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| Review of competition: mobile access and call origination - 11 April 2003 | |
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The Notification NOTIFICATION OF A PROPOSAL UNDER REGULATION 6 OF THE ELECTRONIC COMMUNICATIONS (MARKET ANALYSIS) REGULATIONS 2003 Proposal for identifying a market 1. The Director General of Telecommunications ("the Director"), in accordance with Regulation 6 of the Electronic Communications (Market Analysis) Regulations 2003 (S.I. 2003/330) (the ‘Regulations’), hereby makes the following proposals for identifying a market. 2. The Director is proposing to identify the following market:
3. The effect of, and the Director’s reasons for making, the proposals to identify the market set out in paragraph 2 above are contained in Chapter 2 and Annex B of the consultation document with this Notification. 4. In identifying and analysing the market referred to in paragraph 2 above, and in considering whether to make the proposal set out in this Notification, the Director has taken due account of all applicable guidelines and recommendations which have been issued or made by the European Commission in pursuance of a Community instrument, and relate to market identification and analysis or the determination of what constitutes significant market power, in accordance with regulation 5(2) of the Regulations. 5. Representations may be made to the Director about any of the proposals set out in this Notification and the accompanying consultation by 20 June 2003. 6. Copies of this Notification have been sent to the Secretary of State, the European Commission, and such of the regulatory authorities of other member States as the Director thinks fit. PETER GRAHAM WALLER DIRECTOR OF OPERATIONS A person authorised under paragraph 8 of Schedule 1 to the Telecommunications Act 1984 11 APRIL 2003
Annex BMarket definitionGeneral comments B.1 There are two dimensions to the definition of a relevant market: the relevant products to be included in the same market and the geographic extent of the market(s). The Director’s approach to market definition follows that used by UK competition authorities (see Office of Fair Trading Market Definition Guideline, OFT 403, March 1999,) and is in line with those used by European and US competition authorities. B.2 Market boundaries are determined by identifying constraints on the price-setting behaviour of firms. There are two main competitive constraints to consider: how far it is possible for customers to substitute other services for those in question (demand-side substitution); and how far suppliers could switch, or increase, production to supply the relevant products or services (supply-side substitution) following a price increase. B.3 The concept of the ‘hypothetical monopolist test’ is a useful tool to identify close demand-side and supply-side substitutes. A product is considered to constitute a separate market if a hypothetical monopoly supplier could impose a small but significant, non-transitory price increase (SSNIP) above the competitive level without losing sales to such a degree as to make this unprofitable. If such a price rise would be unprofitable, because consumers would switch to other products or because suppliers of other products would begin to compete with the monopolist, then the market definition should be expanded to include the substitute products. Relationship between the wholesale and retail markets B.4 This consultation document will define the relevant markets both at the retail and the wholesale level. Consideration of the relevant retail markets logically precedes the analysis of the wholesale markets, since the demand for wholesale services is derived from the demand for retail services. The relevant (upstream) wholesale market will then generally be as broad as the demand-side substitutes in the relevant retail market. This also means that competitive conditions at the retail level will be relevant to the existence of market power at the wholesale level. For example, it does not follow from the fact that operators are vertically integrated and may not supply wholesale services to third parties that they have market power at the wholesale level. Any such power could be constrained by competition between vertically integrated operators at the retail level. Moreover, if vertical integration is efficient, the adoption by a number of firms of a vertically integrated structure could not then be construed as evidence of co-ordinated conduct. B.4 The purpose of this exercise is to assess whether a mobile network operator has SMP in a wholesale market and to identify appropriate remedies in that market to counter the existence of market power. Given this objective, it is necessary for the definition of retail markets to be undertaken on the basis of an assumption of no regulation of the wholesale services being considered. To do otherwise would mean that the wholesale market power assessment would depend on a retail market definition that relied on a wholesale remedy arising from the finding of wholesale market power. This would be a circular and incorrect approach to market definition. Therefore, the demand side and supply side substitution possibilities at the retail level will be considered only if they are viable in the absence of regulated wholesale inputs. B.5 In this consultation document, markets will be defined first on the demand side. The analysis of demand side substitution will be undertaken by