S.1 This consultation document gives notice that the Director General of Telecommunications intends to determine that both Vodafone and BTCellnet have Market Influence in the market for mobile telephony in the UK under the terms of their licences. A firm has Market Influence when 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.

S.2 Determination that a mobile operator has Market Influence triggers conditions in their licences which require them:

• To provide mobile airtime to Service Providers on request;

• To provide separate accounts for various activities;

• Not to show undue preference to or undue discrimination in the provision of various services;

• To publish charges, terms and conditions for services.

S.3 Where an operator has Market Influence at the network level, these requirements are necessary to ensure that Market Influence cannot be leveraged into adjacent or related markets.

S.4 The determinations are based on an analysis of the mobile market to establish whether any of the four network operators – Vodafone, BTCellnet, Orange, and One2One – has Market Influence. The method and findings of this analysis are explained fully in the explanatory memorandum. In summary they are that, whilst there are indicators – like the continuing downward trend in prices – that the market is becoming more competitive, Vodafone and BTCellnet have Market Influence. Primary indicators of this are the market shares and profitability of the networks.

S.5 Oftel would be grateful for comments on the notices and the reasons for the intended determination set out in the explanatory memorandum. Full details of the consultation process are available - click here.

I.1 This consultation document contains Notices published by the Director General of Telecommunications (the Director) under paragraph 6 of Part 1 of Schedule 1 and Condition 56 of the licences of both Vodafone and BTCellnet that he intends to determine that both Vodafone and BTCellnet have Market Influence in the market for mobile telephony in the UK. It also contains an explanatory memorandum covering the reasons for the determination and details of consultation on the draft.

I.2 The document follows consultation earlier this year (published in February) on competition in the mobile market. The results of that consultation were published in a Statement in July. The evidence showed that Vodafone and BTCellnet had market power in the market for mobile telephony in the UK. Conditions requiring the provision of mobile airtime to service providers were therefore retained in the licences of Vodafone and BTCellnet. Equivalent conditions had previously been removed from the licences of Orange and One2One on the basis that they did not have market power in the market for mobile telephony in the UK.

I.3 Changes to all existing mobile licences took effect on 27 September 1999. As a result, all 4 networks are now operating under a standard licence in accordance with the EC Licensing Directive. All of the new licences contain a condition (Condition 56A) requiring provision of mobile airtime to service providers. This condition is only triggered in the event that the Director determines that the Licensee has Market Influence in relation to a relevant economic market which is comprised of at least the generality of Mobile Radio Telecommunications Services (MRTS) in Great Britain. Oftel’s analysis covered the market for mobile telephony in the UK and was therefore broader than the market for MRTS in Great Britain. When it published its Statement in July, Oftel signalled that it would review the market again at such time as the licence changes were in place in order to establish whether or not it would be necessary to determine that any of the mobile operators has Market Influence. Such a determination would have the effect of triggering the licence condition requiring provision of mobile airtime to service providers. It would also trigger the following licence conditions:

• Condition 56B – Separation of activities and preparation of accounts.

• Condition 57 – Prohibition of undue preference and undue discrimination.

• Condition 58 – Publication of charges, terms and conditions.

I.4 This document explains the results of Oftel’s analysis of the market and gives formal notice of determinations that Vodafone and BTCellnet have Market Influence in the market for mobile telephony in the UK.

I.5 Oftel would welcome representations and comments on the draft determinations and explanatory memorandum. Details of the process and deadlines for consultation under paragraph 6 of Part 1 of Schedule 1 of the licenses of Vodafone and BTCellnet are set out - click here for more information..

Whereas:

1. Condition 56 of the Licence granted by the Secretary of State for Trade and Industry to Vodafone Ltd ("Vodafone") ("the Licensee") under section 7 of the Telecommunications Act 1984 (the "Licence") provides for a power of the Director General of Telecommunications ("the Director") to determine the Licensee to be an Operator having Market Influence in relation to any particular telecommunications market specified by him;
2. In serving this Notice of Determination, the Director has taken into consideration the matters described in the Explanatory Memorandum to this Notice in accordance with Condition 56 of the Licence;
3. The Director considers that for the time being the Market for the purposes of making a determination of Market Influence under Condition 56 of the Licence is the market for mobile telephony in the UK.

