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Assessment of whether H3G holds a position of SMP in the market for wholesale mobile voice call termination on its network

Summary

1.1 Wholesale mobile voice call termination (“MCT”) is the service purchased from mobile network providers by another communications provider so that they can connect their networks to enable their customers to contact the person they are calling. The recipient of the call will be answering using their mobile phone. If call termination was not available a communications provider could only terminate calls to other customers on its own network. This service is referred to as wholesale because it is sold and purchased by communications providers rather than retail customers.

1.2 In 2003, a new European regulatory framework for electronic communications networks and services entered into force, which was implemented in the UK via the Communications Act 2003 (‘the Act’).

1.3 In keeping with its requirements under the Act, Oftel and then Ofcom conducted a review of the extent of competition in the provision of wholesale mobile voice call termination. Following this market review, Ofcom, in June 2004, determined that there was a separate market for wholesale mobile voice call termination on the network of each of Vodafone, O2, T-Mobile, Orange and H3G (“the MNOs”) (plus Inquam, which has since ceased to trade). Those markets were considered to include voice call termination on both 2G and 3G networks, but they exclude termination of data and SMS. Ofcom also concluded that each MNO had Significant Market Power (‘SMP’) in its respective market.

1.4 On this basis, Ofcom imposed regulatory remedies on each of the operators for the period June 2004 to April 2006, with the 2G MNOs, Vodafone, O2, Orange and T-Mobile, being subject to charge controls and other requirements. H3G was required only to give advance notification of price changes and provide Ofcom with details of its call volumes. Inquam was subject to a requirement to give advance notification of its price changes.

1.5 H3G subsequently appealed Ofcom’s determination that it had SMP to the Competition Appeal Tribunal (‘the CAT’), on the grounds, amongst others, that Ofcom did not carry out a sufficient analysis to entitle it to come to a decision that H3G had SMP and, failed to take account or sufficient account, of the ability of BT to restrain pricing, in reaching its conclusions^(-1-).

1.6 The CAT, in November 2005, found that Ofcom erred in its SMP determination since it did not conduct a full assessment of the extent to which BT had Countervailing Buyer Power (“CBP”). It made an Order requiring Ofcom to:

Reconsider whether H3G has SMP in the market for mobile wholesale voice termination on H3G’s network taking into account the extent to which CBP exists in BT and any other matters as are relevant at the time of Ofcom’s reconsideration; and
Take account of the CAT’s Judgment in its reconsideration.

1.7 On 13 September 2006 Ofcom published the consultation document Assessment of whether H3G holds a position of SMP in the market for wholesale mobile voice call termination on its network (the ‘H3G reassessment consultation’)^(-2-), reassessing H3G’s position of SMP consistent with the Order made by the CAT.

1.8 In the H3G reassessment consultation, Ofcom proposed that H3G has SMP in the market for wholesale mobile voice call termination on its own network as:

H3G has 100% market share of the relevant market;
There are absolute barriers to entry; and
Ofcom considered that BT did not and will not, over the period under consideration, have sufficient CBP to constrain H3G’s prices to a competitive level.

1.9 Additionally, Ofcom proposed to impose a transparency obligation on H3G for the period until 31 March 2007.

1.10 This statement (the H3G reassessment statement) sets out Ofcom’s decision in relation to the reassessment of H3G over this period.

1.11 Ofcom has today also published its final decision in relation to its review of Calls to Mobile^(-3-) for the period from 1st April to 31 March 2011.

Responses to the September H3G reassessment consultation

1.12 Ofcom received three responses to the H3G reassessment consultation; from the European Commission, H3G and O2. The Commission made no comment on Ofcom’s analysis in its response.

1.13 O2 considered that Ofcom had carried out a thorough analysis and that there was empirical evidence to support Ofcom’s view of the absence of sufficient CBP exerted by BT on H3G. O2 therefore agreed with Ofcom’s proposal as set out in the H3G reassessment consultation that H3G has SMP in the relevant market.

1.14 H3G raised a number of issues in its response:

H3G questioned Ofcom’s interpretation of our dispute resolution powers. In H3G’s view, the fact that BT can refer a pricing dispute to Ofcom of itself implies that BT constrains H3G’s pricing independence.
H3G questioned Ofcom’s view that in resolving a dispute, Ofcom’s approach would vary according to whether or not an operator has SMP. In H3G’s view, there is no legal justification for adopting such a distinction.
H3G disagreed with Ofcom’s view that in resolving a dispute about end-to-end connectivity, where neither party has SMP, its main objective would be to ensure that connectivity (and, therefore, the outcome might be different from a dispute where one or both parties possessed SMP). Further, H3G questioned what price would be determined under these circumstances.
H3G questioned Ofcom’s view as to the extent to which CBP would have to act as a constraint on prices before it could be considered sufficient to counter SMP. H3G noted that, under competition law, dominance is considered to be shown by an ability to sustain prices that “substantially” exceed costs; the ability for prices to exceed the competitive level is not, of itself, an indication of dominance.
More broadly, H3G also argued that Ofcom had erred by setting out the prima facie evidence of SMP before considering whether any purchaser is able to exercise sufficient CBP to counter that SMP. In H3G’s view, this approach presents a risk that Ofcom would fail to give adequate consideration to all the factors relating to countervailing buyer power.