considering if other retail services could be considered as substitutes by consumers, in the event of the hypothetical monopolist introducing a SSNIP above the competitive level. B.6 Supply side substitution possibilities will then be assessed to consider whether they provide any additional constraints on the pricing behaviour of the hypothetical monopolist which have not been captured in the demand side analysis. In this assessment, supply side substitution will be considered as a low cost form of entry which could take place within a relatively short period of time (which the OFT Guidelines on Market Definition, OFT 403, March 1999, consider to be within a year). That is, for supply side substitution to be relevant, there would need to be additional competitive constraints arising from entry into the supply of the service in question, from suppliers who are able to enter quickly and at low cost, by virtue of their existing position in the supply of other services. Only those supply side substitution possibilities that are viable in the absence of unregulated wholesale inputs will be considered as relevant to the analysis. B.7 There might be suppliers who provide other retail services but who might also be materially present in the provision of demand side substitutes to the service for which the hypothetical monopolist has raised its price. However, such suppliers are not relevant to supply side substitution since they supply services already identified as demand side substitutes. As such their entry has already been taken into account and so supply-side substitution cannot provide an additional competitive constraint on the hypothetical monopolist. However, the impact of potential expansion by such suppliers can be taken into account in the assessment of market power. B.8 A third factor that is sometimes an additional consideration is whether there exist common pricing constraints across customers, services or areas such that they should be included within the same relevant market even if demand- and supply-side substitution are not present. Retail market analysis B.9 At the retail level, the main relevant questions are:
The following sections discuss each of these questions in turn. Access and outgoing calls B.10 From the consumer’s point of view, mobile access can be thought of as the ability to make and receive calls. From the perspective of the mobile network operator this involves the registration and recognition by the network as well as the supply of a SIM card. The SIM card is a small chip contained in each mobile handset. Each SIM card is identified by unique numbers and it enables services to be delivered by one UK network. B.11 The first question to consider is whether or not access and outgoing calls are in separate markets as a result of demand-side substitution. Supply side substitution possibilities will then be assessed to consider whether they provide any additional constraints on the pricing behaviour of the hypothetical monopolist which have not been captured in the demand side analysis. B.12 It is clear that access and calls are not demand-side substitutes. In fact they are likely to be complements. There is a "buy-through" in that a customer cannot purchase calls without first purchasing access. B.13 In the case of wholesale access and outgoing calls, all current access providers offer calls as well and vice versa. They are therefore already included in the market as providers of demand side substitutes, and so supply-side substitution cannot provide an additional competitive constraint. For this reason, supply side substitution is ineffective. B.14 Despite the fact that, on application of the hypothetical monopolist test, these wholesale services may be defined as distinct markets, Oftel has always taken bundled wholesale access and call origination together as cluster markets. A cluster market approach has the effect of grouping together services in a single market that face sufficiently similar competitive conditions (ie measures of market shares, entry barriers, relative pricing, ability to switch). Oftel take this approach to market definition because access, origination and conveyance are supplied together in a bundle to resellers, and are consumed in a bundle (eg domestic calls, international calls, mobile use whilst abroad). This implies that they face a common pricing constraint: if an mobile network operator increases the price of an element in the bundle, it would have to alter the prices of the other elements to maintain the overall price of the bundle, otherwise consumers could migrate to another mobile network operator in response to the price rise of the bundle. B.15 Call termination is considered to be a separate market for each individual mobile network operator on the demand side, due to the calling party pays arrangement and the level of current technology. The definition of call termination as a separate market is supported by both the European Commission's Recommendation (list of markets) and the UK Competition Commission. B.16 An alternative method of defining the outgoing mobile market has been raised by the Competition Commission (CC) in its recent review of calls to mobiles). The CC stated that an important distinction could be made between the competition among the mobile network operators mobile network operatormobile network operatorto acquire and sign up new customers (in respect of which the mobile network operatormobile network operators incur various subscriber acquisition costs), and the ongoing competition among the mobile network operatormobile network operators in respect of call charges. It has therefore suggested two separate activities for the purposes of the retail market definition:
B.17 It examines access and call origination separately for the purposes of establishing where competitive pressures are felt in the retail market. The CC concludes that there appears to be vigorous competition in access, but in terms of call origination, high margins for off-net calls, a substantial level of unused ‘free’ minutes in mobile packages, and the bundling and complexity of call tariffs indicates less than effective competition at the retail level. Another argument for suggesting that calls and access should be considered separately revolves around possible innovations such as indirect access – i.e. the supply of calls by a number of different suppliers, not just the access provider. B.18 Oftel recognises that there are some arguments for this particular definition considered by the Competition Commission. There does appear to be some evidence that during the recent period of market growth, competition for new subscribers has been intense. B.19 However, evidence from Oftel’s consumer research suggests that consumers are likely to take into account the cost of making a call when selecting their tariff packages. The Consumers’ Use of mobile telephony survey, November 2002 gives survey evidence as to why consumers chose particular packages. 38 per cent of prepay consumers and 33 per cent of post pay consumers gave the reason that their choice of package was because it was 'cheapest for my needs'. This was the most popular reason. 20 per cent of post pay consumers stated 'the benefit of inclusive minutes' was a reason for the choice of their package. This survey result suggests that consumers are likely to consider the cost of calls, when making their 'access' decision. This would suggest that access and call origination are subject to a single pricing constraint, and that they can be defined as part of a single cluster market. The existence of Indirect Access ('IA') would suggest separate markets for calls and access. However, there are currently no providers of mobile IA services. B.20 There are merits to both Oftel's approach and to the Competition Commission’s. However, on balance, Oftel considers that evidence from consumer research and the continued bundling of access and calls suggests a single market for access and outgoing calls. Fixed services and mobile services B.21 The Director continues to maintain the view that fixed services are in a separate market to mobile services. The following paragraphs provide the reasoning for this view. Demand substitution: fixed and mobile voice – access B.22 For the purpose of voice telephony, mobile phones may be viewed by consumers as adjuncts to fixed line phones; the latter are attached to a place, the former belong to a person and can travel with that person. B.23 Consumer research from November 2002 (published January 2003) found that only seven per cent of UK adults use only mobiles to make and receive telephone calls. This is slightly higher than figures found in surveys conducted earlier in the year where approximately five to six per cent of UK adults used mobiles only. However, even with this slight rise, it is still apparent that over 90 per cent of UK adults continue to use their fixed line. This seems to indicate that the growth of mobile phones can largely be seen as an adjunct to the fixed market rather than a substitute. B.24 More detailed analysis from a survey conducted in February 2002 (Consumers' use of mobile telephony, February 2002) had shown that only about 17 per cent of UK adult consumers use their mobile as their main method of phone calls and, of these, eight out of ten have a fixed line at home. Further, the survey found that 77 per cent of residential consumers still consider their fixed line as their main method of making and receiving calls. Consumers who choose predominantly to use only mobiles appear to do so due to the distinguishing feature of mobiles (i.e. the mobility element). B.25 Evidence of changing call patterns can be found from Oftel’s Market Information. This shows that the number of voice minutes from fixed lines has continued to fall over recent quarters. However, this fall in call minutes from fixed lines has been more than offset by an increase in call minutes from mobile phones, meaning that the overall trend in minutes is still upward. However, it is not sufficient to rely on trends in fixed and mobile call volumes to infer causality, ie substitution from fixed to mobile calls such that these are in the same market. For example, some of the decline in fixed voice call volumes will reflect, to a degree, increased use of e-mail (although as argued below, Oftel does not consider e-mail a substitute for fixed voice calls). B.26 This conclusion is supported by the qualitative surveys indicating that typically mobile phone calls made by consumers are short convenience calls such as calling someone whilst walking home from the station – the type of call that, by definition, cannot be made from a fixed line. The qualitative analysis suggests that the advent of the mobile has, to a significant degree, expanded the market for making calls, rather than substituting fixed calls, implying that a large majority of mobile calls are an adjunct to fixed calls. Demand substitution: fixed and mobile voice – calls B.27 Oftel