NOW THEREFORE THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE, HEREBY GIVES NOTICE THAT:

1. It appears to the Director that the Licensee is an Operator having Market Influence as referred to in Condition 56 of its Licence, for the reasons given in the Explanatory Memorandum which accompanies this Notice.

A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act 1984

Whereas:

1. Condition 56 of the Licence granted by the Secretary of State for Trade and Industry to Telecom Securicor Cellular Radio Ltd ("BTCellnet") ("the Licensee") under section 7 of the Telecommunications Act 1984 (the "Licence") provides for a power of the Director General of Telecommunications ("the Director") to determine the Licensee to be an Operator having Market Influence in relation to any particular telecommunications market specified by him;
2. In serving this Notice of Determination, the Director has taken into consideration the matters described in the Explanatory Memorandum to this Notice in accordance with Condition 56 of the Licence;
3. The Director considers that for the time being the Market for the purposes of making a determination of Market Influence under Condition 56 of the Licence is the market for mobile telephony in the UK.

NOW THEREFORE THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE, HEREBY GIVES NOTICE THAT:

1. It appears to the Director that the Licensee is an Operator having Market Influence as referred to in Condition 56 of its Licence, for the reasons given in the Explanatory Memorandum which accompanies this Notice.

A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act 1984

Explanatory memorandum

1.  A review of competition in the mobile market was undertaken in February. Oftel is reviewing the market again in order to establish whether it is necessary to determine that any of the mobile network operators has Market Influence. The analysis uses the same methodology as that adopted in February, updated to take into account any recent developments in the market and responses to the February consultation document. First, the relevant market is defined. Then, the proposed method for determining whether an operator could be said to possess Market Influence is applied to operators in the mobile market.

2. Oftel defines Market Influence as being when a firm 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.

3. In the February 1999 consultation document Oftel outlined its approach to market definition. The approach follows that used by the UK competition authorities and is broadly similar to that of the European and US authorities. It focuses on the existence of constraints on firms’ ability to set prices. Constraints are characterised by the possibility of demand-side substitution, that is the ability of customers to respond to a price increase by switching to good alternative products, or supply-side substitution, which occurs when firms producing other products switch resources into producing a product whose price has increased.

4. Using this approach Oftel defines the relevant market as the single mobile telephony market; fixed and mobile systems are not yet effective substitutes, although this may change as fixed and mobile technologies and tariffs converge. Indeed, there is evidence that mobile and fixed telephony tariffs are converging. Mobile call charges have continued to fall and new tariffs introduced recently by Orange and One2One are comparable with fixed telephony prices. However in general a substantial premium is charged for the extra functionality of mobile phones. This is particularly the case at peak times. Moreover daily charges are sometimes applied, in addition to the basic call tariffs. As a result Oftel considers that fixed and mobile telephony still fall in separate markets.

5. In the February document the mobile operators were considered in terms of key summary indicators. The usefulness of these indicators was also discussed. For the purposes of the Market Influence determination this evidence is updated in the light of new data and other useful information, including responses to the February document.

6. There are currently four mobile network operators – Vodafone, BTCellnet, Orange, and One2One – and there is no immediate prospect of further market entry since no new mobile licences will be issued before the auction of spectrum to support third generation mobile services. Whilst the entry of a further network operator following the auction is likely to expand the market, Oftel has concluded that the prospect of this does not presently constrain the pricing behaviour of mobile networks since third generation services are unlikely to be offered commercially before 2002.

7. Some Rresponses to the February document suggested that the market currently has five operators – the four already listed plus Dolphin. Oftel considers it to be too early to conclude that Dolphin is an effective competitor in the mobile market. Oftel considers that four or five firms could be enough to deliver an effectively competitive market. However it is important to examine entry conditions and other indicators of Market Influence because it is a sufficiently small number for there to be a risk that there will be insufficient rivalry between firms for there to be fully effective competition, particularly if entry barriers are high.

8. The number of firms is considered in conjunction with their relative size in order to assess the existence of Market Influence. Oftel’s latest available data suggests that Vodafone has 37.5% of all subscribers and BTCellnet 30.4%. Shares of this magnitude are consistent with a position of suggestiveMarket Influence and comfortably exceed the 25% threshold used by many competition authorities to assess market positions.

