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Wholesale mobile voice call termination

Preliminary consultation on future regulation

Executive Summary

A market review to consider the future of regulation of mobile termination

1.1 When fixed and mobile operators offer their customers the ability to call UK mobile numbers, they pay mobile operators a wholesale charge to complete those calls^(-1-). The rates that operators pay are known as “mobile call termination” (MCT) charges.

1.2 On 31 March 2011, the current rules which set wholesale MCT charges will expire. In our Mobile Sector Assessment^(-2-) (MSA I) we asked what rules, if any, should apply after that time. This consultation initiates a market review to consider that question in more detail.

1.3 This consultation focuses primarily on how changes in mobile markets might impact regulation of MCT after March 2011(which is one reason why this market review is closely tied to our MSA consultations). The mobile sector is changing rapidly; for an increasing number of users, mobile services are used to access the internet and send messages as much as to make telephone calls. These changes may affect the question of what MCT charges are likely to lead to the best outcomes for consumers, and whether regulation is needed to achieve this.

1.4 Responding to a changing market, European regulators have been debating the merits of different approaches to regulating MCT charges. The European Commission (EC) has issued a Recommendation^(-3-), which sets out its views about how national regulators, including Ofcom, should approach these questions. We assess the approach set out by the EC in its Recommendation in section 6. At this stage however, we think it worthwhile to consider the merits of alternative approaches (in terms of the impact on consumers), also, as part of the wider policy debate.

1.5 The focus of this preliminary consultation is on whether to regulate prices and, if so, how. It does not, at this stage, consider what the regulated prices might be, or attempt to decide the best approach.

The question of which costs are paid for by termination charges is pivotal

1.6 Currently, MCT charges are controlled by regulation and are based on the cost of providing wholesale call termination. The question of what it costs operators to provide this service is contentious and highly contested. Ofcom has previously calculated those costs by looking at the additional costs of providing wholesale call termination (‘incremental’ costs), including a share of the fixed and common costs^(-4-) that a mobile operator is likely to incur in running a network which supports a number of services, including voice calls.

1.7 The EC’s Recommendation suggests revising this approach, essentially by no longer allowing fixed and common costs to be paid for by termination charges. This change would be likely to reduce the MCT charges currently in place across the European Union, potentially by a significant amount^(-5-).

1.8 This market review considers, among other things, a range of approaches to this question, and whether Ofcom should adopt a similar approach to that recommended by the EC. In arriving at a decision on the best approach, Ofcom is required to take utmost account of the EC Recommendation.

The MSA I consultation and wholesale voice call termination

1.9 In the MSA I Consultation, we stressed the importance of thinking widely about the regulatory options, including not regulating termination charges or adopting a simpler approach (at the extreme, setting termination rates to zero, sometimes called Bill and Keep (B&K)).

1.10 In the MSA I Consultation, we gathered and analysed data from the UK and other countries, and commissioned analysis by expert advisers on various aspects of call termination. Where possible, this analysis has been included in the annexes to this consultation^(-6-).

1.11 Based on this initial work, our current view is that there is no single regulatory option for termination regulation that is unambiguously better than the alternatives. Different approaches would affect different types of consumers to differing degrees, particularly if there were to be a sudden shift in approach, and considerable uncertainty remains about how future services might develop.

Possible regulatory remedies

1.12 Determining what approach should be adopted for the period after March 2011 will involve weighing the relative merits of various different approaches.

1.13 With the possible exception of deregulation, all of the options identified would lead to a reduction in mobile termination rates. This raises a further question about whether we should adopt a policy of reducing termination rates as far and as fast as we reasonably can, within the boundaries of sound economic policy, and the legal framework, whilst recognising underlying cost differences. One objective of such a policy would be to allow greater flexibility at the retail level, thereby facilitating innovation, although doing so may have other consequences that would need careful consideration.

1.14 We have not yet decided whether we should adopt such a strategy, but have identified six possible options for the future regulation of MCT. We would welcome comments on all these options, on other options that we should consider and on the broader question of our strategy on the future regulation of MCT.

Possible regulatory approaches for MCT

Deregulation – removal of all termination regulation from mobile operators.
Long Run Incremental Cost + (LRIC+) – charge control set broadly on the basis of the same cost standard as it is today.
Long Run Marginal Cost (LRMC) – revised charge control methodology with no allowance for recovery of common costs, broadly the approach recommended by the EC.
Capacity Based Charges (CBC) – a different approach to setting the structure of termination charges based on the capacity required for termination.
Mandated Reciprocity – set mobile changes to match the rates set for fixed operators.
Mandated “bill and keep” (B&K) – termination charges effectively set at zero.

