Competition in the mobile market

Please note that the timetable for this document has changed. The deadline for responses is now close-of-buisness on 1 April 1999.  Any comments on submissions made by the first deadline should be received no later than close-of-business on 19 April 1999.

Please note this document refers to graphs held in separate files.

Contents

1.1 Oftel’s goal is to achieve the best possible deal for customers in terms of quality, choice, and value for money. It believes that the best way to achieve this is through competitive supply of services. Effective competition drives down prices to their efficient level and spurs innovation in the development of new products and services.

1.2 This document presents for consultation the findings of Oftel’s review of competition

in the mobile market. Oftel’s objective in carrying out this review is to ensure that the mobile market is providing the customer with the best possible deal. In assessing the results of the review and their implications, Oftel has paid special attention to the prices of calls from mobile phones. Oftel is particularly concerned to ensure that the prices paid by customers represent value for money.

1.3 The document is published simultaneously with Oftel’s consultative document on indirect access from mobile networks, Customer Choice: Indirect Access from Mobile Networks. Oftel’s consideration of indirect access from mobile networks has been prompted by a request to resolve a dispute between two operators. The results of consultation on this document and on Customer Choice: Indirect Access from Mobile Network will be published in June.

1.4 The finding of Oftel’s review is that Vodafone and Cellnet continue to possess market power in the market for calls from mobile phones, but that there are now strong indications that competition in the mobile market is increasing. This document requests views on the following proposals arising from this finding

• that it is not appropriate now for regulatory controls to be applied to the prices of calls from mobile phones. Oftel expects that competitive pressure will drive down prices. However, Oftel will be closely monitoring prices and will review competition in the market again next year. It expects to complete this review in September 2000;
• that specific conditions requiring provision of wholesale airtime on mobile networks (referred to in mobile licences as Mobile Radio Telecommunication Services) to mobile service providers should remain in the licences of Vodafone and Cellnet;
• that the market analysis at Annex A to this document includes consideration of all the relevant factors which the Director General would need to take into account in proposing to determine that an operator has Market Influence under the terms of the new standard licence template for mobile operators, scheduled to take effect in June of this year. On the basis of this market analysis, the Director General will therefore propose to determine that Vodafone and Cellnet have Market Influence. Such a determination would also need to be the subject of a subsequent formal statutory consultation.

1.5 The document also sets out Oftel’s concerns that Vodafone and Cellnet are acting anti-competitively in cross-subsidising their tied service providers (TSPs - service providers which are owned by or in common ownership with the network operator’s Group). It considers that regulatory action is appropriate to ensure that wholesale airtime is supplied to efficient service providers on terms which enable them to make a reasonable return.

1.6 In formulating these proposals, Oftel has balanced its finding that two of the four

players currently possess market power against strong indications that the market is becoming increasingly competitive, and the prospect of effective competition between the four networks.

1.7 A firm is said to possess market power if it can raise prices above their competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable. A number of factors can indicate that a firm has market power. These are explained at Annex A to this document which also contains the detail of Oftel’s review of competition in the mobile market.

1.8 A key consideration for Oftel has been the structure of the mobile market. Competition at the network level is limited to four players because lack of available spectrum means that no further mobile licences will be granted ahead of the auction to provide third generation mobile services. There is therefore a barrier to any further market entry.

1.9 The limitation in the number of operators to four could have an effect on the competitive behaviour of market players. Four players operating in a market where there is a high barrier to entry is consistent with effective competition, but can also result in a range of outcomes from vigorous competition to collusion between the four. Chapter 2, which explains Oftel’s proposals in detail, includes an analysis of the general market conditions which can lead to collusion and checks these against the particular characteristics of the mobile market. The conclusion is that a competitive outcome is more likely than collusion in the mobile market. However, given the characteristics of the mobile market, Oftel will continue to monitor for signs of anti-competitive behaviour.

1.10 Oftel has also considered the history of competition between the four networks. Following the licencing of Vodafone and Cellnet in 1983, a duopoly operated until the entry of One2One in 1993 and Orange in 1994. There is evidence that competition intensified with the prospect of market entry by the two newer operators, and has been developing since as Orange and One2One have established themselves. This is explained in detail in the review of competition in the mobile market at Annex A.

1.11 One of the factors contributing to Oftel’s finding that Vodafone and Cellnet continue to have market power is the consistently high rates of return earned by both of them. Annex A includes analysis of the profitability of the networks over the past six years. It shows that return on capital employed for the year ending in March 1998 for UK business was 68.5% for Vodafone and 28.4% for Cellnet. High profitability can be the consequence of a number of factors - for example, efficiency, innovation, quality of service, or high volume growth which is a characteristic of the mobile market – and care needs to be taken in the interpretation of figures at UK company level which may include the effect of a number of different activities and, in the case of Cellnet, significant inter-Group transactions with parent companies. However, the persistent high profitability of Vodafone and Cellnet and the fact that this has not been significantly eroded by competition from the two newer networks has contributed to concern about the level of prices for mobile services.

1.12 The market review presented in this document has found evidence that the market is now heading towards effective competition. The main indicators of this are explained below.

1.13 The market shares of Vodafone and Cellnet remain consistent with the possession of market power. Graph 1.1 tracks the movement of shares of subscribers between December 1993 and December 1998.

Graph 1.1 – Trend in share of subscribers
Source: Financial Times Mobile Communications

1.14 This shows that the shares of subscribers of Orange and One2One have been consistently growing since their entry into the market, whereas Vodafone and Cellnet have been losing share. Oftel has also considered trends in shares of revenues, call minutes, and connections. However, generally, it is clear that the market shares of Vodafone and Cellnet are declining whilst the opposite is true of Orange and One2One. This is indicative of developing competition. Furthermore, this may accelerate now that number portability is available and that the network coverage of the Orange and One2One networks is closer to that of the two larger networks (see paragraphs 1.17 and 1.18 below).

1.15 Oftel’s study includes an assessment of movements in the price of mobile services. This shows that the mobile market is characterised by falling prices and that new tariff package and service innovations have become more prevalent since the entry into the market of Orange and One2One. Graph 1.2   shows percentage reductions in prices each year between 1990/1 and 1997/8 measured using the minimum cost package available averaged across 5 categories of users. It illustrates that prices fell every year between 1990 and 1998 with the biggest reductions coinciding with the awarding of new licences to provide mobile services in 1992, the entry into service of One2One and Orange in 1993 and 1994 respectively, and the recent acceleration in competition between the four operators. Overall, prices fell 68% in real terms during this period. The development of new tariffs and services has become particularly noticeable in the past year with the availability of a range of new tariff options, and pre-pay packages offered by all four networks proving to be very popular (though this is not shown on the graph). The emergence of pre-pay in particular may have a significant impact on the market positions of the four networks, but it is presently too early to assess this fully.

1.16 However, the persistence of high returns has led to a perception that prices are presently too high. Oftel is therefore establishing a comparative study of mobile package prices which will enable it to track prices over time. The study will be undertaken regularly. The results will be a key input to future reviews of the mobile market. Oftel will consult on the methodology to be employed.

1.17 The availability on all four networks of number portability from the beginning of this year means that customers can switch networks without changing their number. This should enhance considerably the level of competition between the four networks.

1.18 Up to now, Orange and One2One have faced disadvantages associated with the build-out of their networks as, during their build out phase, they have not been able to offer the same level of coverage as those of Vodafone and Cellnet. Current figures for network coverage are shown in Table 1.1 below. These show that the Orange and One2One networks now offer roughly equivalent coverage to the networks of Vodafone and Cellnet in terms of population coverage (except for in Northern Ireland where One2One has no network). They are not yet able to offer land coverage equivalent to the networks of Vodafone and Cellnet, but the gap will narrow as Orange and One2One continue to build. Overall, competition in the market is likely to increase as the coverage of the two newer networks is improved.

1.19 Oftel’s proposals have been formulated on the basis of the finding that Vodafone and Cellnet continue to have market power but that there are strong indications that the market is becoming increasingly competitive. The proposals below fit with this finding.

1.20 Oftel believes that the operation of effective competition should deliver quality and value for money to customers. However, there are circumstances in which effective competition does not operate – for example where firms are dominant or jointly dominant. Regulators are able to respond in a number of ways to these circumstances, and their response will be conditioned partly by the extent to which the situation results in disbenefits to customers, and by the prospects for the development of effective competition in the market concerned.

1.21 The persistence of high profits reported by the two larger mobile operators in the face of market entry has contributed to concern that prices are currently higher than they would be in an effectively competitive market. It is therefore legitimate to question whether Oftel should intervene to reduce the prices of calls from mobile phones. One option for such regulatory intervention is through price caps of the type currently applied to some of BT’s prices. One other option for regulatory intervention which could have the effect of reducing prices would be a requirement on mobile networks to provide indirect access (IA). Oftel’s assessment of IA and interim conclusions for consultation are contained in the consultative document, Customer Choice: Indirect Access for Mobile Networks, published simultaneously with this document.

1.22 Oftel proposes that price control applied to mobile calls is not appropriate at the present time. Oftel believes that price control is justified where prices are persistently excessive and there is little likelihood of effective competition to reduce those prices in a reasonable timeframe. Oftel’s review of the mobile market has found that effective competition is emerging and competitive pressure is already influencing prices. Oftel’s proposal and the reasons for it are set out fully in Chapter 2.

1.23 The licences of Vodafone and Cellnet both currently contain licence conditions which require them to provide wholesale airtime to independent service providers (ISPs). Similar conditions were removed from the licences of Orange and One2One following the finding of Oftel’s previous review of the mobile market that they did not possess market power (see Fair Trading in the Mobile Market, published in April 1997).

