Mobile Price Monitoring

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In July 1999 Oftel issued a statement summarising its views on the state of competition in the mobile market. This document explained that, while competition in the mobile market has driven down prices and led to a huge growth in services, Oftel believes there is further progress that can be made in terms of delivering the best deal to consumers.

Consumers remain concerned about the perceived high price of mobile tariffs and whether they are falling quickly enough. In the July statement Oftel committed to develop a mechanism for more comprehensively monitoring mobile price movements. Oftel will also carry out a further review of the mobile market in 2000. The price monitoring study will form one of the key inputs into this 2000 review.

This consultation document presents the model, which has been developed by NERA (National Economic Research Associates) to monitor trends in the prices paid by mobile customers in the UK. Comments are invited on the proposed methodology and the data series Oftel is proposing to publish. Comments are also sought on the assumptions made in the construction of the model, which are necessary to ensure that the various tariffs and schemes which the networks operate are dealt with in the most consistent way possible.

The model will identify trends in the prices paid by mobile customers on each of the four networks. It works by identifying groups of users with similar usage patterns and applying appropriate retail tariffs from each network to these usage patterns. In this way, it is possible to calculate prices for particular types of user and consequently track how these prices have changed over time. By weighting together this data the model can calculate an overall price trend for the UK as well as individual price trends for each of the four networks. Results will be presented in the form of an index with each series having a starting base of 100.

Results from the model will be used by Oftel to assess whether competition is delivering value for money to all types of mobile customers. In particular, the analysis will be a key input to Oftel’s review of the mobile market in 2000. This will consider whether prices are falling fast enough or whether any further regulatory action is required.

1.1 At the beginning of July 1999 Oftel published a statement, Oftel’s review of the mobile market, which considered the extent of competition between the four mobile networks. It found that although competition was increasing and was delivering a better deal to consumers in terms of choice, quality and value for money there was still further to go. In particular, the statement set out Oftel’s view that competition was not yet sufficient to deliver the best deal to consumers.

1.2 Oftel undertook to continue to monitor the development of competition in the mobile market and committed to a further review of the mobile market in 2000 which would assess whether competition was delivering the necessary benefits to consumers or whether further regulation was required. As an essential part of this monitoring Oftel undertook to establish a comprehensive mechanism for tracking the price that consumers pay to make calls from mobile phones.

1.3 Oftel issued a competitive tender to build the price monitoring model and, following bids, appointed NERA to construct the model. NERA’s remit was to build a statistically robust model that would allow Oftel to track price changes over time and reflect the actual experience of different types of customer.

1.4 Oftel committed to consult on the methodology used by NERA in the construction of the price monitoring model in summer 1999. The purpose of the consultation is to allow interested parties to consider the approach adopted by NERA and to test the validity of assumptions they have made in the construction of the model.

1.5 Oftel intends to publish results from the model on a quarterly basis with the first set of results to be published towards the end of 1999. The published data will all be presented in index form to enable the user to accurately track trends in mobile prices over time. The indices that Oftel is proposing to publish are:

• an index for the whole market;
• separate indices for advance contract, monthly contract and pre-pay packages;
• separate indices for individual types of user classified by volume usage;
• separate indices for each operator (but not disaggregated by type of user).

1.6 Publishing the above indices will enable the user to identify how prices have changed for different types of mobile customers over time. It will also be possible to track the effect of price changes introduced by each operator and monitor the movement of an overall index weighted across all 17 million mobile customers in the UK. Examples of how the indices will look are shown in chapter 7 of the NERA report.

1.7 At this stage, Oftel will not publish indices showing price movements for individual operators by type of customer or track price movements for individual packages on the different networks. This will keep the number of published indices down to manageable levels while at the same time providing sufficient detail to interested parties.

1.8 All series will be presented in index form with a starting base of 100. This means that if two operators make equivalent price changes but from different levels, this difference in levels between the two operators will not be reflected by the index. It is not the purpose of this exercise to compare price between the networks – a much more detailed and flexible model would be needed and, given the speed with which the mobile customer base is changing and the rapid introduction of new and innovative tariffs by the operators, this would present complex modelling problems.

2.1 The methodology that NERA has used is set out in a separate report which can be found at the end of this consultation document. This report gives an in-depth explanation of how the model works and details the assumptions that NERA has made in constructing the model. A brief summary of the approach that NERA adopted is set out in the remainder of this chapter while the main assumptions they have made are explained in the next chapter.

2.2 The methodology that NERA has used is based on the approach suggested by Oftel in the invitation to tender. This involves classifying mobile customers into particular categories or ‘profiles’ according to usage patterns and then applying operator tariffs to these profiles. This approach was chosen as it allows Oftel to monitor how prices are changing for different types of user and thus better assess whether all mobile users are benefiting from lower prices or whether price falls are concentrated amongst particular types of customers.