9. An analysis of market share data in both value and volume terms can also be revealing. For example discrepancies between value and volume can reveal that new firms may be successful at, say, winning low value customers but that incumbents are able to retain high value customers and thus could retain a degree of influence in the market. The table below shows shares of total market revenues from calls and rentals and outbound traffic minutes, in addition to subscriber numbers:

Table 1 – Market shares, Q4, 1998/99

10. Vodafone’s share of revenues is larger than their share of subscribers, suggesting that they have been relatively successful in securing high value subscribers. Moreover, both Vodafone and BTCellnet enjoy significantly higher shares of revenues than of call minutes, unlike the other two operators. This may reflect a tendency for Vodafone and BTCellnet to charge higher prices on average than Orange and One2One in the past, although it may also indicate differences in calling patterns.

11. The figures for One2One are likely to be particularly influenced by subscribers who continue to benefit from the continuing availability of free calls on their network, although this is likely to be a declining proportion of their customers. It would help explain One2One’s relatively high share of call minutes and the large discrepancy between their share of revenues and call minutes.

12. Static market share figures provide only a partial indicator of the development of competition in a market. More important is an understanding of how market shares have developed over time. A market in which new entrants’ shares are increasing is more likely to be competitive than one where shares are relatively stable or tending towards increased concentration.

13. Since the entry of Orange and One2One the market shares of Vodafone and BTCellnet have declined, indicating increasing competitiveness in the market. Vodafone’s share of all subscribers declined from 57% at the end of 1992 to 35.7% at September 1 1999. BTCellnet’s share fell from 43% to 30.6% over the same period. The graph below tracks this movement in shares of subscribers.

14. Vodafone’s share of revenues (calls and rentals) has fallen from 56.7% in 1993/4 to 41.7% in 1998/9, whilst BTCellnet’s has fallen from 42.8% to 30.9% over the same period. Vodafone’s share of outgoing call minutes fell from 57.4% in 1993/4 to 33.0% in 1996/7. It has remained fairly constant since then. BTCellnet’s share of outgoing call minutes fell from 38.8% in 1993/4 to 24.0% in 1997/8 and 22.1% in 1998/9. As can be seen from Graph 3 below, One2One’s share of call minutes is significantly above that of BTCellnet. As already stated, this is likely to be a consequence of the availability of free calls on One2One’s network.

15. Whilst this pattern The downward trend in market shares of BTCellnet and Vodafone is consistent is consistent with the development of competition. However the relatively high level of their static market shares is it is also indicative of the possession of Market Influence by Vodafone and BTCellnet, particularly as they still appear to be winning considerably more new customers than the other networks. Over the first three months of 1999 a total of some 1,878,000 new subscribers joined the four networks, with Vodafone gaining 37% of the new customers (700,000 subscribers), BTCellnet 26% (479,000), Orange 20% (370,000) and One2One 18% (329,000). More recently, a total of 1,135,000 new customers in August 1999 were distributed across networks as follows: Vodafone – 280,000 (25% of the total), BTCellnet – 500,000 (44%), Orange – 175,000 (16%), One2One – 175,000 (15%). Even though monthly figures on new subscribers are volatile, the figures for August show a substantial gap between the numbers of new customers for Vodafone and BTCellnet compared with Orange and One2One.

16. The threat of entry may constrain the pricing behaviour of incumbents. A firm is unlikely to possess Market Influence if entry barriers are low although high barriers to entry do not necessarily indicate ineffective competition; they may be consistent with a competitive outcome.

17. The current lack of spectrum constitutes an effective barrier to further market entry by mobile operators, since no new mobile licences will be issued before the auction of spectrum to support third generation mobile services. The enhancement of competition, by allowing new entry by mobile network operators is an explicit objective of the auction, and this new entry is therefore likely to have an impact on the competitive situation in the market. However third generation services are unlikely to be offered commercially before 2002. It therefore seems unlikely that the prospect of auctioning spectrum for third generation will constrain the pricing behaviour of existing operators immediately, although we might expect some impact prior to the launch of services by new entrants (as occurred when Vodafone and BTCellnet anticipated the entry of Orange and One2One).