1.24 The requirement to provide wholesale airtime to ISPs enables competitive supply of mobile services to customers by ensuring that they can purchase services from competing service providers. The requirement is necessary where operators have market power at the network level and may wish to extend this to the service provider level. It has enabled service providers to compete in the provision of calls and value added services in a market in which there were originally only two network operators. It continues to provide valuable channels to market for mobile services and encourages provision of value added products by service providers.

1.25 On the basis of Oftel’s finding that Vodafone and Cellnet continue to have market power, Oftel proposes that the licence conditions requiring provision of wholesale airtime to ISPs should remain in the licences of Vodafone and Cellnet. Oftel’s proposal and the reasons for it are set out fully in Chapter 2.

1.26 Implementation of the EC Licensing Directive means that each of the four mobile network operators will have a new standard licence template when the directive is implemented in the UK in June 1999. The DTI consulted on the form of this licence in Implementation of the EC Licensing Directive: Changes to Existing Licences, published in November 1998. The new licence will include provision for the Director General to determine that operators have Market Influence. Oftel contends that the economic analysis contained in this document includes consideration of all the relevant factors which the Director General would need to take into account in proposing to determine that an operator has Market Influence under the provisions of the new standard licence template, scheduled to take effect in June of this year. On the basis of this market analysis, the director General will therefore propose to determine that Vodafone and Cellnet have Market Influence. This will need to be the subject of subsequent formal statutory consultation. This proposal is explained further in Chapter 2.

1.27 Oftel is concerned that the margins achieved by some tied service providers TSPs are less than what is required to earn a reasonable rate of return. Whilst this may be viable in the context of the overall Group within which a TSP operates because the parent company is likely to be generating profits through supply of wholesale services, it would not enable ISPs to earn a reasonable return. This problem is considered in detail and a range of options for regulatory action are presented for consultation in Chapter 3.

1.28 The finding of Oftel’s review has established that there is the prospect of effective competition between the four networks. Oftel will review the market again to assess the progress of competition, but does not expect the position to change sufficiently for the findings to be different to those of the review contained in this document until 2000. By then, number portability will have been working for a year, Oftel will be able to assess the impact of the current popularity of pre-pay packages, further network build will have taken place, and full year financial data for the year 1998/9 will be available. Oftel therefore proposes to carry out a further review of the mobile market next year. It expects to complete this review in September 2000. Oftel invites comments on this proposal in Chapter 2.

and explains fully Oftel’s finding that Vodafone and Cellnet both continue to have market power, but that there are now signs that effective competition between the four networks is developing. The key factors in this finding are also summarised in Chapter 1.

2.2 Oftel would be grateful for comments on its finding, based on the analysis set out at Annex A, that Vodafone and Cellnet continue to have market power, but that there are now indications that effective competition is developing in the market.

2.3 The results of consultation on Oftel’s findings will have important consequences for regulation of the mobile networks. This chapter explains and requests comments on Oftel’s proposals on regulatory control of prices of calls from mobile phones; the continued inclusion in the licences of Vodafone and Cellnet of requirements to provide wholesale airtime; and the proposal to determine that Vodafone and Cellnet have Market Influence under the terms of new standard licence templates to be issued later this year. It also contains Oftel’s proposals as to its expectations for future review of the mobile market. Proposals for regulatory action to ensure that ISPs can make a reasonable return on wholesale airtime are explained in Chapter 3.

2.4 The analysis of Vodafone’s and Cellnet’s competitive position indicated persistent high profits and other factors which suggest that current mobile prices may be higher than they would be in a fully competitive market. Should additional measures be introduced in order to benefit consumers by reducing prices? One option available to a regulator when prices are seen to be persistently excessive is to introduce a price cap of the type which currently applies to some of BT’s prices. Oftel has considered the case for a price cap or some other form of regulatory control on prices (eg indirect access, see Customer Choice: Indirect Access for Mobile Networks published simultaneously with this document). It has concluded that regulatory intervention to reduce prices is not appropriate at the present time. The reasons for this are explained in this section.

2.5 Oftel has set out a number of principles which it believes should underlie regulation. These are

• detailed sectoral rules should be imposed only where necessary;
• the need for these rules should be assessed using the standard framework of competition authorities, weighing up the state of competition in the relevant markets and the advantages and disadvantages of intervention. This is the type of analysis set out in Annex A;
• rules should generally be applied only to those with market power in the relevant market;
• regulators should not apply rules where the objectives can be achieved by market forces (sometimes referred to as the principle of forbearance).

2.6 There are good reasons for adopting this approach. Regulation is costly. Setting a price cap requires particularly detailed knowledge of the firm’s costs and revenues. Obtaining and using this information is costly both for the regulator and for the firm which has to provide it. However, and more importantly, regulation may result in distortions of the markets to which it is applied. Sometimes intervention is needed in order to correct the even bigger distortions caused by dominance or other market failures, but inappropriate regulation can stifle competition, particularly where this is only just emerging.

2.7 In the light of this, it is proper to analyse very fully the implications of new regulation, such as a price-cap. A conclusion that some operators still enjoy market power is not a sufficient condition for price control. A price cap would only be justified if there were little likelihood of effective competition developing in a reasonable time-frame.

2.8 The Monopolies and Mergers Commission (MMC) recently supported Oftel in concluding that the prices of calls to mobile phones should be subject to a form of control. It does not automatically follow that the prices of calls from mobile phones should also be controlled.

2.9 Telephony markets, both mobile and fixed, are characterised by a form of market failure which affects the prices charged for terminating calls. This market failure arises because, in the UK, the originating party usually pays for the call but has no choice over which operator terminates the call. This is determined by the called party, who does not pay for the call. This separation of call payment from choice of terminating operator provides the latter with the ability to maintain high prices for call termination.

2.10 This failure is inherent in telecoms networks and may not be fully addressed by the market even where there is strong competition to provide call origination. This means that the state of competition in calls from mobiles must be assessed independently of that in calls to mobiles.

2.11 Oftel believes that the current structure of the mobile market is consistent with the development of effective competition, although it may also be consistent with more collusive outcomes. The key features of this structure are that there are four competitors at the network level, subject to an entry barrier created by the lack of additional spectrum. This structure is described by economists as ‘oligopolistic’.

2.12 In oligopolistic markets, outcomes can vary considerably depending on a number of factors. The list below includes the most important: a ‘+’ indicates a factor which tends to make competition more (and collusion less) likely given the industry structure, a ‘-’ indicates a factor which tends to make competition less (and collusion more) likely.

• whether firms are selling a homogeneous (+) or a differentiated (-) product. Differentiation reduces the extent to which two firms’ products substitute for each other and hence reduces the extent to which they constrain each others’ prices;
• whether the firms compete in that market only (+) or in many markets (-). If the same companies face each other in a number of markets, opportunities to enforce collusion may be increased, eg by threats of retaliation for active competition in each others’ ‘home markets’;
• whether there has been competition in the past (+) or collusion (-);
• whether barriers to entry are insignificant (+) or significant (-).

2.13 The following factors are less easy to determine unambiguously:

• whether prices are secret or published. Publication is desirable in some circumstances, notably where it is necessary in order to police non-discrimination requirements on dominant vertically integrated network operators whose downstream competitors depend on it for access to the network. However, publication may make collusion more likely in oligopolistic industries because it enables special deals to be detected and punished in order to maintain collusion;
• whether the cost structures of the firms are similar or different;
• whether the market is growing or declining. One reason why a growing market might be more competitive is that new customers will not be ‘locked in’ to existing suppliers by switching costs and it may therefore be easier for entrants to gain a significant share of the market.

2.14 Looking at the mobile market in the light of this list, it appears that:

• mobile telephony services are essentially homogeneous: although there are some differences in coverage, quality of service and in brand image, a call minute made on one operator’s network is very similar to a call minute made over a competing network;
• the firms generally compete only in the mobile market;
• competition was muted when there were only two operators, but has significantly increased with the entry of the PCN operators;
• barriers to entry are high, in particular because of limitations on spectrum availability;
• prices are published, although some secret discounting for large corporates may occur and, given the complexity of the data, customers may have considerable difficulty in making effective comparisons;
• PCN and GSM cost structures are different;
• demand is growing rapidly and this has facilitated the entry of One2One and Orange into the market.

2.15 The principal factor which tends towards an anti-competitive outcome is the high barrier to entry. All the other factors point, at least in part, towards competition as the likely outcome. The next section draws on the analysis in Annex A to consider whether there is evidence that this competition may be emerging.

2.16 There are a number of signs in the market analysis that competition is increasing.

2.17 The entry barrier imposed by the lack of available spectrum cannot of course be addressed in the short-term, although it is possible that additional entry may occur via the auction of third generation mobile spectrum. Some of the other factors identified as entry barriers may be becoming less important - in particular, coverage. Given the importance which customers attach to coverage, this is likely to increase the competitiveness of One2One and Orange relative to Vodafone and Cellnet.

2.18 Two other factors may also reduce barriers to switching between operators. Firstly, number portability between mobile networks was introduced at the beginning of this year. The need to change number when switching networks can be a significant deterrent to switching, particularly for business customers. Number portability is likely to be a significant pro-competitive development therefore.

2.19 Another potentially pro-competitive development is the introduction of innovative tariff structures such as pre-pay schemes. It is too early to say exactly how significant a development these represent. However, the absence of contractual ties may reduce barriers to switching.