1.15 In summary, H3G continues to consider that BT has CBP, and that it does not have SMP in the relevant market.

1.16 Ofcom has taken these responses into account in reaching its decision, and its response to each of the issues raised by H3G is set out in the relevant sections of this document. In particular, Ofcom responds to H3G’s points regarding dispute resolution and end-to-end connectivity in paragraphs 3.8 and paragraphs 4.56 to 4.74 and in relation to the extent of CBP held by BT 4.15 to 4.50. Section 5, in particular paragraphs 5.10 to 5.15 set out the SMP criteria relevant to this analysis.

Assessment of whether BT has CBP

1.17 In accordance with the CAT’s Judgment and Order, in arriving at its decision as set out in this statement, Ofcom has considered and taken account of all the available evidence which relates to the relative positions of BT and H3G in negotiating the price that H3G would charge and charges BT for mobile voice call termination on its network.

1.18 Such evidence includes that relating to the initial negotiations between H3G and BT to the extent it continues to have relevance in the period under consideration, any further material following the initial negotiations and the effect that any prospect of relevant regulatory intervention may have on BT’s CBP.

Conclusion on CBP

1.19 Over the period from 1 June 2004 to 31 March 2007, given H3G’s 100% market share in the market for wholesale mobile voice call termination on its own network, and the absolute barriers to entry to that market, Ofcom’s view is that BT has not been able and is unlikely to be able to exert CBP through a threat either to purchase the service from an alternative source or to self-supply.

1.20 BT is a well-informed purchaser of termination services and is likely to be increasingly price sensitive to the charge for termination on H3G’s network as H3G grows. However, BT is not currently in a position to constrain the price it must pay H3G by credibly threatening to delay a price notification aiming at a charge increase, or to cease purchasing termination from H3G. This is a result of the provisions in the current contract between BT and H3G and BT’s end-to-end connectivity obligation. In relation to the contract, these provisions include timelines within which proposed price changes have to be accepted or rejected. Furthermore, since H3G has grown significantly since the establishment of the interconnection agreement between H3G and BT, BT’s commercial incentive to cease purchasing termination will have decreased substantially.

1.21 Should a stalemate situation occur in terms of negotiating H3G’s termination rate between H3G and BT, both parties could refer the issue as a dispute to Ofcom and in this context, BT would have no certainty as to the outcome of dispute resolution by Ofcom. Importantly, the range of potential charges set in the context of an end-to-end dispute is wide, and a reasonable charge in that context would likely be appreciably above the competitive level.

1.22 Over time, H3G’s mobile voice call termination rates have remained stable, although the termination charges of the other 2G MNOs have been reduced substantially. The evidence shows that the level of CBP held by BT is unlikely to be sufficient to counter H3G’s pricing power due to its 100% market share and the absolute barriers to entry.

1.23 Ofcom notes that during the period between publication of the H3G reassessment consultation and publication of this statement, negotiations between BT and H3G regarding H3G’s charges for provision of MCT have reached an impasse. BT has since referred a dispute in relation to these charges to Ofcom.

Other relevant SMP criteria

1.24 As part of Ofcom’s reconsideration of whether H3G has SMP in the relevant market Ofcom also revisited the full range of relevant factors to determine whether there have been any changes since the assessment set out in Ofcom’s June 2004 CTM statement. The relevant factors in 2004, in addition to CBP, were (i) market shares, (ii) the absence of potential competition and (iii) excessive pricing and profitability, which was used only in relation to the SMP findings on the 2G MNOs, not in relation to H3G.

1.25 In considering these factors for the purposes of this re-assessment, Ofcom considers that:

H3G continues to have 100% market share of the relevant market; and
There are absolute barriers to entry which Ofcom believes will persist through to at least April 2007 and which would preclude effective potential competition.

Conclusion

1.26 Ofcom has determined that H3G has SMP in the market for wholesale mobile voice call termination on its own network. H3G has 100% market share of the relevant market and there are absolute barriers to entry. Following further analysis of CBP and having reviewed the responses to the H3G reassessment consultation and taking into account the further information provided by BT and H3G in relation to negotiations for the supply of MCT, Ofcom considers that BT did not and will not, over the period under consideration, have sufficient CBP to constrain H3G’s prices to a level that is not appreciably above the competitive level.

1.27 In light of this conclusion, Ofcom by this statement designates H3G as having SMP in the market for wholesale mobile voice call termination provided by H3G (such termination being provided via H3G’s mobile network), over the period from 1 June 2004 to 31 March 2007.

1.28 As a consequence of which, Ofcom has set a transparency obligation on H3G for the period until 31 March 2007.

Footnotes:

1.- See the CAT’s judgment, paragraph 35, (http://www.catribunal.org.uk/documents/Jdg1047H3G281105.pdf).

2.- See http://www.ofcom.org.uk/consult/condocs/h3gsmp/

3.- http://www.ofcom.org.uk/consult/condocs/mobile_call_term/statement

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