has previously set out in detail its views on the scope for substitution between particular types of fixed and mobile calls. Specifically, although fixed and mobile access are not good substitutes, as indicated by the fact that most customers have both, there is the possibility of call by call substitution for those who have both. B.28 In considering whether a call from a mobile to a fixed line or to another mobile is an adequate substitute for a call from a fixed line, a number of issues arise. In the first instance, substitution is more likely if the caller already has a mobile and therefore bases their decision on the marginal call price. Oftel’s quarterly residential survey published in August 2002 indicates that the proportion of households with both a fixed and a mobile phone is estimated at 73 per cent. The same survey reports that about two-thirds of consumers with both fixed and mobile phones find occasions on which they use their mobile instead of their fixed telephone. (This proportion is virtually unchanged from two years ago.) This means that just less than one third are not substituting mobile usage for fixed to take advantage of lower prices at certain times, or for convenience. B.29 However, only a minority of consumers with both fixed and mobile phones use a mobile instead of a fixed phone either at certain times of day or to call certain numbers on the basis of price differences (ten per cent and nine per cent of consumers, respectively, Consumers' use of mobile telephony, August 2002). B.30 The size of the price differential between calls from fixed and mobile phones depends on a number of factors including whether the caller’s mobile tariff package provides an allowance of ‘free’ calls in return for a fixed fee. Where users purchase an allowance of free calls with their subscription, the marginal call price may be regarded as zero and this may encourage use of the mobile in preference to the fixed phone. However, the possible scale of substitution of calls from the fixed line may be limited if the allowance of free calls is small relative to the volume of fixed line calls. In addition, whilst some off-peak mobile tariffs are now comparable to some prices for calls on the fixed network, the general price premium for making calls form a mobile suggests that mobile prices do not constrain the prices of calls from a fixed line. B.31 Another consideration arises in the case of substitution by mobile to mobile calls. This is most relevant for fixed to mobile calls. Absent other information, the probability that a call will remain on-net will reflect the market share of the mobile network operator in question, which will currently lie between around 24 per cent and 27 per cent on the basis of total subscriber numbers (see Chapter 3, Table 3.1). However, it is likely to be higher if the caller is a member of a ‘closed user group’. A closed user group can be defined as an identifiable group of people who have an interest in how much it costs to call each other. Nevertheless, it is not always the case that even on-net calls are cheaper than the corresponding fixed to mobile call for given times of day. B.32 Moreover, mobile operators’ traffic-sensitive costs are expected to remain above those of fixed networks. Therefore, starting with both services priced at their respective competitive levels, it is unlikely that a SSNIP above the competitive level of a call originating on a fixed line would induce a sufficient amount of demand-side switching to mobile originated calls. Even with mobile originated calls priced at the competitive level, a significant price differential would likely remain. To illustrate this, the network charge control model yields a LRIC+EPMU value for fixed call origination to the tandem layer of 0.292ppm for 2002-03. Oftel's modelling of the costs of mobile network operators pursuant to the Competition Commission investigation of mobile termination rates yields a LRIC+EPMU figure of 2.494ppm for call origination to the tandem layer (for both the 900MHz and 1800MHz mobile network operators). For 2005-06, LRIC+EPMU fixed call origination to the tandem layer is forecast to be 0.234ppm, whereas for mobile call origination to the tandem layer it is forecast to be 2.321ppm. B.33 Although call origination is just one element of an end-to-end call, these figures suggest that at the competitive level, the price differential between fixed-to-fixed and mobile-to-fixed calls would currently be around 2.2ppm and three years hence would be around 2.1ppm. This margin is significantly greater than the ppm increase implied by standard application of the SSNIP test at 5 to 10 per cent, ie 0.015ppm or 0.029ppm (using the current estimated fixed call origination value). Consumers may well be prepared to pay some premium for the additional convenience of mobiles but full substitutability of residential fixed lines by GSM is unlikely as long as a significant price premium remains. Supply side substitution B.34 On the supply side, there appear to be few opportunities for substitution between fixed and mobile services. New entrants into either the mobile or fixed markets will face considerable barriers to entry. In particular, an absolute barrier to entry into the mobile market currently exists in the unavailability of spectrum, although this may diminish over the longer term with the development of spectrum trading. In addition, there are high sunk costs involved in building a mobile network, which cannot be recovered on