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Summary

1.1 Wholesale mobile voice call termination (“MCT”) 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 voice call termination, generally, 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.

1.2 Ofcom is reviewing the market(s) for supply of MCT to determine whether they are effectively competitive and, if not, what remedies should be imposed.

Background

1.3 Ofcom last conducted a review of markets for the supply of MCT during 2003/2004, and concluded that exercise on 1 June 2004 when it published the statement Wholesale Mobile Voice Call Termination (the “June 2004 Statement”) in which it designated Vodafone, O2, T-Mobile, Orange and Hutchison 3G UK (together, “the five MNOs”) as having Significant Market Power (“SMP”). Various conditions were imposed on the five MNOs, including charge controls which were imposed on only Vodafone, O2, T-Mobile and Orange (the “2G/3G MNOs”). Hutchison 3G UK (“H3G”) subsequently appealed its SMP designation and the Competition Appeals Tribunal (“CAT”) remitted the decision back to Ofcom to reconsider. The reassessment of H3G’s SMP during the period to 31 March 2007 is being undertaken as an exercise distinct from the present market review. The charge controls imposed on the 2G/3G MNOs will expire on 31 March 2007.

1.4 The present market review was initiated on 7 June 2005 when Ofcom published a document Wholesale mobile voice call termination – a preliminary consultation (“the Preliminary Consultation”). That document was intended to initiate consideration of the issues.

1.5 On 30 March 2006, having considered responses to the Preliminary Consultation, Ofcom published a more detailed consultation document Wholesale mobile voice call termination – (“the March 2006 Consultation”). That consultation set out Ofcom’s initial view that there are separate markets for MCT supplied by each of the five MNOs, and that the prima facie evidence indicates that each of these mobile operators has SMP in the market in which they supply MCT. Ofcom emphasised, however, that it had not yet concluded its analysis of whether any purchasers of MCT have countervailing buyer power (“CBP”) such that would constrain a supplier’s ability to exercise SMP.

1.6 The March 2006 Consultation also considered the detriments which may arise from the exercise of SMP in these markets; principally, that MCT charges may be excessive, and that excessive profits may not wholly be returned to consumers through reduced charges for other services or, if they are so returned to consumers, that the resulting price structures may be economically inefficient. Concern was expressed that excessive charges for MCT may result in a number of detrimental outcomes, including; under-consumption of fixed to mobile calls and other services originated on fixed networks; over-consumption of subsidised outgoing mobile services and mobile phones; inequitable outcomes in that some groups of consumers, such as heavy users of subsidised mobile goods and services, may benefit to the detriment of other groups whose use of fixed to mobile calls is high relative to their consumption of subsidised mobile services.

1.7 The March 2006 Consultation explored a number of regulatory options for addressing those detriments. Ofcom indicated an initial view that, in the presence of SMP, some form of charge control might be appropriate and that there may be merit in applying a “technology-neutral” charge control to each MNO. For example, in the case of MNOs with both 2G and 3G networks a single control applying irrespective of which network is used to terminate a specific call. The March 2006 Consultation noted that as Ofcom had not yet concluded its cost modelling work it was unable also to express a view as to whether the same or different charge controls should be imposed on each of the five MNOs. Ofcom noted, however, that any distinctions between the controls imposed on different MNOs would need to be based on clear and unambiguous cost differences, otherwise controls risk distorting other markets, such as the retail markets for outgoing mobile services.

1.8 The March 2006 Consultation also proposed that Ofcom should ensure that any charge controls should not be so tight as to impact adversely prospects for investment, particularly in the light of uncertainty about future traffic levels on 2G and 3G networks. The document also noted the likely asymmetry of risks consequent on setting a charge control which, in light of subsequent market developments, is found to be above or below an MNO’s efficiently incurred costs.

Ofcom’s present view

1.9 Having considered responses to the March 2006 Consultation, having completed an analysis of CBP and having more fully completed the cost modelling work, Ofcom is setting out in the present consultation its proposed views that

• There are separate markets for wholesale mobile voice call termination in the UK by each of Vodafone, O2, Orange, T-Mobile and H3G.
• BT and other purchasers are unable to exercise CBP to the extent needed to constrain charges to the competitive level.
• Each of the five MNOs has SMP in the market for termination of voice calls on its network(s)
• Charge controls should be imposed on the supply of MCT by each of the five MNOs, and those controls should apply without distinction to voice call termination whether on 2G or 3G networks.
• The charge control should apply for 4 years from 31 March 2007
• Average charges of Vodafone, O2 , Orange and T-Mobile should be reduced to 5.3 ppm (2006/7 prices) by the final year of the charge control period (1 April 2010 to 31 March 2011). This would remove the current differential charge control between providers who use 1800 MHz as opposed to 900 MHz spectrum. The reduction should be implemented in 4 equal (percentage) steps across the four years. However, Ofcom will re-evaluate the proposed final level of the charge and the glide path cap (in respect of each MNO separately) in the light of responses to this consultation exercise.
• Average charges of H3G should be reduced to 6.0 ppm (2006/7 prices) by the final year of the charge control (1 April 2010 to 31 March 2011). This level reflects exogenous cost differences between H3G and the 2G/3G MNOs. The change to be implemented by one of three alternative paths (to be determined by Ofcom following consideration of responses to this consultation exercise); either (i) a glide path of four equal percentage changes to the 2010/11 level; (ii) an initial reduction to 8.5ppm (2006/7 prices) in the first year of the control (1 April 2007 to 31 March 2008) followed by three reductions each of equal percentage change across the next three years; or (iii) an immediate reduction to cost in 2007/08 falling to the cost level in 2010/11 over four years. The proposed level of the charge cap in the final year of the four year control will also be re-evaluated in the light of responses to this consultation exercise (and the size of the charge reduction in the first year under option (ii) may also be adjusted).
• Further conditions should be imposed requiring provision of voice call termination on fair and reasonable terms and conditions (including contract terms), prohibiting undue discrimination, and requiring charge and contract term transparency.

1.10 The Notification setting out the proposed market definition, SMP designations and SMP conditions, including draft charge control conditions, are attached at Annex 21.

Next steps

1.11 In accordance with the Communications Act, Ofcom is sending this proposal to the European Commission and to other National Regulatory Authorities (“NRAs”), as well as interested parties including the Secretary of State. Ofcom is inviting detailed comments on the issues raised in this consultation document by 22 November 2006.

1.12 After considering responses Ofcom expects to publish a concluding statement on this issue early in 2007.

1.13 Ofcom has developed a new mobile LRIC model to inform forward looking benchmarks for efficient MCT charge levels. The Excel model files are large and are available on request through webmaster@ofcom.org.uk. Please include your postal address for CD delivery.

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