2.20 Related to the introduction of pre-pay tariffs is the emergence of large supermarket chains as outlets for mobile phones. These may possess some countervailing power to the market power of (some of) the network operators. This may in turn benefit consumers although, again, the impact is as yet uncertain and indeed the OFT is currently looking into the market position of the large supermarket chains themselves.

2.21 Annex A notes that the trend in market shares of Vodafone and Cellnet is downwards. Signs are that it will continue and until recent months it appeared to be accelerating. This decline in market shares of the two largest network operators is evidence that competition is taking place.

2.22 Annex A also notes that the clearest impact of the development of competition is in the trend in prices. A step change in the degree of price competition occurred with the entry of One2One and Orange. Since then, and particularly over the last year, there have been a number of highly publicised price-cuts and innovations from all the operators. Some off-peak mobile tariffs are now competitive with rates for fixed telephony. These tariff developments are the strongest indicator that competition is increasing.

2.23 It is to be expected that the profitability, at least of the two larger operators, will decline as competition increases. However, the available profits data have not so far shown any tendency to decline, particularly in the case of Vodafone. Reports of falling profits at Cellnet may reflect factors other than increasing competition. However, one difficulty with using profits data as an indicator of competition is that they only tend to become available after a significant time lag. They may not therefore immediately reflect the most recent competitive developments. Oftel will continue to monitor the profitability of the four operators and will request further financial analysis if required.

2.24 Developments such as the introduction of number portability and the increasing parity of coverage between the four operators suggest that competition is likely to increase in future. The former may be particularly significant and there is a good argument that it should be given time to have an impact on the market before any other regulatory intervention is considered. Recent pricing announcements suggest that competition may already be increasing and the market shares of the two largest operators are still tending to decline though with little apparent reduction in profitability as yet. Oftel believes that this combination of evidence means that the market shows signs of becoming more competitive, although it is not yet so. In these circumstances, it would not be appropriate to introduce a price control. However, it will keep the market under review and will consider intervention if it appears necessary.

2.26 The requirement on mobile operators with market power to provide wholesale airtime to ISPs promotes competitive supply of mobile services to customers.

2.27 Oftel’s policy is to ensure that reasonable demand from service providers for wholesale airtime is met, either through the operation of effective competition or, failing that, through regulation. At present, this is ensured through regulatory obligations on Vodafone and Cellnet. Where market power is not present, there will be natural incentives for network operators to exploit all efficient channels to market for their services and so Oftel would expect reasonable demand to be met though the operation of effective competition. However, where competition is not fully effective, Oftel will take regulatory action to ensure that reasonable demand is met.

2.28 Oftel’s Statement, Fair Trading in the Mobile Telephony Market, published in April 1997 set out Oftel’s view that, in an effectively competitive market, mobile network operators should be freed from licensing constraints which were originally designed to provide competition in provision of services to customers when there was a duopoly of mobile networks (Vodafone and Cellnet).

2.29 The entry into the market of One2One and Orange in 1993 and 1994 respectively provided the possibility of real competition between four network operators. However, it was evident that this would not have an immediate effect on the market power of Vodafone and Cellnet as the two newer networks needed time to build out their networks and establish a customer base. Oftel concluded in the April 1997 Statement that Vodafone and Cellnet still had market power and that appropriate conditions in their licences should therefore continue to operate accordingly. Orange and One2One were found not to have market power. The decision was therefore taken that the conditions in the licences of Orange and One2One requiring provision of wholesale airtime to service providers should be removed. The licences of Orange and One2One were modified accordingly in April 1998. Oftel published an explanation of the grounds for this decision in a Statement published with the licence modifications. Oftel indicated that it would review this position in the light of changes in the marketplace.

2.30 On the basis of Oftel’s finding that Vodafone and Cellnet continue to have market power, Oftel proposes that the licence conditions requiring provision of wholesale airtime to service providers should remain in the licences of Vodafone and Cellnet.

2.31 Oftel seeks comments on its proposal that, on the basis of Oftel’s finding that Vodafone and Cellnet continue to have market power, requirements to provide wholesale airtime should remain in their licences.

2.32 The new standard mobile licence template to be issued in June has been the subject of consultation by the DTI (see Implementation of the EC Licensing Directive: Changes to Existing Licenses, published in November 1998). It is proposed that the standard licence will contain a condition requiring provision of wholesale airtime to service providers. The will only be triggered where the Licence holder has been determined to have Market Influence. It is proposed that, when the four network operators begin operating under the new standard licence, the condition would be triggered in the licences of Vodafone and Cellnet, and not in the licences of Orange and One2One. Oftel will consult formally on the proposal to determine that Vodafone and Cellnet have Market Influence. It is consulting now on the proposal that the economic market analysis contained in this document at Annex A includes consideration of all the relevant factors which the Director General would need to take into account in proposing to determine that an operator has Market Influence.

2.33 Oftel seeks views on its contention that the market analysis at Annex A to this document includes consideration of all the relevant factors which the Director General would need to take into account in proposing to determine that an operator has Market Influence under the terms of the new standard licence template for mobile operators scheduled to take effect in June of this year.

2.34 The finding of Oftel’s review suggests that there is the prospect of effective competition between the four mobile networks. Oftel will review the market again to assess the progress of competition, but does not expect the position to change sufficiently for the findings to be different to those of the review contained in this document until 2000. The following factors will make a reassessment then appropriate:

• number portability will have been operating for a year and it will be possible to assess the impact which it has had on the market;
• it will also be possible to better assess the impact on the market of the current popularity of pre-pay packages;
• further network build will have taken place, and the land coverage of the two newer networks should be closer to that of the older networks;
• financial data for the year 1998/9 will be available.

2.35 Oftel therefore intends to review the mobile market again next year. It expects to complete this review in September 2000.

2.36 Oftel seeks comments on its proposal that it will carry out a further review of the mobile market in 2000.

3.1 Vodafone and Cellnet are required to provide wholesale airtime (more formally, Mobile Radio Telecommunications Services or MRTS) to independent service providers on a fair and non-discriminatory basis compared to terms provided to service providers owned by the licensee's Group. The operators supply regulatory returns so that Oftel can monitor this licence obligation. Oftel is concerned that the margins achieved by most of the service providers owned by the operators' Groups have fallen below what is reasonable. This suggests that the margins of independent service providers may be being squeezed for anti-competitive purposes.

3.2 It is possible that, while an operator may demonstrate that it is not supplying wholesale airtime to a service provision company within its Group on terms which are preferential to those being offered to independent service providers, the parent company of both the operator and the service provider might be prepared to accept that the service provider may show losses or achieve an abnormally low margin. The parent company’s ability to accept such losses might be based on the profits being generated by the operator through supply of wholesale telecommunication services. Where the relationship between retail and wholesale prices is such that it does not leave room for an adequate return to be earned, this may indicate that the operators are conducting a margin squeeze against independent service providers.

3.3 In 1994 the Director General required both Cellnet and Vodafone to submit quarterly returns demonstrating compliance with a formula devised by Oftel to measure tied service providers’ achievement of a minimum rate of return on subscriptions. Where the returns indicate that a service provider is failing to achieve that minimum margin, this may be evidence that the operator is unfairly cross subsidising that service provider's operations and thereby squeezing, for anti-competitive purposes, the margin of competing independent service providers. Nevertheless, both operators have questioned whether formula returns provide a realistic indication of margin squeeze.

3.4 This formula, known as ‘the Oftel formula’ requires the operators to specify, for each tied service provider, (i) the average cost incurred in acquiring a new subscription and (ii) the average monthly profitability of each subscription. The operators’ tied service providers are expected to demonstrate that over the life of an average subscription, and taking account of the acquisition costs, subscriptions will deliver a reasonable rate of return on the investment in acquiring the customer. Following consultation in 1997, Oftel set the length of an average subscription life at 27 months (previously it had been 35 months) and the required rate of return at 1.5% per month (previously 2%). The new values were applied to the formula return submitted in respect of Q1 of 1997/8 and to all returns submitted thereafter.

3.5 Assuming that the 27 months average subscription life, adopted for the purposes of the Oftel formula, is still representative, evidence that a service provider is consistently reporting acquisition costs and revenues which require longer than the assumed average life to achieve a reasonable return may suggest that the business is receiving some kind of subsidy. Prior to changes made to the formula in 1997, Cellnet service providers and BT Mobile generally achieved the required return of 2% per month over the 35 months assumed to be the average subscription life. Vodafone’s service providers achieved mixed returns, with Vodacom achieving this requirement in most quarters and Vodacall and Vodac consistently failing to achieve the 2% per month minimum rate of return over the assumed average subscription life.

3.6 Since the formula was changed in 1997, BT Mobile has continued to achieve the required rate of return in every quarter except Q1 of 1998/9. Cellnet's performance has been far less satisfactory, failing to achieve the required rate of return in every quarter except Q2 of 1997/8. The company has offered various reasons for this failure. The costs of reorganising its subscriber base was cited as an influence in 1997/8, and the poor return for Q4 of 1997/8 was, in part, attributed to changes made to the Service Provider Payment Plan in response to the Provisional Order issued by Oftel. More recently, Cellnet anticipated that the poor performance in Q1 of 1998/9 would be recovered in Q2 by which time the new Service Provider Payment Plan would have been launched; in fact the situation worsened in Q2. Cellnet attributed that poor performance to start up costs and upheaval associated with launch of the Cellnet First programme.

3.7 Vodafone service providers all consistently failed to achieve the required rate of return over the assumed average subscription life. Vodafone has argued that the level of service provider support (including discretionary funding) from Vodafone Ltd to independent service providers is actually higher than that which is given to Vodafone service providers and that there is no preferential treatment given to Vodafone service providers.