18.  Some respondents to the February analysis suggested that market entry is already taking place in the form of Dolphin, which has launched services using spectrum in the TETRA band. Oftel believes it is too early to conclude that consumers will regard the services as substitutable or that Dolphin will effectively intensify competition in the mobile market. It is possible that further spectrum in the TETRA band will become available, and the Radiocommunications Agency (RA) is currently considering how this might be achieved.

19.  In addition spectrum trading in the future might enable further entry, though it is unlikely to be possible in the UK for some time. Spectrum trading could in principle enable new entrants to acquire licence rights through the market instead of having to be licensed through regulatory procedures by the Government. Spectrum trading has already been successfully introduced in Australia, New Zealand and the US. Spectrum trading is not currently available anywhere in Europe, and is being considered as part of the current review of telecoms regulation in the EU.

20.  Another potential entry barrier is the high cost of building a mobile network, with a substantial element of sunk costs (in the sense that costs could not be recovered if the operator decided to exit the industry) (in the sense that it could not be recovered if the operator decided to exit the industry). The extent of sunk costs is relevant to the height of barriers to entry to a market.

21. Network coverage has typically been important for competition in the mobile market and, within this, for business customers. The need for an entrant to have coverage comparable to that of an incumbent combined with the level of costs which must be sunk (in the sense that it could not be recovered if the operator decided to exit the industry) in order to attain national coverage, is potentially a significant barrier to entry into the mobile market.

22. The table below shows that population coverage of the GSM 1800 networks (Orange, One2One) is now approaching that of the GSM 900 networks (Vodafone, BTCellnet). This suggests that the same is true for area coverage (NB One2One’s coverage does not extend to Northern Ireland and they have recently announced plans to build there). Given the importance which customers attach to coverage, this is likely to increase the competitiveness of One2One and Orange relative to Vodafone and BTCellnet.

23. Other 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 may include penalties for early termination. The increasing popularity of pre-pay 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). The introduction of dual band telephones and number portability on all four networks also reduces switching costs and enables customers to migrate between networks more easily. However some switching costs are likely to remain, which means that a consumer will require a possibly significant discount to induce them to change network operators.

24.  Vertical integration arises when a company is active in more than one stage in the production and supply of a good or service. Vertical integration in itself does not imply that a firm has Market Influence. However where a firm has Market Influence in one sector and is vertically integrated, there is the potential for misuse of Market Influence with an adverse impact on competition in the upstream and downstream markets. Therefore, the obligation to supply service providers, combined with rules on cross-subsidy and discrimination is intended to address potential anti-competitive behaviour where there is Market Influence at the network level.

25. The February consultation document outlined the relevance of vertical integration to the position of network operators and independent service providers and Oftel’s concerns about the potential for anti-competitive behaviour. The document indicated that there has been an increasing trend to vertical integration in the mobile market as independent service providers have lost ground to, or have been taken over by, tied service providers and network operators. This trend has continued since February.

26. The Market Influence of a network operator may be offset by the countervailing power of buyers. Countervailing power may 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. In the absence of regulation, independent service providers would be in a relatively weak position vis-à-vis the two largest network operators. Conversely the latter have a choice of a number of service providers as routes to market including, crucially, their own tied service providers.

27. Network operators are finding new channels to market, including through large retailers and supermarket chains, particularly for the sale of pre-pay packages. Large supermarket chains may possess some countervailing power to the Market Influence of (some of) the network operators. In addition the increasing importance of supermarkets and high street retailers as channels of distribution means that they may be well placed to achieve favourable deals from network operators. This may in turn benefit consumers although the impact is not clear; where countervailing power is combined with Market Influence in the downstream market, it is not necessarily the case that benefits will be passed on to customers.

28. However, it does appear that supermarkets have had a substantial impact on the price of pre-pay packages, recently cutting purchase prices by up to 50%, although Vodafone, BTCellnet and Orange subsequently increased their wholesale prices by broadly 90%. ASDA complained to Oftel that the simultaneous increase in prices was evidence that the network operators were colluding with each other. Oftel undertook an investigation, concluding that there was no evidence of collusion. The increases suggest that there may be limits to the retailers’ countervailing power.