exit. The level of sunk costs is high: a new entrant would have to achieve a national coverage in order to compete effectively with incumbents. The market for outgoing voice calls B.35 Focussing further on market definition by considering a hypothetical monopoly supplier of outgoing domestic calls, on the demand side, if the monopolist of outgoing domestic call services increased its price, it seems clear to Oftel that different types of voice calls, eg, mobile domestic and international calls would not be perceived as effective substitutes by consumers. B.36 An assessment of supply-side conditions could suggest a wider market definition might be appropriate. For example an increase in the price of international calls by a monopoly supplier of international calls would be likely to encourage suppliers of domestic calls to switch resources into the supply of international call services, say by purchasing international conveyance from fixed operators with international networks. Since suppliers of domestic mobile calls could purchase access to international facilities on similar terms to that achieved by the monopolist supplier of mobile international calls, Oftel would expect domestic suppliers to be able to switch resources relatively easily to undermine the price rise made by the hypothetical monopolist. This suggests that international and domestic calls fall within the same market. B.37 However, no mobile network operators are likely to enter the market through supply side substitutability given that all suppliers already offer all the outgoing services in the bundle. This is because potential suppliers of other services that could switch in to the supply of the service in question already offer services identified as demand side substitutes, and their entry has accordingly already been taken into account and so supply side substitution cannot provide an additional competitive constraint on the hypothetical monopolist. B.38 Notwithstanding the above arguments, Oftel take the view that the cluster market analysis would suggest that these services should fall in the same market because the different retail call types are subject to a common pricing constraint. Moreover, in order to win a consumer a retailer must supply all outgoing call types in the bundle. It is also clear that there are economies of scope in retailing outgoing call types together. Inclusion of SMS in the access and outgoing calls market B.39 In order to complete the market analysis, Oftel now considers whether SMS (Short Messaging Service), or text massaging, forms part of the access and outgoing calls market discussed above. On the demand side, text messaging could be a partial substitute for a call to a mobile. But because it enables parties to exchange only relatively short messages, and these messages can be delayed, this form of communication is nothing like a complete substitute for a telephone conversation in most cases. Unlike a mobile voice call, SMS is transferred between networks on a store and forward basis (SMS can be stored within the SMSC). There is no end to end connectivity for SMS, as each leg of the message is separate from the preceding leg, consequently SMS does not take place in 'real time.' B.40 Oftel’s qualitative research showed that text messaging is regarded, especially by the young, as an activity separate from voice calling, and that text messages were largely additional to voice calls rather than a substitute for them. There does not appear to be any significant switching on the basis of price. However, quantitative research indicates that a significant proportion of mobile customers send text messages rather than making voice calls from their mobiles. The research did not however examine the extent of substitution or the circumstances in which text replaces voice calls. B.41 The demographic differences in SMS usage are changing, and this could have an impact on SMS as a voice substitute. Recent research shows that 62 per cent of 18-34 year olds with mobiles use SMS frequently, in place of mobile voice calls, compared with 30 per cent of those aged 35-54 and 6 per cent of the 55+ group. As penetration and SMS use are a lot higher among younger consumers, including the under-18s who do not yet feature in the consumer research, the relative frequency of SMS will definitely grow. It is debatable whether this increase in frequency corresponds to an increase in SMS for voice substitution. One can equally argue that the increase in frequency occurs alongside voice calls (i.e. there is no causality between the two) implying that they are adjuncts rather than substitutes, i.e. consumers are likely to consume them alongside voice calls. Indeed, there does not appear to be any evidence to indicate that voice volumes have decreased in response to an increase in SMS volumes. B.42 To conclude, the Director takes the view that while SMS may substitute some voice calls it does not provide an adequate substitute for voice calls on the demand side. B.43 On the supply side, in order for substitution to be effective, there would need to be suppliers that present additional constraints on the pricing behaviour of the hypothetical monopolist which have not been captured in the demand side analysis. B.44 Supply side substitution is not relevant because the providers of voice are essentially the same providers of SMS. Providers of voice are already captured in the SMS market on the demand side since they provide SMS services as well. This is because, in