The most important issue is how each approach affects consumers

1.15 We consider that all of the options identified above, with the possible exception of the deregulatory option (the outcome of which is uncertain) is likely to reduce the current pence-per-minute charge for MCT^(-7-). Such a reduction would have different effects on consumers, competition and commercial practice in the industry.

1.16 These effects are considered further in section 6. In summary we consider that:

lower mobile termination rates are likely to benefit consumers overall (both fixed and mobile) because operators will have greater retail pricing flexibility. We would expect operators to be able to offer consumers a wider variety of retail packages and tariff structures;
while some low-usage customers may be worse off (if termination rates are reduced) there may be more appropriate policy mechanisms to ensure that these and other vulnerable consumer groups are adequately protected;
lower termination charges might ameliorate possible competition concerns over on/off-net price differentials;
lower mobile termination charges are likely to lessen possible concerns over discrepancies between fixed and mobile termination rates; and
the commercial impact of lower termination rates on UK operators, particularly regarding the potential for discrepancy of effect between fixed and mobile operators, needs careful consideration.

Structure of the document

1.17 This documents sets out the arguments summarised above in the following way:

Section 2 provides a more detailed background to the mobile sector, and the market review process.
Section 3 notes our historical approach to defining the wholesale mobile call termination market.
Sections 4 and 5 build on the market definition, and describe how we approach the assessment of market power and the implications for consumers of a finding of significant market power (SMP).
Finally, section 6 examines what regulatory remedies might be appropriate to address a SMP, were such a finding to be made.

Key questions in the consultation

1.18 We ask several questions in the consultation; these are the three primary questions on which we would like stakeholder’s views. These are repeated in the main body of the document.

Question 1.1: Should our policy approach to regulating MCT change? For example, given the possible benefits, should we adopt a policy of reducing termination rates as far and fast as we reasonably can, within the boundaries of sound economic policy, and whilst recognising underlying cost differences? If our policy approach did change, what do you think are the relevant factors for us to consider in deciding on the best future policy to regulating MCT?

Question 1.2: Are there additional options (other than the six set out in this consultation) that we should consider? If so what are they and what advantages/disadvantages do they offer?

Question 1.3: Do you agree with our preliminary views set out for each of the options? If not, what are the additional factors that we should take into consideration, and why are they relevant to our analysis?

Next steps

1.19 This consultation closes on 28 July 2009. Annex 1 provides further details of how to respond to this consultation.

Footnotes:

1.-‘Call termination’ describes the process of connecting (‘terminating’) a telephone call from a user on one network to a user on another network. Wholesale voice call termination is the service provided by a network operator to other providers in order to terminate calls. It is provided to and by all types of operators, including between fixed and mobile operators, normally on a two-way basis.

2.- Our Mobile Sector Assessment consultation (the MSA I Consultation) (see http://www.ofcom.org.uk/consult/condocs/msa08/) considers whether and how Ofcom’s strategic approach to regulation of mobile services should adapt given developments in the sector. It considered many issues, although highlighted MCT as an area for particular focus. In the MSA I Consultation, we conjectured that the current MCT regime would come under growing pressure, given changes in the mobile market, and sought a strategic debate about future options for change. That debate will now be progressed through the market review described in this consultation. Our second MSA consultation will be published shortly and looks at Ofcom’s wider regulatory strategy for the mobile sector.

3.- See http://ec.europa.eu/information_society/policy/ecomm/doc/implementation_enforcement/article_7/
recom_term_rates_en.pdf EC final Recommendation on termination (EC C(2009)3359).

4.- This is termed “long-run incremental cost plus” (or “LRIC+”). A fuller explanation of LRIC+ and other cost assessment approaches is set out in section 6).

5.- The European Regulators Group (ERG) ‘snap-shot’ benchmark calculates the average EU mobile termination rate at 8.7 Euro cents per minute. The EC’s impact assessment presented to COCOM on 10th December suggested that if the EC’s proposed methodology were applied mobile termination rates would fall to around 2.5 Euro cents per minute.

6.- In part, this work has also been used to help inform our recent consultation on fixed termination regulation, on the Network Charge Control See the review of BT Network Charge Control at http://www.ofcom.org.uk/consult/condocs/review_bt_ncc

7.- Relative to current rates calculated using a LRIC+ methodology.