and mobile networks. The direct setting of charge controls is therefore indeed the efficient and proportionate response to control SMP in this market. Question 7: Do you agree that, from the perspectives of both practical implementation and economic efficiency, a technology-neutral charge is strongly preferable to separate controls across different technologies? We have discussed this issue at some length in the main body of this response. We understand that the question has also been answered (in the affirmative) in the same way in all other Member States which have 3G networks. There is no doubt that there should be one charge which does not depend on the network used to terminate the call. It should also be noted that inter-network pricing (and indeed pricing awareness amongst consumers) is currently heavily dependent on numbering. The National Numbering Plan does not distinguish between 2G and 3G networks, which means it is not possible for originating operators to set different prices in respect of the different networks. In circumstances where there can only be single price at the retail level due to one aspect of regulation there should be a strong presumption for permitting only one price at the wholesale level. Given the above, BT believes that the only possible sustainable outcome is a single technically neutral charge, and that the level of that charge should be capped at the level of 2G costs. This would ensure that fixed consumers originating calls to mobiles are only incurring the costs for the specific services they are using of an efficient operator. Question 8: Do you believe that the factors listed below paragraph 7.99 are relevant in assessing the appropriate level(s) of technology-neutral call termination charge(s)? Are there any other key relevant factors? BT agrees with Ofcom that: • charge controls should be imposed on all Mobile Network Operators (MNOs) which have SMP identified by Ofcom; and Mobile Termination Review BT Response 250506.doc Page 11 of 12
  • 12. Ofcom’s Mobile Call Termination Market Review Consultation BT Response • these controls should be imposed on a technology-neutral basis without any distinction between termination on 2G and 3G networks. To the extent that Ofcom does seek to set price controls on 3G network costs, we do not have grounds for believing that different price controls ought to be set for different MNOs. A single price control would still permit competition in the sense that network operators would compete in terms of each operators’ network efficiency (competition cannot take place in charges for bottleneck services due to the very nature of a bottleneck service). Efficient MNOs could then beat the (industry) price cap and keep any surplus they earn as a result and then use this surplus to compete in the retail market. Indeed, BT has no objection to all five operators over-achieving the implicit efficiency targets in a price cap as long as the target is fair (that is, challenging yet achievable) at the outset. We do not think that Ofcom should allow any MNOs a higher cost allowance than others without a very convincing case that the operator concerned has a genuine set of circumstances as to why its efficiently incurred costs are necessarily higher than those of its competitors. The voluntary decision of one MNO to roll out a 3G network ahead of, or behind, others is not in BT’s view an exogenous factor which should be recognised in its “efficiently incurred costs”. The one area where BT does consider that there is a justification for the introduction of different price caps on different operators is in the case of those operators which have been charging very high rates for call termination whilst this technology has been unregulated. They have, in effect, already begun to recover their costs and this puts them at an advantage over those operators which have not sought to charge such high rates. Without action in this way, different operators will, in effect, be given differential cost allowances and this might be expected to have a distortionary effect at the retail level, as well as being unfair on customers of fixed-line networks. *** Mobile Termination Review BT Response 250506.doc Page 12 of 12

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