29.  Until 1993, prices were high and mobile services were aimed primarily at business users. Vodafone and BTCellnet reacted to the anticipated entry of One2One and Orange by introducing innovative tariff packages aimed at attracting different categories of user and selective price cuts. The graph below shows evidence that price competition has continued, with prices having fallen by around 74% in real terms between January 1990 and January 1999. Orange and One2One have introduced tariffs which compete with BT’s fixed line rates for off-peak calls, although this is only the case for certain usage levels or at certain times of the day and week. Peak rate call charges generally remain significantly above fixed levels, an exception being a business package recently introduced by One2One which offers comparable rates to BT’s fixed business rates.

Source – Analysys

30. Since February pre-pay packages have maintained their popularity. All four networks offer pre-pay packages at similar prices. Comparatively high call charges mean that pre-pay packages tend only to be competitive with contract packages for relatively low users. In addition consumers who largely make off-peak calls can benefit from pre-pay packages from some networks. Nevertheless, their current popularity demonstrates that other users are also opting for pre-pay, possibly because the format is more convenient to them, and it may be that pre-pay tariffs will evolve to meet the demands of other groups of customers. It is worth noting however that, notwithstanding the increase in popularity of pre-pay packages, almost two-thirds of all users are still using subscription packages, and pre-pay has made little impact on the high-value business market.

31. Over the period December 1998 to October 1999, prices for subscription and pre-pay packages fell progressively, as shown in the graphs below. For example as noted above, the initial cost of pre-pay packages fell substantially since February, with supermarkets cutting prices by up to 50%, although recent increases in wholesale prices by operators have partly offset this. The graphs reflect average price changes in the five cheapest packages and suggest that the largest price reductions were experienced by high-spending subscription customers. This clearly does not reflect the experience of all subscribers.

32. Oftel intends to publish a more detailed, ongoing review of prices in the mobile market, reflecting more accurately the impact of price changes on a wider cross-section of customers. The price monitoring study is described in the consultation document Mobile Price Monitoring published in September 1999. The results will be published quarterly, with the first set expected towards the end of 1999. Initial results from this study suggest that overall prices fell by some 5% over the first five months of 1999, whilst prices in the pre-pay market fell on average by 8% over the period. The decreases have been most dramatic for high spenders, particularly in the pre-pay market, where heavy use customers saw price reductions of nearly 15%. It is expected that this downward price trend will continue, as traffic volumes increase, costs fall and competition intensifies. Historically, Vodafone and BTCellnet have been able to maintain a price premium, being generally the most expensive networks whilst One2One has been the cheapest. Their ability to maintain a price differential without dramatic losses of market share appears to have reduced. There is evidence of significant price competition in the residential market, particularly for pre-pay, and whilst Vodafone and BTCellnet may still be able to maintain a price premium for business users their ability to charge higher prices has substantially diminished.

33. Oftel has previously noted that competitive pressure will tend to bring prices into line with costs. It is clear that continued price reductions since February should have brought prices closer to costs. However, in the case of mobile telephony, the relation of prices to costs is complicated by the practice of supplying handsets at prices well below costs, with the cost being recovered by airtime prices and other charges which are well above the cost of provision. This is not necessarily incompatible with competition between networks in which handsets and airtime are sold as a package, provided the charges for the whole package broadly equate to the total costs of the package. This might occur if handset subsidies are simply intended to expand the market by making initial purchase of a mobile phone more affordable.

34. 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 more customers joining the networks and/or higher usage and hence 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 confused by the complexity of tariffs and contract terms.

35. Care needs to be taken in the interpretation of figures which may include the effect of a number of different activities. High profitability can be the consequence of, for example, efficiency, innovation, quality of service, or high volume growth which may be characteristic of the market. Moreover profits data only tend to become available after a significant time lag. They may not therefore reflect the most recent competitive developments. However, persistently high profits which have not been significantly eroded by competition will be viewed with some concern.

36. There is a clear distinction between the profitability of Vodafone and BTCellnet and that of Orange and One2One. The two older networks are highly profitable whilst the other operators have typically recorded losses, although there is evidence that the smaller operators are becoming profitable.