3.8 The exact values appearing in particular periods do not automatically denote anti-competitive behaviour and the returns must be considered in the light of prevailing circumstances, not in isolation. However, it is now evident that the failures indicated by the returns submitted for the quarters which immediately followed the modification of the formula were not isolated events. With the exception of BT Mobile, tied service providers are consistently failing to achieve the margins required by the formula. Furthermore, the minimum average subscription life consistent with achieving the required margins is substantially longer than the assumed average life of 27 months. Indeed in some periods Vodafone service providers report figures which would take twice the assumed average life to generate the required rate of return. The discrepancies are so great that it is unlikely that they can be accounted for by short term market fluctuations.

3.9 Oftel is discussing these concerns with the operators in parallel with this consultation exercise. If when the consultation process has been concluded the Director General is still not satisfied by remedial action taken by the operators he will use those enforcement mechanisms which seem most likely to be effective in ensuring that independent service providers are supplied with airtime on a fair and non discriminatory basis.

3.10 The manner in which the operators’ Groups choose to structure their tied service providers can have a significant influence on the enforcement options available to Oftel.

3.11 Condition 32 of the licences of Cellnet and Vodafone was intended to prevent the licensees from circumventing regulatory controls by conducting certain activities through other companies within their Group. Where the Director General is of the opinion that an operator is acting in this way he can direct that operator to ensure that other members of its Group alter their behaviour to remedy the concern. As part of a broader process to align the provisions of all licences in accordance with the Licensing Directive, the DTI has proposed to modify this condition so that specific reference is made to the right of the Director General to direct the licensee to refrain from carrying on commercial activities with a particular member of the licensee's Group if he is not satisfied that the Licensee has taken reasonable steps to cause that other company to alter its behaviour.

3.12 However, due to the provisions of UK company law, it is not possible to require a licensee to take steps to make companies other than subsidiaries act in a particular way. Thus, where mobile service provision is undertaken by a company which is within the operator's Group but which is not a subsidiary of the operator, the operator may attempt to argue that it is unreasonable to expect him to influence the behaviour of a sister or parent company.

3.13 Over recent years, Vodafone Group plc, the parent company of Vodafone Ltd which holds the Telecommunications Act licence, has restructured its service provision interests. From the completion of that re-organisation in 1997 until recently, all mobile service provision by the Vodafone Group was undertaken by three distinct companies. These are Vodafone Corporate Ltd , Vodafone Retail Ltd and Vodafone Connect Ltd. These 3 companies are subsidiaries of Vodafone Distribution (Holdings) Ltd and not subsidiaries of the licence holder, Vodafone Ltd. Only recently have mobile services been supplied through the Direct Business of the licence holder, Vodafone Ltd; Vodafone's retail distribution of Pre-paid packages is now being channelled through the Direct Business. Sales by the three companies and by the Direct Business in total account for about 60% of the customers and about 50% of the revenues of the Vodafone network; the remaining business comes via 26 service providers outside the Vodafone Group.

3.14 Cellnet undertakes service provision through its own Direct business and through BT Mobile Communications, the service provider arm of its ultimate holding company, BT. The Direct Business supplies about 49% of all airtime minutes on the Cellnet network, BT Mobile Communications supplies about 25% and the remaining 26% is supplied by 24 independent service providers.

3.15 Oftel recognises that both Cellnet and Vodafone are at liberty to restructure their tied service provision interests at any time, and activity could be moved between the Direct Business, subsidiaries of the licensee, other companies within the operator’s Group and, indeed, other legal entities in which the operator might have an interest.

3.16 As has been explained earlier in this chapter, when presented with evidence that an operator’s Systems Business is unduly preferring or unfairly cross subsidising that operator’s Direct Business or one of the operator’s subsidiary companies, the Director General has powers to direct that operator to take specific action to remedy the situation. Relying on the ‘Group’ condition and the licence provisions governing unfair cross subsidies, the Director General may direct the operator to take reasonable steps to require that other company (or its Direct Business) to adjust its retail prices or costs to the extent necessary to achieve a reasonable margin.

3.17 However, where there is evidence that a service provider company, within the operator’s Group, which is not a subsidiary of the operator is achieving margins below those which would normally be required of such a company, the mechanism outlined in paragraph 3.16 is not available to the Director General and he may need to rely on other mechanisms to enforce the principle that service providers within the operator's parent Group shall not be unfairly subsidised, directly or indirectly, by profits generated by an operator’s Systems Business. Oftel has identified two possible mechanisms for achieving this. These are (i) a prohibition on the operator supplying airtime to that other company and (ii) a control of wholesale prices for airtime.

3.18 Under the terms of the modified ‘Group’ condition which it is proposed will be incorporated in the standardised mobile licence, and against the background of an operator’s failure to cause another company within its Group to achieve a reasonable margin, the Director General might direct the operator to cease supplying wholesale airtime to that other company. Clearly, it would not be acceptable to deny service to the customers of that company and in these circumstances arrangements for seamless transfer of existing contracts to another service provider would have to be agreed. One possible option would be for the operator's parent company to transfer customers to the licensee's Direct Business, where Oftel's powers to enforce the prohibition on unfair cross subsidy are stronger.

3.19 Against the background of an operator’s obligations to supply airtime to service providers, and the Director General's statutory duty to ensure that all reasonable demand for telecommunications service can be met, the Director General might judge that, given the prices prevailing in the retail market, the wholesale prices being charged to service providers amount to a constructive refusal to supply independent service providers. In these circumstances, the Director General would direct the operator to supply airtime on reasonable terms. The precise nature of those terms would be devised by the operator, but that operator would be obliged to satisfy the Director General that the terms were reasonable. It is conceivable that prices might be set by reference to the retail prices being charged by service providers within the operator's parent Group less their audited costs and a reasonable margin (such as the 1.5% per month currently used for the purpose of the Oftel formula).

3.20 Do respondents share Oftel’s view that the figures presented in Table 1 provide evidence of anti-competitive behaviour?

3.21 Which of the options outlined in paragraphs 3.18 and 3.19 do respondents believe would be the more effective in securing fair prices for independent service providers?

3.22 During the 5 years since the formula was constructed, the mobile services market has evolved greatly. A large proportion of all new handsets are now supplied to customers who are upgrading from analogue to digital services or who are simply upgrading their existing digital handset. Clearly, calculation of the expected life of an average subscription will vary according to whether some or all of these upgrades are treated as beginning and ending a subscription. The duration of an average subscription was last assessed in 1997.

3.23 A further significant proportion of all new subscriptions are for pre-paid services. Given that this is still a fairly recent market development, there are no reliable estimates of how long on average a subscriber whose acquisition is subsidised by the network will use his phone for this purpose. Whilst in principle the Oftel formula can adequately measure rates of return on such arrangements, the different usage patterns of pre-pay users will distort the formula returns if they are included together with other subscribers. Economic values calculated from the airtime profits of existing subscribers might not be appropriate to pre-pay users.

3.24 As long as Cellnet and Vodafone continue to have market power (‘Market Influence’ under the proposed new licences), Oftel will require them to continue to provide quarterly returns similar to those currently provided to demonstrate compliance with the Oftel formula. Oftel does not propose to change any of the economic inputs to the returns, including the minimum monthly rate of return. However, rather than assume, for the purposes of the return, that the life of an average subscription is 27 months, the operators will be asked to treat that figure as a variable established by the actual costs and revenues and Oftel’s requirement that service providers within the parent Group should achieve a minimum return of 1.5% per month. Furthermore, the operators will be asked to state what in practice is the average life of a subscription. Oftel proposes to publish the two figures.

3.25 Throughout this document, reference has been made to (a) obligations to supply airtime and (b) prohibitions on discriminatory supply, more broadly, of telecommunications services by means of the Applicable Systems. The scope of this chapter is intended to be limited to a review of the commercial terms on which supply of those services should be offered. However Oftel recognises that there are longer term issues about the branding of airtime and the availability to service providers of network functionality.

3.26 At a technological level it may appear to be clear what is meant by airtime, but the question is made more complex by factors such as network branding and marketing which, at a commercial level, are critically important. Branding and other forms of marketing are not activities in which only the holders of licences to operate networks are capable of engaging, and yet most wholesale airtime is supplied on a branded basis. As a consequence, those independent service providers which wish to develop their own brand are often forced to contribute, through charges for airtime, to the recovery of the marketing costs of the network operator. There may be merit in reviewing whether the obligation to supply wholesale airtime should relate to branded or unbranded airtime or both. However, Oftel recognises that the network branding established by the operators during the present regulatory framework is a very powerful force and the impact of any change of regulatory obligations would have to be considered very carefully before any changes were made.

3.27 Similarly, although it may seem obvious what is the extent of the Applicable Systems (in effect the network which generates the wholesale services which are the subject of regulatory controls governing undue preference, undue discrimination and unfair cross subsidy), the development of technology for delivery of enhanced services (often reliant on stand-alone databases) makes this too a complex issue. Technology to deliver some enhanced services is so integrated with intelligence within the rest of the network that it could not be provided efficiently as a stand-alone facility capable of being supplied competitively by service providers. However it might be advantageous to ensure that, where technological efficiency allows, the largest possible proportion of enhanced services are delivered in a way which allows service providers to offer competing services.

3.28 The issues addressed in the two preceding paragraphs could have far reaching implications for operators and service providers. It is too early to address the key concerns in this Consultation Document and Oftel will be exploring the issues over the next few months. In the meantime, Oftel would welcome initial observations from industry.