2.3 The first step in the process was to identify ‘user profiles’ which are intended to represent the usage patterns of particular types of user. These user profiles were identified by carrying out a consumer survey, conducted by IFF research under the supervision of NERA, which asked questions about customers’ patterns of use on their mobile phone. These responses were then collated to construct user profiles relating to ‘typical’ customers. This approach is explained in more detail in section 4.1 of the NERA report.

2.4 NERA analysed the survey results and found that 63 profiles were required to properly represent the number and variety of mobile customers in the UK. Any less than 63 profiles would mean that price trends for some particular types of user would not be properly reflected. Any more than this would make the results difficult to interpret and might have resulted in some profiles being unreliable due to the small sample sizes involved.

2.5 The 63 profiles are made up of 21 profiles each for customers on pre-pay, monthly contract subscription and advanced contract subscription schemes. For each of these schemes one profile was identified for those customers that make no outgoing calls. The remaining 20 profiles within each of the three schemes are then broken down according to volume of usage (based on total monthly outgoing minutes) and the time of day that most calls are made. The precise breakdown of the profiles is set out in tables 4.1 and 4.2 of the NERA report.

2.6 It should be noted that Oftel does not intend publishing all 63 profiles on a quarterly basis as such a large number would be difficult for the reader to interpret. Instead Oftel is proposing to publish 5 profiles classified by level of usage (ie very low, low, medium, high, very high) for each payment scheme to give an overview of how prices have changed for different types of customer. These indices are set out in chapter 7 of the NERA report.

2.7 Having identified these 63 profiles, the model identifies the optimal least cost tariff for each network for each profile. The optimal tariff, which is re-identified each time the model is run, is then used to generate price trends for a particular customer group. These individual customer groups can then be weighted together to generate an overall price trend for the UK as well as individual price trends for each of the four networks.

2.8 This approach of identifying particular usage profiles and then applying tariff data to them is a widely used technique for monitoring price trends. Oftel has used it in the past in the fixed market and believes it is a robust method for assessing how price changes impact on particular types of user. We do not therefore anticipate that this consultation will result in an alternative approach being adopted, but would welcome any suggestions for refinements to the methodology or views on the assumptions set out in the next chapter.

2.9 Some initial results from the model for the period January-June 1999 are set out in chapter 7 of the NERA report. These results indicate that the overall market index fell by 5% over the first 5 months of 1999. The biggest price reduction was seen in the pre-pay market which fell on average by 8% over the period, while the least price reduction was in the monthly contract market which fell by an average of 3%.

2.10 On the whole, the largest price falls were concentrated amongst heavier users, particularly in the pre-pay market where some heavy use customers saw price reductions of nearly 15%. However, light users, particularly on the advance contract and monthly contract side also saw some price falls over the 5 months.

2.11 In addition to the indices shown in chapter 7 of the NERA report, it is intended that future publications will include separate indices for each of the four operators to show how each has changed its prices over time.

3.1 In order to try to accurately reflect the operators’ tariffs, NERA has had to make some basic assumptions and approximations in the construction of the model. All these assumptions are explained in detail in the NERA report. However, a few of the key issues have been singled out below as particularly important issues on which Oftel wishes to consult in order to improve the reliability and usefulness of the model.

3.2 NERA visited all four operators to discuss the data that they might be able to supply to assist NERA in the construction of the price index. All the operators have supplied initial tariff data to be fed into the model and arrangements are being made so that they can continue to provide this tariff data on a regular basis.

3.3 In addition to the tariff information, the model is also reliant on data to construct the customer profiles and calculate the weighting of each index. It is clear that the overall reliability of the results is very much dependent upon the quality of this data. Operators, service providers and consumer groups are therefore requested to supply any data they hold which might help NERA to improve the reliability and accuracy of the model and the assumptions on which it is based. Any data supplied to NERA will be treated in strictest confidence.

3.4 The key issues on which Oftel would welcome views are set out in the remainder of this chapter. The issues are:

• migration rate
• phone subsidy
• profiles
• service provider tariffs

3.5 One of the key assumptions NERA has had to make concerns the initial choice of package for new customers and the rate at which existing customers move between packages. New and pre-pay customers are in fact relatively straightforward to deal with since it can be assumed that they will automatically find their way onto the optimal package. This is because the ‘rational’ customer will investigate the cheapest deal when they first subscribe to a network or when they buy a new voucher.