37. The table below shows that Vodafone and BTCellnet consistently earn high rates of return (measured by profit before interest and tax) on sales and capital. Vodafone’s return on capital employed (ROCE) is high and has increased over the last two financial years. Although BTCellnet’s ROCE is considerably lower than that earned by Vodafone and has fallen in recent years, it still exceeds the cost of capital estimated by the Competition Commission (then the Monopolies & Mergers Commission) as part of its investigation into the cost of calls to mobiles. The cost of capital is the minimum return on capital needed to attract investment to a firm and roughly equates to the return which would be expected on average in a competitive market. It thus provides a ready benchmark for comparison with ROCE.

38. The downturn in profit for BT Cellnet for 1998/9 was attributed to increased investment and subscriber acquisition costs. As a result turnover increased by 25% over this period to £1.4bn. Large scale growth in subscriber numbers will tend artificially to depress profits in the short term because of the practice of subsidising subscriber acquisitions. The reduction in profitability might therefore be expected to be temporary if the strategy of boosting subscriber numbers succeeds. Consequently there does not appear to be enough evidence to suggest that the substantial reduction in ROCE is permanent, particularly given their persistently high market share figures and recent gains in subscriber numbers.

39. The Orange group reported operating profits of £15m for the year to 31 December 1998 (up from operating losses of £51m over the previous year) on turnover of £1213m (up from £91m for 1997). One2One expects to become profitable in the calendar year 2000. Operating losses of £52m were recorded for the financial year ending 31 March 1999 (down from losses of £125m over the previous financial year) on a turnover of £781m (up 43% from £548m over the previous financial year). Although pre-tax profit levels expressed in £m are not directly comparable with the figures for ROCE in Table 3, they are a useful indicator of trends in profits. These results are indicative that Orange and One2One are becoming profitable following the completion of major expenditure on network build and increases in their customer bases. It is worth noting that both Orange and One2One are currently in the process of acquisition by Mannesmann and Deutsche Telekom respectively. The prices have been quoted in the media as around £20bn for Orange and £8bn for One2One, which gives an indication that both companies are expected to become profitable.

40. It was suggested, in a response to the February document, that attention should focus on EBITDA (earnings before interest, tax, depreciation and amortisation) or EBITDA as a percentage of sales, rather than our use of ROCE. However Oftel considers ROCE to be a better indicator of long-term profitability for use in competition analysis since it can more appropriately be compared with the cost of capital of a company. A value of ROCE persistently in excess of the cost of capital suggests that market power is enabling excess profits to be sustained. Data on return on sales were examined as part of the analysis contained in the February document showing high returns for Vodafone and to a lesser extent for BTCellnet, in line with the analysis of ROCE. Although we have not analysed EBITDA information in detail it is likely that the measures for both Vodafone and BTCellnet also remain high relative to the two smaller operators. All indicators would be expected to decline as competition in the market intensifies.

41.  The persistently high rates of return earned by Vodafone and BTCellnet seem to indicate that prices currently exceed the competitive level, which is consistent with possession of Market Influence by these two operators. Whilst a 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 Influence. However it is important to continue to monitor profitability, particularly in the case of BTCellnet, to determine whether the downward trend in their returns is permanent.

42.  The February consultation document gave a brief overview of the evidence supporting claims about the level of charges for mobile telephony in the UK when compared to certain overseas countries. The document also noted that international comparisons are prone to a number of difficulties. Taking these difficulties into account the February document presented evidence consistent with the view that UK mobile telephony prices were higher than in some other European markets which may themselves not be fully competitive and therefore are likely to be higher than they would be in a fully competitive market. Information published since February is consistent with this evidence. The August 1999 edition of the Eurodata/OECD international telecoms price indicator ranks BTCellnet (‘Regular Caller+’) 12^th cheapest and Vodafone (‘Vodafone 30’) 15^th cheapest in its residential GSM basket comprising 31 operators.

43. There are indications that the initial pre-pay package may be considerably cheaper in the UK than on the continent, although call charges may be higher. Reductions in pre-pay phone prices by supermarkets has opened up a considerable gap in continental and UK prices, with suggestions that UK phones, costing some one-third of the price of phones elsewhere in Europe, are being bought and resold on the continent for use on rival networks. According to reports, BTCellnet have suggested that the export of pre-paid packages has contributed to their decision to increase wholesale charges faced by supermarkets.