4.1 Oftel seeks views on any points arising from this document. Specifically:

• Oftel seeks comments on its finding, based on the analysis set out at Annex A, that Vodafone and Cellnet continue to have market power, but that there are now indications that effective competition is developing in the market.
• Oftel seeks comments on its view that it is not appropriate to consider further the implementation of price controls on the prices of outgoing calls from either or both of the two larger mobile networks.
• Oftel seeks comments on its proposal that, on the basis of Oftel’s finding that Vodafone and Cellnet continue to have market power, requirements to provide wholesale airtime should remain in their licences.
• Oftel seeks views on its contention that the market analysis at Annex A to this document includes consideration of all the relevant factors which the Director General would need to take into account in proposing to determine that an operator has Market Influence under the terms of the new standard licence template for mobile operators scheduled to take effect in June of this year.
• Oftel seeks comments on its proposal that it will carry out a further review of the mobile market in 2000.
• Do respondents share Oftel’s view that the figures presented in Table 3.1 provide evidence of anti-competitive behaviour?
• Which of the options outlined in paragraphs 3.18 and 3.19 do respondents believe would be the more effective in securing fair prices for independent service providers?

Oftel seeks the views of consumers and industry on the proposals contained in this consultation document by 18 March 1999. There will then be a 2-week further period during which comments on the representations made during the first period of this consultation are invited; this will end on 1 April 1999.

Comments should be made in writing and sent to:

Chris Taylor
Regulatory Policy Directorate
Oftel
50 Ludgate Hill
London, EC4M 7JJ

Tel: 0171-634 8850
Fax: 0171-634 8924
or E-mail

Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their response, or parts of it, are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing: 0171 634 8761 (fax: 0171 634 8946).

Oftel would like to set up a link between this Consultative Document and any responses places on respondents own Internet pages. Please contact Lauren Ryner at Oftel on 0171 634 8753 or by e-mail to arrange this. Confidential responses should not be sent via the Internet.

Alternative Formats

• Copies of the full Consultative Document are available on disk.
• The Summary is available in large print, braille, and tape formats.

Please contact the Oftel Research and Intelligence Unit on 0171 634 8761, or by e-mail, or call textphone 0171 634 8769 for more information.

A.1 The purpose of this analysis is to consider whether, and to what extent, Vodafone and Cellnet can be said to possess market power. It is an updated and expanded version of the analysis published as Annex B to the April 1997 Statement, Fair Trading in the Mobile Telephony Market (‘the Statement’). Some of the material from the Statement is repeated for ease of reference, where it continues to be relevant.

A.2 The note is organised as follows. First, the relevant market or markets are defined. Then, a method for determining whether an operator could be said to possess market power in any of these markets is proposed. This is then applied to the positions of Vodafone and Cellnet in the markets identified.

A.3 Oftel’s most recent statement of its approach to market definition is contained in the February 1998 Effective Competition Review. The approach follows that used by the UK competition authorities (see for example Market Definition in UK Competition Policy; a Report for the Office of Fair Trading, NERA, 1993) and is broadly similar to that of the European and US authorities and focuses on the existence of constraints on firms’ ability to set prices. These constraints may be provided by the possibility of demand-side substitution, that is the ability of customers to respond to a price increase by switching to products which are good alternatives from their point of view, or supply-side substitution which occurs when firms producing other products switch resources into producing a product whose price has increased.

A.4 In the Statement and using this methodology, it was considered that mobile telephony represented a distinct market from fixed telephony but that there was a single market for mobile telephony including both digital and analogue systems. It was considered that customers are primarily interested in services rather than technologies and that from the customer’s perspective analogue and digital systems were effectively substitutes.

A.5 Oftel stated its belief that fixed and mobile systems were not yet effective substitutes. The differences in functionality and price levels strongly suggested that they were in separate markets. However, it was noted that this may change as fixed and mobile technologies converge. Mobile telephony prices have continued to fall over the last year and some operators have reduced prices for some calls, for example, Orange’s cuts in international call prices announced in September 1997, to levels comparable to fixed telephony prices. In October 1998, Orange again cut off-peak prices to levels which it claimed undercut BT’s fixed line rates, at least at certain levels of usage. However, in general and particularly at peak times a significant premium remains for the extra functionality of mobile phones and therefore Oftel continues to regard the fixed and mobile markets as distinct.

A.6 This is supported by the results of research recently carried out for Oftel. Although the object of the research was to examine the availability and take-up of advanced services, operators and service providers were also asked about their main competitors. The replies indicated that mobile operators compete with each other but not with fixed operators, whilst fixed operators also do not yet regard mobile operators as a significant competitive threat.

A.7 Oftel noted that there are also differences in functionality between analogue and digital mobile systems. However, Oftel did not regard them as being in separate markets because network operator pricing policy suggested that there was significant substitutability between them. This substitutability is also reflected in the policy of eventually switching all analogue subscribers to digital networks. Oftel’s view therefore remains that the prices of analogue and digital systems do constrain each other sufficiently for them to be regarded as part of the same market.

A.8 Whilst the importance of the analogue sector is declining as users migrate to digital, Oftel has noted that the existence of a base of analogue subscribers in which Vodafone and Cellnet have dominant shares would continue to be relevant even if the analogue and digital segments were regarded as separate, but closely related markets. Thus the precise market definition would not necessarily affect Oftel’s conclusion regarding market power, because it would be necessary to take account of the possible leverage of market power from the analogue market. The possession of an analogue subscriber base has given Vodafone and Cellnet an advantage in being able to switch subscribers to digital systems without a change of number and as a source of funds to finance the acquisition of new subscribers.

A.9 A firm is said to possess market power if it is able to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable. The ‘Well Established Operator’ test is the same as the test for market power and employs the same indicators and analysis.

A.10 There is no unique indicator of market power. A number of factors are important, although they may be related. For example, if entry barriers are low, it may not matter that there are few firms in an industry whilst, if there are many firms, it may not matter that entry barriers are high.

A.11 The number of firms in a market gives some idea of the state of competition. An unregulated monopolist is likely to enjoy the maximum level of market power as it will be able to set prices without fear of being undercut by (existing) rivals. Firms in a duopoly will also generally possess market power because, with only two firms, (tacit) collusion is likely to be relatively easy. In general, the larger the number of firms, the less likely it is that any individual firm will possess market power.

A.12 However, even a monopoly is not strictly a sufficient condition for the existence of market power. In the special circumstances of the perfectly contestable market, the threat of entry is sufficient to restrain prices to competitive levels even if there is a monopoly producer. Whilst the stringent conditions for perfect contestability may rarely, if ever, be met, the concept at least illustrates the need to consider other indicators of market power, particularly entry conditions, in addition to the number of firms.

A.13 The number of competitors needs to be supplemented by some consideration of their relative sizes. Market shares are the obvious measure but are also only a highly imperfect indicator of market power. A market share of 25% is required for investigation under the Fair Trading Act and this can be used as a rule of thumb below which firms are unlikely to possess market power.

A.14 The usefulness of market share as an indicator of market power is discussed in Oftel’s effective competition review, published in February 1998. It is noted there that the pattern of changes in market shares over time may provide a better indication than a simple ‘snapshot’ figure. Thus a market in which recent entrants are rapidly increasing their shares is more likely to be competitive than one where market shares are stable or showing a tendency towards increased concentration.

A.15 The Effective Competition Review also pointed out that it may be useful to consider market shares calculated from both value and volume data. In particular, it may be that, whilst new firms may be able to win low value customers, established firms are able to retain high value customers (or to charge higher prices), which may indicate that they retain some market power. This would be reflected in established firms taking a higher share of the market by value than by volume.

A.16 An entry barrier allows an incumbent firm to earn additional profit as a sole consequence of being established in an industry. If entry barriers are low or non-existent, then the possibility that new competitors may enter may provide an effective constraint on behaviour. A firm is unlikely to possess market power if entry barriers are low.

A.17 Vertical integration is particularly relevant in telecommunications where one firm has a significant share of both calls and the provision of network services. If one firm has market power at the network level then, in the absence of effective regulation, the firm could exert considerable market power over operators who need to interconnect with it in order to deliver calls to final customers. In that situation, a measure simply of the number of operators competing in the retail calls market or of their market shares would understate the extent of the integrated firm's market power.

A.18 The market power of a producer may be offset by the countervailing power of buyers. Countervailing power is likely to be important where the buyer purchases a large volume relative to the producer's total output, where the buyer's purchases represent a large proportion of the buyer's total costs, where the buyer can switch between suppliers easily but the seller perhaps has some customer specific investment and where the buyer has alternative sources of supply, perhaps by in-house production. Large telecommunications users, for example, are likely to be well-informed about competitive offerings and telecommunications may form an important part of their own costs. Multinational companies may have the ability to choose between telecoms operators located in different countries. It should be borne in mind, however, that where a firm with countervailing power also has market power in a downstream market, it may not pass any benefits on to final customers.

A.19 The above measures have focussed on the structure of the market. However, there is no deterministic relationship between the structure of a market and the behaviour of firms in it. Market power could therefore be seen as a behavioural concept. The history of entry, prices and profits may also be a useful guide to the existence of market power. The Statement listed an openness to competitive service provision, acceptance of number portability, a willingness to interconnect with other operators on reasonable terms, keen competition in consumer pricing, a close relationship between tariffs and costs and an open and fair relationship with fixed network operators as signs of active competition.