3.6 More of a problem, however, is the treatment of existing subscription based customers who are no longer on the optimal tariff. In constructing the model NERA has assumed that each month 10% of those on non-optimal tariffs will migrate onto optimal tariffs. In reality, however, any migration rate will vary considerably from package to package depending on how widely a new tariff is advertised, how much cheaper it is etc. NERA has met with the operators and requested any data that they could provide that would allow NERA to more accurately calculate these migration rates. Such data would need to cover a range of recently introduced packages and indicate what proportion of customers have moved onto them from other existing packages.

3.7 Most mobile phones when purchased are heavily subsidised in order to reduce the initial purchase price for consumers. This subsidy is then reclaimed by the operator over the period that the person uses the phone through higher call charges. The model needs to take account of the level of subsidy associated with a mobile phone when the package is purchased in order to properly calculate the overall cost to the consumer. This is important because if the phone subsidy was excluded, this could mean that the index would not be fully representative of the prices customers actually pay. For example, if the phone subsidy was cut, then consumers would face higher prices but this change would not be reflected in the index. The model currently assumes a figure of £70 as the average level of subsidy. This is based on a basic phone as used by the majority of customers (see section 2.2.5 in the NERA report for a more detailed explanation). Operators and service providers are asked to comment on the validity of this figure of £70.

3.8 It would be useful if any views on the appropriateness of this figure of £70 could be accompanied with details of:

• the types of phone bought (including the numbers buying each type)
• the subsidised price of the phone
• the true retail value of the phone.
  

3.9 The profiles, on which the price indices rely, are based on usage patterns as found by a customer survey which was conducted by IFF Research Ltd under the management of NERA. Although the sample size of the survey (1,200 people) appears relatively small, it was sufficient to allow NERA to construct user profiles which represent particular types of user within the UK.

3.10 If the model is to produce reliable results it is essential that the profiles properly reflect the usage patterns of customers in the UK. Operators and service providers are therefore asked to look at the profiles as defined in the NERA document and consider how representative they are of their own customers. If upon inspection they feel that some of the profiles do not properly represent their customers they should notify Oftel and provide NERA with the relevant information that would allow them to construct more representative profiles. The type of information that NERA would need is set out in section 3.1 of the report.

3.11 It is particularly important that operators and service providers carry out this check as unrepresentative profiles could result in some misleading results for that particular operator. Oftel emphasises that any data supplied to NERA to help answer these or other questions will of course be treated in strictest confidence.

3.12 Although mobile services are provided through service providers, the model is based on tariffs as supplied by the four network operators. This approach was chosen as it is intended that the results will be representative of all mobile customers in the UK and as such only the very largest retail outlets can be covered. In addition, NERA found little evidence of service providers deviating significantly from the recommended retail price and consequently believe that the tariffs supplied by the network operators will be an accurate reflection of the price paid by most UK consumers (see section 2.2.4 of the NERA report for more details).

3.13 It is of course possible that at some point in the future a new service provider will emerge with a significantly different tariff structure which attracts large numbers of customers. Should this situation arise the model will need to be adapted to incorporate these tariffs.

Oftel seeks the views of consumers and industry on the proposals contained in this consultation document by 31 October 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 15 November 1999.

As part of the initial consultation Oftel would welcome comments on the following issues.

• the indices Oftel is proposing to publish (as explained in paragraphs 1.5 and 2.6)
• the methodology proposed by NERA
• the assumptions made by NERA

Comments should be made in writing and sent to:

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

Tel: 0171 634 8973
Fax: 0171 634 8757

E-mail: cwoolford@oftel.gov.uk

Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their responses, 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).

This document is also available at Oftel’s web site at http://www.oftel.gov.uk

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

Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on Oftel’s website (http://www.oftel.gov.uk) subscribers to the list receive an e-mail informing them about the document. If you would like to join please use the electronic form on the web site to add yourself to the list. There is a link to the form from the What’s new section of the site.

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 infocent.oftel@gtnet.gov.uk, or call textphone 0171 634 8769 for more information.

Advance contract package – A package which includes the phone, connection, a year’s line rental and, in some cases, some inclusive call minutes.

Index – A numerical scale used to show how a variable has changed over time against a given reference number, normally 100.

Migration rate – Measures the rate at which users on one tariff will move onto a new optimal tariff (assuming they keep the same usage pattern).

Monthly contract package – After paying a one-off fee for the phone and connection, the user pays a monthly rental charge which may include some inclusive call minutes.

Optimal least cost – Assumes that the user will purchase the cheapest tariff option to suit their particular requirements.

Phone Subsidy – Difference between the retail price of the phone and the cost of the phone.

Pre-pay package – After paying a one-off fee for the phone and connection, the user buys vouchers which enable them to use the phone.

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

Usage pattern – See user profile.

User profile – Describes how a particular customer or group of customers use their phone in terms of usage (number of minutes per month), time of day and/or destination number (ie national, international, calls to mobile etc.)

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