1. Ofcom’s Consultation
Mobile Call Termination
25 May 2006
BT would welcome comments on this response. Comments should be
addressed to Alun Banner and sent by e-mail to firstname.lastname@example.org
2. Ofcom’s Mobile Call Termination Market Review Consultation
Mobile Call Termination: Market Review
BT’s response to Ofcom’s Consultation published on 30 March 2006
• 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
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3. Ofcom’s Mobile Call Termination Market Review Consultation
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
BT’s Responses to Ofcom’s Questions pages 9-12
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
“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.
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4. Ofcom’s Mobile Call Termination Market Review Consultation
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
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.
See page 30 et seq. in Ofcom’s June 2005 Explanatory Statement on wholesale mobile voice
call termination markets (charge control conditions) at
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5. Ofcom’s Mobile Call Termination Market Review Consultation
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
Paragraph 1.18 of “Next Generation Networks: Further Consultation” issued 30 June 2005 at
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6. Ofcom’s Mobile Call Termination Market Review Consultation
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
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
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
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7. Ofcom’s Mobile Call Termination Market Review Consultation
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
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
Figures 4.1 & 4.2 in Ofcom’s June 2005 Explanatory Statement on wholesale mobile voice call
termination markets (charge control conditions) at
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8. Ofcom’s Mobile Call Termination Market Review Consultation
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.
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
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9. Ofcom’s Mobile Call Termination Market Review Consultation
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
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
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
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
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 @
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10. Ofcom’s Mobile Call Termination Market Review Consultation
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’
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
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
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
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.
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11. Ofcom’s Mobile Call Termination Market Review Consultation
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
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12. Ofcom’s Mobile Call Termination Market Review Consultation
• 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
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.
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