A.20 Oftel’s Effective Competition Review also lists consideration of profitability and pricing trends among the relevant indicators. Some care in interpreting profits data is needed, not least because accounting data may not approximate very closely to economic measures of profit. Moreover, high profits do not necessarily indicate market power as they can result from relative efficiency or innovation. Similarly low profits are consistent with the possession of market power if the company is inefficient. However, the earning of persistently high profits over a significant period suggests that the company has some market power as, in a competitive market, one would expect to see excess profits eroded.

A.21 Evidence that a firm has market power might include:

i) the firm has few or no active competitors;

ii) the firm has a market share above 25%;

iii) entry barriers are significant;

iv) the firm has control of a vital input which its rivals must use;

v) buyers have no countervailing power, for example because they are typically small and diffuse (such as domestic telecoms users);

vi) lack of new entry or entrants which remain small or rapidly exit the market;

vii) a market share which is static or which shows a tendency to increased concentration;

viii) evidence of collusion or price leadership (when smaller firms simply follow the price set by the market leader);

ix) high profits. However, high profits may result from efficiency or innovation as well as market power.

Market power in the mobile market: position of Vodafone and Cellnet

A.22 It is useful to consider Vodafone’s and Cellnet’s positions in terms of the summary indicators in paragraph A.21.

A.23 There are now four network competitors, including Vodafone and Cellnet, in the mobile market. The existence of four firms has the potential to generate more effective competition than was the case when there were only two licensees. However, entry conditions are likely to be particularly important because, whilst limitation of a market to four players is consistent with a competitive market, it is also a sufficiently small number for collusion to be a serious risk, particularly if entry barriers are high.

A.24 At 1 December 1998, Vodafone had 37.0% of all subscribers and Cellnet 32.4%. Shares of this magnitude are suggestive of market power and are considerably above the 25% threshold used by many competition authorities. Vodafone has 33.1% of digital subscribers which is also above the 25% threshold referred to above, whilst Cellnet has 32.5%. As the digital segment grows in importance, the overall shares of Vodafone and Cellnet are likely to continue to decline. However, currently and even if this were to be regarded as a separate market, it would also be necessary to take into account the two companies’ shares (split roughly 68:32 in favour of Vodafone) of analogue subscribers, both because of the advantage which this gives them in switching subscribers to digital systems and as a source of profits to finance the acquisition of new subscribers.

A.25 It may also be useful to consider shares of total market revenues and traffic minutes, in addition to subscriber numbers. The table below is derived from Oftel’s November 1998 Market Information update.

A.26 Vodafone’s share of revenues, in particular, is higher than its share of subscribers, suggesting that it has been relatively successful in securing high value subscribers. Moreover, both the two larger operators enjoy significantly higher shares of revenues than of call minutes, which is not true of either of the two more recent entrants. This is consistent with the idea that Vodafone and Cellnet are able to charge higher prices on average than Orange and One2One, although it may also reflect differences in calling patterns and is clearly strongly influenced by One2One’s free calls offer. The effect of this is also seen in One2One’s relatively high share of call minutes.

A.27 As noted in the Statement, privileged access to spectrum is not of itself a justification for regulating the terms of access for service providers, though it may be to the extent that it confers market power on the spectrum holder. At present the lack of spectrum constitutes an effective barrier to market entry by new mobile operators, since the Government has announced that no more mobile licences will be issued before the auction of spectrum to provide third generation (wideband) mobile services. Third generation networks are expected to commence operations in 2002 or 2003. The existence of this entry barrier makes a collusive outcome between the four operators more likely to be sustainable, though it is also consistent with a competitive outcome.

A.28 A number of other constraints exist which continue to hinder the progress of Orange and One2One and will also be relevant to potential third generation new entrants. One of these is the high cost of building a mobile network. Moreover, a large part of this cost may be sunk in the sense that it could not be recovered if the operator decided to exit the industry. The extent of sunk costs is particularly relevant to the height of entry barriers into a market. It follows that Vodafone and Cellnet derive a first mover advantage from having their networks already rolled out.

A.29 The size or reliability of a network can be considered as an example of ‘vertical product differentiation’. The most natural interpretation of vertical differentiation is ‘quality’. Where products are vertically differentiated, all consumers will rank the products in the same order of preference if their prices are the same (the distinction is with ‘horizontal product differentiation’ in which consumers rank products differently according to taste). In other words, for the same price and other things being equal, all consumers will prefer the higher quality product. Alternatively suppliers of products perceived to be of higher quality will be able to charge higher prices. Area coverage appears to be particularly important for competition in the mobile market and, within this, for business customers. It seems likely that area coverage may be seen as a form of vertical differentiation since all consumers are likely to prefer the network offering the greater coverage, other things equal, although it is also necessary to take capacity in the covered area into account since lack of capacity can lead to congestion and blocked calls. This could give the larger networks the ability to charge a price premium. The table below shows estimates of the current UK geographic coverage of the four mobile networks.

Table A.2 – Mobile network coverage
Source: Operator estimates except

A.30 Given the smaller geographic coverage of the Orange and One2One networks and possible continuing perceptions of lower reliability, they may find that they have to price some way below Vodafone and Cellnet in order to attract customers – and may still find it difficult to do so. The need for an entrant to have network coverage comparable to that of an incumbent, or to offer lower prices in order to attract customers to a smaller network, combined with the level of costs which must be sunk in order to attain national coverage, is potentially a significant barrier to entry into the mobile market. However, the coverage of the PCN networks is now approaching that of the GSM networks. Given the importance which customers attach to coverage, this is likely to increase the competitiveness of One2One and Orange relative to Vodafone and Cellnet.

A.31 Further entry barriers result from the existence of switching costs which are faced by customers changing networks. Switching networks may require a new phone and contracts typically last twelve months with penalties for early termination. The increasing popularity of prepay tariffs, in which there are no contractual ties, may reduce barriers to switching, although the high initial cost of the handset may be a deterrent (especially where handsets are network-specific).

A.32 Until 1 January 1999 switching networks also required a change of number. Vodafone and Cellnet have enjoyed an advantage from the ability to migrate subscribers from analogue to digital services on their own networks without a change of number. This has now been addressed by the introduction of number portability on all four networks. This is a very significant step in the development of competition between the networks. The need for a new number may have been a considerable barrier to switching networks in the past. The removal of this barrier should enable customers to migrate between networks more easily.

A.33 The auction of third generation mobile spectrum provides an opportunity for new entry by mobile network operators. The enhancement of competition is an explicit objective of the auction. However, it is clear that new entrants without existing mobile networks will face a number of important disadvantages. Firstly, it is likely that customers will wish to purchase the advanced services provided by third generation mobile operators as part of a package with voice services. Entrants will need access to the networks of existing operators in order to provide this over a comparable geographic area to those operators. Secondly, existing operators will be able to use some of their existing infrastructure (sites and masts) for third generation services. Indeed, in the absence of sharing agreements, new entrants may find it difficult to obtain the sites necessary. Thirdly, existing operators will benefit from their large customer bases. Whilst it may be possible to address these incumbent advantages both in the design of the auction and by measures such as the availability to new third generation operators of roaming on existing networks, and some potential new entrants have expressed interest in taking part in the auction, third generation networks will not in any case become operational until 2002/3. It therefore seems unlikely that the prospect of auctioning spectrum for third generation services will yet constrain the pricing behaviour of existing operators.

A.34 Vertical integration is obviously particularly relevant to the position of independent service providers because they have to compete against tied service providers owned by the network operators on whom they depend for airtime. In the absence of regulation, network operators with market power could effectively exclude independent service providers from the market by refusing to supply airtime, by doing so only on terms which discriminated in favour of tied service providers or by cross-subsidy of the tied service providers. The issue then is whether this could be done for anti-competitive motives.

A.35 A number of possible reasons for the cross-subsidy of tied service providers by network operators were identified in the May 1996 Consultative Document Fair Trading in Mobile Service Provision. Not all are anti-competitive. However, among the possible reasons were: to establish market power in the service provision sector (although this may be unlikely because entry barriers at the service provision level are low); to create a barrier to entry at the network level by denying entrants access to service providers; and, perhaps as part of a strategy to achieve this, to acquire independent service providers at a lower price (by reducing their expected profitability). These could only be relevant to operators having market power at the network level as they rest on extending this power to the service provider sector in order to enhance or protect excess network profits. It was therefore concluded that rules requiring fair access for independent service providers to networks with market power should be retained.

A.36 Fair and reasonable terms for interconnection and access for service providers were among the list of signs of active competition outlined in the Statement. Two recent events are particularly relevant to this. The referral to the MMC of the cost of calls to mobile phones and the order against Cellnet requiring it to remove elements of its service provider payment plan which were found to be unduly discriminatory reflect continuing concerns about anti-competitive and exploitative practices by the network operators. The EU competition authorities are also examining fixed-to-mobile and mobile-to-fixed interconnection charges in Europe.

A.37 There has been an increasing trend to vertical integration as independent service providers have lost ground to, or have been taken over by, service providers tied to Vodafone and Cellnet. Vertical integration is not of itself harmful and in the absence of market power this trend would not normally be regarded as a cause for concern. As noted above, exploitation of market power at the service provision level, independently of market power exercised by the network operators, seems unlikely. However, where there is market power at the network level, it would be appropriate to address this and, in particular, to prevent it being leveraged into the service provision level of the market. This is the intention of the obligation to supply service providers, combined the rules on cross-subsidy and discrimination.

A.38 In the absence of regulation, independent service providers would be in a relatively weak position vis-a-vis the two largest network operators. The latter however have a choice of a relatively large number of service providers as routes to market including, crucially, their own tied service providers. Hence the importance of continuing regulation to ensure that ISPs have access to networks judged to have market power.

