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Summary

1.1 Wholesale mobile voice call termination is the service necessary for a network operator to connect a caller with the intended mobile recipient of a call on a different network. If call termination was not available a network operator 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 network operators rather than retail customers.

Process

1.2 On 7 June 2005 Ofcom published a consultation document Wholesale mobile voice call termination – a preliminary consultation (“the Preliminary Consultation”). That consultation ran in parallel with a proposal, since implemented, to extend the existing charge controls on wholesale mobile voice call termination for a further 12 months to 31 March 2007. The Preliminary Consultation was intended to initiate consideration of the issues which would need to be addressed during the next review of the wholesale mobile voice call termination market, to be completed before the extended charge controls expire.

1.3 Non-confidential responses were received from Vodafone, O2, Orange, T-Mobile, H3G, BT, UKCTA, C&W, MCI and Mr S Jackson. One further response was received from an individual who requested that his identity should remain confidential. Several respondents also submitted additional confidential information.

1.4 Having considered responses to the Preliminary Consultation, Ofcom is setting out in the present consultation document its views on market definition and the prima facie evidence of Significant Market Power (“SMP”), and intends that this document should move forward the discussion of future options for regulation after 31 March 2007. Ofcom intends to publish its final consultation document (the ‘Final Consultation’) in Summer 2006.

Ofcom’s proposed view

1.5 In Sections 3 and 4 of this document Ofcom sets out its proposed view that:

• There are separate markets for mobile voice call termination supplied by each of the UK MNOs (ie Vodafone, O2, T-Mobile, Orange and Hutchison 3G UK (“H3G”), and
• The prima facie evidence indicates that each of these mobile operators has Significant Market Power (“SMP”) in the market in which they supply wholesale mobile voice call termination.

1.6 The remainder of the document sets out Ofcom’s proposed view that these market definitions and the existence of SMP are unlikely to change during the timeframe of this review (4 years from March 2007). Section 5 explores the detriment likely to be caused by excessive termination charges (including inefficient allocation of resources and equity concerns with respect to certain groups of consumers) and Section 6 considers whether there are actions which Ofcom could take to remove the underlying causes of SMP in this market. That section presents Ofcom’s current view that neither of the two key options considered in the Preliminary Consultation for effecting fundamental change are practicable at this time: namely

• A mandated change to a Receiving Party Pays (“RPP”) billing arrangement, under which called parties would pay to receive calls, might be relied on to remove the causes of SMP, but would be likely to cause unacceptable levels of disruption to retail markets and be extremely unpopular with consumers,
• Technical change to enable more than one mobile operator to compete to terminate a call on any mobile phone, while perhaps conceptually feasible, is not practicable at this time without very significant modification to mobile networks and/or mobile phones.

1.7 Given that neither Ofcom nor stakeholders have been able to identify any other means by which Ofcom could reasonably address the underlying causes of the prima facie SMP in the market, the remainder of the document considers a variety of remedies for preventing MNOs from exploiting their SMP to the detriment of consumers. Ofcom’s proposed view is that, while reliance on competition law or ex ante obligations to ensure that charges are fair and reasonable or cost-oriented may appear “light touch” in comparison with direct charge controls, the absence of any consensus view on what is the appropriate level of charges for mobile voice call termination in a world where such termination is variously provided using 2G and 3G networks, is almost certain to result in early disputes. While Ofcom could choose not to determine the appropriate level of charges until a dispute is brought for resolution, such an approach would result in a period of regulatory and commercial uncertainty, and might not facilitate full and transparent consultation on the basis on which charges should be set. Therefore, it is Ofcom’s proposed view that;

• Charge controls appear to offer the most efficient and proportionate means to ensure that charges are set at the appropriate level.

1.8 As discussed in Annex 5, Ofcom is continuing to work with the industry to develop a new cost model for mobile voice call termination (including the costs of delivering voice call termination on both 2G and 3G networks). Ofcom is not, therefore, attempting to indicate in the present consultation document what is the appropriate level of charges for wholesale voice call termination (Ofcom expects to address that question in the next consultation exercise to be published during the summer of 2006). Nevertheless, all 5 UK Mobile Network Operators (“the 5 MNOs”) are now terminating some voice calls on 3G networks, and the volumes can reasonably be expected to increase sharply over the period to 2011. Charge controls, such as those in force today, which apply only to termination on 2G networks, are likely to present artificial incentives for the charge-controlled MNOs to develop the means to use unregulated 3G networks to terminate traffic in preference to 2G networks.

