Liberalisation and regulation in the telecommunication sector: Theory and empirical evidence

Liberalisation and regulation in the telecommunication sector: Theory and empirical evidence

Week 6Call Termination on Mobile Network OperatorsRegulating a Market, the case of Mobile Operators in the UK

24/06/2004 Β. Μerekoylias 2

Overview of presentation

The CaseConsultation ProcedureDefining a MarketMarket AnalysisMarket FailureSuggestions for regulatory obligations


The Case

Call origination and termination On net Off net

New regulatory framework on 25/7/2003 NRAs carry reviews of competition in communication markets

The case of Mobile Operators Services sold and purchased by communications providers in

order to complete end-to-end calls. Wholesale voice calls terminated on individual mobile networks. Wholesale 2G voice call termination provided to the subscribers

of “3” The definition of a new Market


Market Review

Definition of the relevant market or markets

Assessment of competition in each market. Is there any company with a SMP?

Assessment of the options for regulation and proposal or obligations.


Existing Regulation 1998 Competition Commission

Vodafone & Cellnet (now O2) 11.7 pence per minute ceiling (Retail Price Index) RPI-9% reduction for two years until March 2002

Oftel 2002 Termination charge reduction by RPI-12% each year for four years until March 2006 for all four

mobile operators, Vodafone, O2, Orange and One 2 One (now T-Mobile). The operators rejected the proposed licence modification.

February 2002 the director modified the licences of Vodafone and O2 to extend the existing controls of RPI-9% on termination charges for one year to March 2003.

December 2002, Competition Commission Report Termination charges of the four mobile operators operate against public interest 30%-40% above a fair charge Fixed to mobile and off net mobile too expensive High termination charges deters people from calling mobiles High off net usage customers unfairly subsidise customers who mainly receive or make on net

calls Recommended

15% reduction O2 and Vodafone should further reduce RPI-15% and for each of the subsequent years to March 2006 Orange and T-Mobile should reduce charges by RPI-14% and for each of the subsequent years to March

2006


Consultation Procedure

Relevant market definition Market analysis, assessment of SMP Detrimental effects arising from SMP Regulation Options Proposed charge controls Consultation Final plan of the Regulation documents

Defining the market Analysis of the market Regulatory obligations for the players

Basic principles of LRIC for the market and the services


Defining a Market

All the services that can be substitutes based on Characteristics Price Usage Competition Existence of Demand and Supply

SSNIP Test Critical loss analysis test Supply Substitution Demand Substitution Common pricing 3G Region Market


Conclusions

Six Separate Market Wholesale voice call termination provided to the

subscribers of “3” Wholesale voice call termination provided by Inquam Wholesale voice call termination provided by O2 Wholesale voice call termination provided by Orange Wholesale voice call termination provided by T

Mobile Wholesale voice call termination provided by

Vodafone


Market Analysis, Assessment of SMP

SMP, Significant Market Power Potential Competition. Even in a 100% monopolistic market.

Low entry barriers Alternative technological solutions Structural changes can effect the negotiation position.

Countervailing customer power The end customers The fixed operators Shares:

BT 26,4% Other fixed 14,8% Off net 18,6% On net 40,2%

Evidence of Operators behavior Price trends Excessive pricing, discriminatory pricing, price squeeze Actual price Benchmarking Excessive profits


Detrimental effects arising from SMP

Is Ex-ante Regulation a solution? Entry barriers The market over time is not competitive Is competition effective?

Negative impact of high prices Distortion of the customers choices The fixed operators can not compete with the mobile operators equally for voice services The fixed operators can not compete with the mobile operators equally for corporate

networks The mobile operators offer lower prices for end to end on-net call service than the call

termination service The mobile operators points

Competition in the end customer level. The prices are getting lower. Redistribution of cost. (“Swings and roundabouts” or “Waterbed effect”) Customers welfare increases as more people use mobile phones.

The Cost for non efficiency of the market being paid from the non customers of the mobile operators.


Regulation Options - Proposed charge controls (1) Alternative solutions

Receiving Party Pays Call Back Call divert Mobile Virtual network operators with multiple roaming agreements Multiple SIMs GSM Gateways Trying termination charges to competitively supplied services Delivering a call further into the terminating network

Obligations the Director can impose: The provision of network access No undue discrimination Transparence Cost Orientation Cost recovery, charge controls Cost accounting and accounting separation


Regulation Options - Proposed charge controls (2) Options

A. No ex ante regulation B. Requirement to secure transparency through publication of prices and prior notification of price changes C. B + transparent the charges, terms and conditions through publication of a reference offer, a requirement to

provide mobile voice call termination on far and reasonable terms, not to unduly discriminate in the provision of the service and imposition of charge controls.

D C + requirement to maintain cost – accounting systems, to set prices on the basis of Forward looking LRIC, separate account systems

Director Initial View MNOs 3G in Option A MNOs 2G in Option C

Charge Control Final target level How the charges should be brought down to this fair target charge. Ramsey prices Network externalities ….Resulting to a cost based pricing LRIC + EPMU

What may be the results? Mobile operators. The medium-term nature permits a time for restructure. Mobile customers. A higher price may occur based on the level of competition Fixed operators and customers. Lower costs for both. A better positioning for the corporate networks market.

Liberalisation and regulation in the telecommunication sector: Theory and empirical evidence

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