A.39 The increasing importance of high street retailers as channels of distribution means that they may be well placed to achieve favourable deals from network operators. It was noted in the May 1997 statement that in practice most high street retailers arrange connections through a tied service provider and that therefore incentive payments made direct to dealers could be regarded as an additional subsidy to customers signing to a tied service provider rather than an independent one not operating through a dealer. Such incentive payments were therefore to be brought within the scope of the cross-subsidy monitoring arrangements.

A.40 Network operators are finding new channels to market, including through large supermarket chains. This is associated with the introduction of pre-pay tariffs which enable customers to pay in advance for their calls by purchasing a pre-paid voucher (which may need to be used in a limited time period) with no need to pay regular subscription fees. Large supermarket chains may possess some countervailing power to the market power of (some of) the network operators. This may in turn benefit consumers although the impact is as yet uncertain and indeed the OFT is currently looking into the market position of the large supermarket chains themselves. Where countervailing power is combined with market power in the downstream market, it is not necessarily the case that any benefits will be passed on to customers.

A.41 Two entrants – Orange and One2One have entered the market and have clearly had a significant impact on it. However, as noted above, they are, after some years, still some way behind the two established operators in terms of subscriber numbers and profitability. There is no prospect of further entry until 2002/3.

A.42 It was noted in the Statement that the entry of Orange and One2One had naturally reduced the market shares of Vodafone and Cellnet, indicating the increasing competitiveness of the market. However, it was also noted that the trend decline in the shares of the latter was fairly slow. Vodafone’s share of all subscribers declined from 43.1% on 1 January 1996 to 41.1% on 1 January 1997 whilst Cellnet’s declined from 42.5% to 39.4% over the same period. This decline has continued with shares at 1 December 1998 being 37.0% (Vodafone) and 32.4% (Cellnet). Graph A1 tracks the movement in shares of subscribers between December 1993 and December 1998.

A.43 The analogue and digital segments were also considered separately. In the analogue segment, the shares of Vodafone and Cellnet are now around 68% to Vodafone, 32% to Cellnet. In the digital segment, both increased their shares in 1996 from 27.9% to 35.5% in the case of Vodafone and from 17.9% to 25.7% in the case of Cellnet. Since then Vodafone’s share has been fairly static but Cellnet’s has risen markedly to 32.5% at 1 December 1998. The overall decline in market share reflects the declining importance of the analogue segment, where they have had a high but static share, in favour of the digital segment, where their shares are lower but have risen. Indeed Cellnet now seems to have a higher share of digital than of analogue subscribers.

A.44 Vodafone’s share of revenues (calls, rentals and connections) has fallen from 48.4% in 1995/6 to 46.1% in 1996/7 and 43.3% in Q41997/8, whilst Cellnet’s has fallen from 40.4% to 37.2% and 31.4% over the same period. Vodafone’s share of outgoing call minutes fell from 35.4% in 1995/6 to 33.0% in 1996/7 and 32.4% in Q4 1997/8. Cellnet’s fell from 27.4% in 1995/6 to 24.8% in 1996/7 and 23.0% in Q4 1997/8.

A.45 The trend in market shares of the two market leaders is therefore downwards. However, it is subject to some volatility from quarter to quarter and current figures indicate that Vodafone and Cellnet are winning more new customers than the other two operators (including customers of pre-pay packages). There appears to be some indication of a faster decline in Cellnet’s market share than in Vodafone’s and a significant gap has now opened up between them. All the networks added record numbers of customers during the pre-Christmas quarter in 1998. Total net new subscribers for the quarter were 2,542,000 broken down by network as follows: Vodafone – 933,000 (37% of the total), Cellnet – 658,000 (26%), Orange – 512,000 (20%), One2One – 439,000 (17%). Of these, 1,889,000 (74.3% of the total) were pre-pay customers, indicating the current popularity of pre-pay. New pre-pay customers for the quarter break down between the networks as follows: Vodafone – 755,000 (40% of the total for pre-pay), Cellnet – 455,000 (24%), Orange – 329,000 (17.5%), and One2One – 350,000 (18.5%). These figures are illustrated in Graph A2.

Graph A2 – Net new mobile subscribers for the pre-Christmas quarter, 1998 (thousands)

A.46 The clearest impact of the development of competition is in the movement of prices. Until 1993, prices were high and the service was aimed at business users. The pattern of prices is at least consistent with muted competition during the duopoly period. Even before entry actually occurred, however, Vodafone and Cellnet responded by introducing innovative tariff packages aimed at attracting different categories of user and selective price cuts. Evidence of price competition has continued, typically with Vodafone and Cellnet following the innovations of the entrants – Orange’s introduction of per second billing being perhaps the best known example. The graph below paragraph 1.15 (Graph 1.2) below illustrates trends in call prices between January 1990 and January 1998.

A.47 Comparisons of mobile prices are notoriously difficult and may be affected by the timing of the comparison, ie on which operator was the last to cut its prices. Vodafone and Cellnet have historically been able to maintain a price premium, being generally the most expensive networks whilst One2One has been the cheapest. For example, in October 1997, it was reported that Vodafone and Cellnet would need to cut tariffs by an average of 20% to bring them close to One2One’s rates, particularly for medium and high users. As noted earlier, the ability to maintain a price differential without dramatic losses of market share suggests that Vodafone and Cellnet retain a degree of market power.

A.48 Vodafone went on to announce significant price cuts in November 1997, but commented that it expected the other operators to follow, indicating that differentials would tend to be largely maintained. Further cuts in off-peak prices were announced by Vodafone in May 1998, shortly after Orange announced new tariffs for business users. It may be that these were intended to increase off-peak network utilisation and did not indicate the start of a ‘price war’. Interestingly too, a Vodafone spokesman was reported as having repeated the statement that other operators were expected to follow, again presumably to maintain differentials. In late June 1998 Orange announced further price cuts. Orange also announced further price cuts in October, claiming that it now undercut BT’s fixed line rates for off-peak calls, although this is only the case for certain usage levels and peak rate call charges remain significantly above fixed levels.

A.49 The most notable recent development in the pricing of mobile services is the emergence of pre-pay packages. All four networks now offer pre-pay packages at equivalent prices. Pre-pay packages are currently very popular for domestic use and sales of pre-pay made up around 75% of the record pre-Christmas sales of mobile packages. Comparatively high call charges mean that pre-pay packages are only economical for very low users. Nevertheless, their current popularity demonstrates that other users are also opting for pre-pay, possibly because the format is more convenient to them. It is worth noting though that, notwithstanding the current popularity of pre-pay packages, most users are still using subscription packages, and pre-pay has made no impact on the high-value business market.

A.50 It is presently too early to assess fully the impact on the market of the

emergence of pre-pay packages. As noted, pre-pay tariffs are usually more expensive than subscription tariffs, except for very low users. Pre-pay tariffs do not themselves seem to represent an intensification of competition therefore. However, given the popularity of the concept, it is possible that tariffs for pre-pay services will evolve to meet the demands of other groups of customers – for example, lower call charges might become available over shorter time periods to suit higher and more frequent users, and the overall level of call charges on pre-pay may fall as call volumes grow.

A.51 The Statement noted that, in a competitive market, competitive pressure would tend to bring prices into line with costs. However, in the case of mobile telephony, the relation of prices to costs was complicated by the practice of supplying handsets at prices well below costs, with the cost being recovered by airtime prices and other charges which were well above the cost of provision. This would not necessarily be incompatible with competition between networks in which handsets and airtime were sold as a package, provided the charges for the package equated roughly to the total costs of the package. This might be the case if the handset subsidies were simply intended to expand the market by making initial purchase of a mobile phone more affordable.

A.52 All four network operators pursue a strategy of price discrimination (the practice of selling the same service to different customers at prices which do not reflect differences in the relative costs of supply). A proliferation of tariff packages has emerged since the entry of Orange and One2One as operators have tried to design tariffs to attract new customers without losing profits on the existing ones, notably by the introduction of low-user tariffs. Price discrimination of this kind, where customers are offered a variety of packages with different balances of fixed and variable charges is not of itself anti-competitive and may be beneficial if it leads to higher output than would have been the case with a uniform tariff. However, there have been concerns about tariff proliferation and that some customers might have been misled by the complexity of tariffs and contract terms and overcharged as a result. It is worth noting in this context that, in its report on the pricing of calls to mobile phones, the MMC reached ‘no firm conclusion’ on whether the increased number of tariffs available has caused customer confusion.

A.53 There has been considerable recent comment in the press about the allegedly high level of charges for mobile telephony in the UK when compared to certain overseas countries, with the implication that the UK market is not as competitive as it could be. This is not the place for a detailed analysis of international call price comparisons. However, before a brief overview, it is worth noting that international comparisons are prone to a number of difficulties. For example, the results may be vulnerable to exchange rate fluctuations. In addition, they may depend on the interaction of the pattern of use assumed with the tariff structure used for the comparison. Results may differ as between large and small users, or depend on the mix of peak and off-peak, or local and long-distance calls. Some comparisons may not adjust for the effects of unit-based charges still used by some overseas operators, which can disadvantage operators who use per-second pricing. In the UK case, it is often pointed out that rental and usage costs may appear relatively high because of the need to recover the cost of the handset subsidy, which may be higher than in other countries where handset prices approximate more closely to costs. Lastly, the quality of service and the extent of network coverage may not be readily comparable between countries.