1.9 Furthermore, the present system of blending regulated 2G charges and unregulated 3G charges to set a weighted average charge to apply to all forms of termination (distinction on a call by call basis not being possible) provides MNOs with both the incentive and opportunity to set high unregulated underlying charges for 3G and so above-cost blended charges. Ofcom notes that Vodafone’s termination charges now include underlying charges for the proportion of calls which are terminated on its 3G network which are more than twice the underlying regulated charges for 2G termination within the blend and this has increased beyond the regulated 2G level, the blended charge levied for all forms of termination. Furthermore, the reasons in the last market review for not regulating 3G (that only H3G was terminating voice calls on a 3G network and H3G had at the time less than 1% of the UK subscribers) have less weight in the context of the current review. Ofcom is proposing, therefore, that

• Any SMP conditions, including any charge controls, should apply to termination on both 2G and 3G networks

1.10 Ofcom has noted that, currently, MNOs are unable to determine on a call by call basis which network type (2G or 3G) should be used to terminate any given call; 3G capable phones are programmed to standby to receive and make calls in 3G mode whenever within a 3G coverage area (as, otherwise, they would be unable to make or receive advanced 3G services – standing-by in both modes simultaneously is not currently possible). Any call to a 3G capable phone which is in a 3G coverage area will, therefore, be terminated using the MNO’s 3G network, and all other calls will be terminated using the 2G network. Consequently, callers and operators which originate calls to a mobile have no choice in how the call is terminated and would, in any event, be unlikely to have a preference, unless on price grounds, as the quality of voice call termination on 2G and 3G networks is indistinguishable. In summary, the choice of whether termination is achieved using a 2G or 3G networks is currently determined by technical considerations, and callers and originating operators have no means to influence the decision. For these reasons, and those more fully explained in section 7, Ofcom currently holds the view that

• There would seem to be good reasons, subject to Ofcom’s work developing a new cost model, for applying the same charge cap to termination on an MNO’s 2G and 3G network, but Ofcom will need to ensure that the approach does not adversely affect prospects for future investment

1.11 As noted in Section 5, where an MNO with SMP is able to set wholesale mobile termination charges above the competitive level, excessive revenue may be used to compete with other MNOs in the competitive mobile retail markets (as well as perhaps more widely with providers of fixed network services). This competition may take the form of reduced outgoing call or subscription prices subsidised by excessive termination charges, or may even include a direct sharing of excessive termination charges with the called party in the form of credits based on incoming call volumes. Such offers are likely to increase the attractiveness of the MNO’s retail offers relative to those of other MNOs. For this reason, Ofcom is proposing that

• It is essential that any differences between any controls imposed on different MNOs are based on a clear and unambiguous analysis of costs as, otherwise, Ofcom risks distorting the competitive retail mobile markets.

1.12 Ofcom also proposes that where SMP charge control conditions are imposed, such conditions should be supplemented by other SMP conditions, including an obligation to meet reasonable demand for mobile voice call termination on fair and reasonable terms, a prohibition of undue discrimination and an obligation to notify charges and certain other information variously to Ofcom, interconnected parties and other stakeholders.

Next steps

1.13 Ofcom is inviting detailed comments on the issues raised in the present consultation document by 25 May 2006. Ofcom expects to consult further on estimating the cost of mobile termination and on countervailing buyer power. Furthermore, as Ofcom considers it important to conclude this market review well before the present charge controls expire in March 2007 Ofcom is asking for responses within 8 weeks.

1.14 After considering responses, and after completing the cost modelling work, Ofcom will publish its final consultation document on this issue. At that time Ofcom will also publish the text of a set of proposed conditions, if appropriate. Ofcom anticipates that it will publish this proposal during the summer of 2006, and Ofcom will invite the European Commission and other National Regulatory Authorities (“NRAs”) to comment at that time (as Ofcom is required to do by the EC Communications Directives).

The full document is available below:

• Mobile Call Termination [pdf]
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