44. In determining that an operator has Market Influence, the Director General may take account of the influence of other members of the Licensee’s Group operating in the same or similar markets which he is minded to specify for the purpose of the determination. The Director General does not consider that it is necessary to specify any company in this context for the purposes of these determinations. It is relevant to note the planned acquisition by BT of BTCellnet because BT has market power in some markets for fixed telephony. Oftel considers that it will be necessary to take steps to ensure that BT is unable to unfairly leverage this market power, and will shortly be consulting on proposed measures to achieve this.

45. The relevant market has been defined as the mobile telephony market in The UK. This document has assessed Vodafone and BTCellnet’s position in this market, using a number of key indicators. Whilst many of these indicators, and in particular recent pricing announcements, point to the development of effective competition in the mobile market, they also provide evidence that Vodafone and BTCellnet currently possess Market Influence.

46. The key pieces of evidence that lead to this conclusion are the distribution of market shares and profitability of the network operators. Both Vodafone and BTCellnet have market shares in excess of 25%, although there is evidence that these shares have declined steadily since Orange and One2One entered the market. In addition it seems likely that both operators have been able to retain relatively high value customers compared with the two new entrants. In terms of profitability, Vodafone continues to consistently earn very high rates of return. BTCellnet’s profitability is less than that of Vodafone and appears to be declining, but the Company is still earning returns higher than the cost of capital.

In accordance with paragraph 6 of part 1of Schedule 1 of the Licences of both Vodafone and

BTCellnet, the Director invites comments by the Licensees and Interested Parties on its notice to make determinations under Condition 56 of the Licences of Vodafone and BTCellnet that Vodafone and BTCellnet have Market Influence in the market for mobile telephony. The Director would be grateful for comments from the Licensees and other Interested Parties on the notices and the reasons for them set out in the explanatory memorandum by 7 December 1999.

Comments should be sent to:

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

Tel: 0171-634 8850
Fax: 0171-634 8924
e-mail

Representations made during this period will be available for public inspection in Oftel’s Research and Intelligence Unit and, where possible, on respondents’ websites via hyperlinks from the Oftel site. Please contact Lauren Ryner at Oftel on 0171 634 8753 or by e-mail: web.oftel@gtnet.gov.uk to arrange this. Respondents who wish their comments to be treated as confidential should therefore indicate clearly that this is so. In the interests of transparency, respondents are encouraged to keep confidentiality markings to a minimum.

After 7 December 1999, the licensee and interested parties will be given a further period ending on 11 January 2000 during which time to make observations on the representations received and published before 7 December 1999.

When the Director has considered the representations and any observations made, he shall prepare a draft decision and statement of reasons for that decision and send it to the Licensees, and any Interested Party who has submitted representations or observations giving those persons a period of not less than 14 days within which to comment.

After considering any comments received, the Director shall inform the Licensees of his decision, with reasons, and publish that decision.

Barriers to Entry – An additional cost which must be borne by entrants but not by firms already in the industry; or other factors, which enable an incumbent to maintain prices above the competitive level without inducing entry.

GSM 900/1800 – Global System for Mobile Communications in the 900 and 1800 MHz frequency band.

Market Influence/market power – The ability to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable.

Mobile number portability – where a customer taking a service from a mobile operator (eg Vodafone, Orange) or Service Provider (eg People’s Phone) can retain their telephone number when they change to a different mobile operator or service provider.

Network operator – the operator of a telecommunication network with a Public Telecommunication Operator (PTO) licence, which provides, amongst other things, network services.

Radio Spectrum – the range of wavelengths used, for example, for broadcasting radio, terrestrial television and satellite television. Usable wavelength ranges from about 100 KHz to about 400 GHz although there are as yet no broadcasts above about 12 Ghz.

Return on Capital Employed (ROCE) – the ratio of accounting profit to capital employed. The measure of capital employed can be either HCA or CCA.

Substitutability – whether an increase in the price of one product would lead consumers to switch to other competing products or services (demand–side substitutability) or lead producers to switch rapidly into the supply of the good in question (supply–side substitutability).

Sunk costs – costs which are not recoverable if the activity for which they were incurred ceases.

Third Generation (3G) Services – A European 3G Mobile communications system which will provide an enhanced range of multimedia services. 3G networks are expected to enter service in 2002/2003 using radio spectrum in the 2GHz bands.

Vertical Integration – When a company is active in more than one stage in the production and supply of a good or service.