A.54 Moreover, the relationship between the level of tariffs and the competitiveness of national markets is unclear. The cheapest markets do not always appear to have the most competitive market structures. For example, the Scandinavian countries tend to do well in price comparisons but, according to ‘Financial Times Mobile Communications’, Finland had, until recently, only two mobile operators (a third launched in March 1998), Norway has only two and Sweden three, compared to the UK’s four (which of course may also illustrate that the number of firms alone is not an adequate indicator of the competitiveness of markets). These factors should be borne in mind when reading the following paragraphs.

A.55 It was widely reported in February 1998 that a study by Philips Tarifica showed that a Vodafone (the most expensive UK network) customer would pay nearly £330 per year for line rental and assumed usage of one hour per month on national calls whereas a Telecom Italia customer would pay only £170 at the exchange rate assumed. Mobile phone users in Germany, Australia, France, Poland and Norway, as well as in Italy, could find service for less than the cheapest UK network (One2One) would charge (about £265).

A.56 A study by Analysys examined mobile tariffs in France, Germany, Italy, the Netherlands, Norway, Sweden and the UK over the period 1990-97. Comparisons were based on the cheapest package available, excluding the costs of handsets (an exclusion which, as noted above, may disadvantage the UK). The study found that, in January 1997, the UK ranked third cheapest for business customers, behind Norway and Sweden, with the highest prices being in Germany and Italy. The Netherlands was slightly cheaper than the UK for low-use business customers, but for high-use customers, the UK was cheaper even than Sweden. The UK’s relative performance had improved significantly with the entry of the Orange and One2One and resulting increase in competition. Sweden also had the lowest charges for residential customers, followed by Norway.

A.57 The November 1997 edition of the Eurodata/OECD International Telecoms Price indicator ranks Cellnet (the only UK operator included) 13th cheapest out of 23 operators in the ‘national mobile basket’. This was however an improvement on its February 1997 ranking of 21st. Cheaper countries included Australia, Sweden and Germany, whilst Italy, Japan and France were more expensive. Attention has also been drawn to the UK’s low penetration relative to the Scandinavian countries. Of course, penetration rates may reflect many factors other than price, including the quality and cost of the fixed network.

A.58 For these reasons, the results of international comparisons must be treated with caution. However, the findings are, on the face of it, consistent with the view that UK mobile telephony prices may be higher than in some other European markets which may themselves not be fully competitive and therefore are higher than they would be in a fully competitive market.

A.59 Here there is a clear distinction between the two established networks and the entrants. Vodafone and Cellnet are highly profitable whilst Orange and One2One continue to report accounting losses. As shown in the table below, Vodafone Ltd. has consistently earned very high rates of return (measured by profit before interest and tax) on sales and capital over recent years, with little apparent tendency for these to be eroded. The addition of data for the year to March 1998 does not change this picture. Cellnet (the figures below are for the main subsidiary Telecom Securicor Cellular Radio Ltd. (TSCR)) has been less profitable, but its return on capital employed (which is a more economically meaningful indicator than return on sales) had risen to 38.6% in the year to March 1996. Whilst there appears to have been some decline in Cellnet’s reported rate of profit in the year to March 1997, this was in fact due to exceptional expenses of £65m associated with the abortive ‘Project Force’. These are arguably not relevant to an assessment of Cellnet’s market position and therefore the table below shows figures before and after these are taken into account. This suggests that there was no significant change in Cellnet’s underlying market position between 1995/6 and 1996/7. However, results for the year to March 1998 show a fall in returns on capital compared to the previous year. This may be indicative of increasing competitive pressure on Cellnet, though it may also reflect other factors. Return on capital is now roughly at the level it was in 1993 and significantly above the cost of capital.

Table A2 - Profitability

* The higher of the two figures for 1996/7 is before subtracting the costs of the Project Force write-off. In the year to March 1998, Cellnet wrote back (due to earlier over-provision) some costs which were previously written off. This has the effect of increasing headline profits in the year to March 1998. The more meaningful figure for the purpose of assessing Cellnet’s market position is ROCE before subtracting the costs of writing off Project Force and before adding back any earlier overprovisions. 1998 figures are also depressed by an allowance of £9m for the cost of the purchase of Call Connections Ltd’s customer base.
# Capital employed = total assets – current liabilities.

A.60 Both Vodafone and Cellnet recently reported results for the 6 months to end-September 1998. These results are expressed in terms of profits before tax in £m and therefore cannot be compared with the figures for ROCE in the above table since the latter are expressed in percentage terms. However, they are a useful indicator of the trends in profits since the end of the last financial year.

A.61 Vodafone reported pre-tax profits for the company’s UK business up 7% on the same period last year. This is a fairly modest increase, but to a level of profit which was already high. Cellnet’s profits for this period were reported as part of the results of Securicor, which owns Cellnet jointly with BT. Cellnet’s profits are 8% down on last year. This performance has partly been attributed by Cellnet to costs associated with the launch of Cellnet’s ‘First’ and pre-pay packages (around £25 million in total) and a new billing system together with the losses of service providers acquired by Cellnet during the year. Taking account of these factors, the underlying level of Cellnet’s profits appears more or less flat.

A.62 By contrast, the Orange group reported operating losses of £51.1m for the year to 31 December 1997 on turnover of £914m, although this was an improvement on 1996 when operating losses were £177.5m. More recently, results for the 6 months to 30 June 1998 show an operating profit of £2.2 million. One2One also became profitable at the operating level for the first time in April 1998. These results are possibly indicative that Orange and One2One are nearing the stage when they will become profitable following the completion of major expenditure on network build and increases in their customer base.

A.63 ROCE measures based on accounting data are not a precise measure of economic profit (although they are widely used by competition authorities) and high profits can result from innovation or greater efficiency and losses from inefficiency. Care must be taken in the interpretation of figures at UK company level which may include the effect of a number of different activities and, in the case of Cellnet, significant inter-Group transactions with parent companies. However, the persistently high rates of return earned by Vodafone and Cellnet are at least consistent with possession of market power by these two operators. Whilst the market leader may expect to make higher profits than average if this results from greater than average efficiency or from innovation, the persistence of these high rates of profit, without significant erosion by competition, suggests the existence of market power.

A.64 It still seems appropriate to regard the mobile market as separate from the fixed market but as including both analogue and digital systems. As before, the inclusion of the analogue and digital segments in the same market is not crucial to the conclusions of the analysis.

A.65 There is clear evidence that the entry of Orange and One2One stimulated price competition in the mobile market. However, their market shares are still significantly below those of the established operators and they are still not operating profitability, whilst the market shares and profits of the two original operators remain high. Taking this into account along with the other evidence, it seems appropriate to conclude that Vodafone and Cellnet continue to possess market power.

A.66 The main factors responsible may be the barrier to entry caused by spectrum constraints, lower coverage of the Orange and One2One networks and various switching costs which make it difficult to persuade customers to change networks. Developments such as the introduction of number portability and the increasing parity of coverage between the four operators suggest that competition is likely to increase in future. The former may be particularly significant and there is a good argument that it should be given time to have an impact on the market before any other regulatory intervention is considered. Recent pricing announcements suggest that competition may already be increasing and the market shares of the two largest operators are still tending to decline though with little apparent reduction in profitability as yet. Oftel believes that this combination of evidence means that the market shows signs of becoming effectively competitive, although it is not yet so.

Accounting Rate of Return (ARR) – the ratio of accounting profit to capital employed, also referred to as Return On Capital Employed (ROCE). The measure of capital employed can be either HCA or CCA.

GSM – Global Standards for Mobile Telephony (Vodafone and Cellnet currently operate GSM networks in the UK).

Independent Service Provider (ISP) – entities which provide telecommunications services over fixed or mobile networks, or services with a telecommunication service component, to the public at large but do not own or operate telecommunications networks. Some independent service providers may not use telecommunication networks, for example they may be publishers of printed directories.

Indirect access – a situation where a customer contracts to buy a telecommunication service from an operator to which the customer is not directly connected, and where the second operator pays the first operator for use of that connection.

Market power – the ability to raise prices above the competitive level for a non-transitory period.

Network operator – the operator of a telecommunication network with a PTO licence which provides, amongst other things, network services.

Network Services – Network Services are services that can only be technically and economically provided by those who build their own telecommunications network infrastructure. BT Network Services (including the elements of these services which are necessarily incidental to the provision of them, like billing customers for the provision of the service) are provided from its Systems Business, whereas Enhanced Services are provided from the Supplemental Services Business. It should be recognised that, notwithstanding the juxtaposition with Enhanced Services, Network Service does not necessarily mean 'simple,' or ‘plain old telephone services (POTS).’ Network Services may be extremely complex.

Originating operator – operator on whose network the call originates, i.e. the operator with the line to the customer.

PCN – Personal Communications Network. High capacity digital cellular networks (Orange and One2One currently operate PCN networks in the UK).

Radio spectrum – the range of frequencies used for broadcasting fixed and mobile telephony for radio, terrestrial television and satellite television. For fixed telephony the frequencies available in the UK are 2.4, 3.4 and 10 GHz ranges. For mobile telephony the frequencies are 900MHz, 1800MHz, and for UMTS there is a 2GHz range.

RPI-X – the system of price control where average annual price changes for the price-controlled services are limited to the increase in inflation (as measured by the Retail Price Index), less a specified number (X).

Service provider – provider of telecommunication services, or services with a telecommunication service component, to third parties whether over its own network or otherwise.

Terminating operator – the operator on whose network a call terminates.

Third generation mobile systems – European 3^rd generation mobile communications system will provide an enhanced range of multimedia services (eg high speed Internet access). 3^rd generation networks are expected to enter service in 2002/3 using radio spectrum in the 2GHz bands.

Tied Service Provider (TSP) – service providers which are owned by or in common ownership with the network operator’s Group.