order to win the consumer, it is necessary for mobile network operators to provide a bundle of services including SMS, so there are no mobile network operators that only provide SMS or voice. Given that the same mobile network operators supply voice and SMS, an mobile network operator would be switching against itself in order to constrain a hypothetical monopoly supplier of SMS. In other words, if an mobile network operator was making supernormal profits on SMS, it would not divert resources away from a voice service in order to constrain the market power in SMS, so the charges for one service do not pose a constraint on the level of the charges for the other. These suppliers are not relevant to supply side substitutability because they supply services already identified as demand side substitutes. This implies that supply side substitution is ineffective. B.45 However, consideration of cluster markets would indicate that SMS should be in the same market as voice. This is because the competitive conditions surrounding SMS are the similar to that of voice products, eg entry barriers, market shares, market structure etc. SMS and voice are, increasingly commonly since the last mobile review, sold as a package and there are no SMS only packages available at the retail level. Mobile network operators compete for retail subscribers, not on the prices of each single outgoing service, but on the overall price of the bundle. This implies that these services, even though no service in the bundle is a demand or supply side substitute for any of the others, are subject to a common pricing constraint and thus can be considered to be part of linked markets. The rise in volume and number of users of SMS services since the last mobile review have increased SMS services' prominence in the overall bundle. A mobile network operator would not be able to increase the price of one element in a bundle of services, without losing its customers to another mobile network operator in reaction to an increase in the overall price of a bundle. B.46 On balance, the Director's initial conclusion is that SMS should be included within the mobile access and call origination market. It should also be noted, however, that its inclusion does not have a significant impact on the assessment of SMP. Data services and access to the Internet B.47 When making mobile calls to the Internet, consumers connect to Gateways (which may be associated with mobile network operators or other Internet Service Providers) and are then passed to portals, which are essentially web pages. The conveyance of the Internet calls may be included in bundled minutes in airtime packages (for calls to customer’s own network gateway) and/or charged separately (depending on the tariff). Calls to other gateways are charged at standard off-network call rates or NTS (Number Translation Services) call rates. B.48 The conveyance element of mobile Internet services is similar to that involved in supplying domestic calls; consumers simply make a domestic telephone call to connect to gateways. B.49 There may also be an argument here for defining mobile Internet services in the cluster of markets that encompass outgoing voice calls, if it can be argued that they are subject to a common pricing constraint. However, this is unclear at present. B.50 Since the mobile Internet is in the early stages of development, it is unclear how the market should be precisely defined. It is likely that the mobile Internet market will be distinct from the fixed Internet market, for the same reasons discussed when distinguishing between fixed and mobile markets generally. There are likely to be other reasons why fixed and mobile internet are separate on the demand side, for example, mobile internet has a smaller screen size and at present has limited content, so consumers may not see it as an adequate substitute. Beyond this it may be that there is an overall mobile internet market or separate mobile internet services markets (which just considers activities beyond the gateway, including the relationship between gateway and portal providers) and internet conveyance markets (which may fall within the market for outgoing calls). B.51 Whatever the precise definition, however, Oftel is interested in the link between call conveyance and Internet services. In particular, it may be possible for any market power in the general conveyance market to be leveraged into Internet services by limiting access to certain portals. B.52 Retail data services offer an end-to-end service to customers, including data conveyance from the mobile network to the customer’s server. Since retail mobile data services are relatively under-developed, detailed market definition is not straightforward. It may be, however, that distinct markets for retail data services will emerge alongside the onset of 3G. The markets may be distinct from other mobile services if consumers are faced with no effective substitutes for the data product. Since the markets are very immature it is too early to say whether other demand-side substitutes will emerge, but it may be that non GSM radio data communications services, currently used for tracking and telemetry applications, will develop as competitors to GPRS. There may be a degree of supply-side substitutability between voice and data services, although this is likely to be limited for the same reasons that retail voice and SMS services are weak substitutes. B.53 A more precise market definition will only emerge over time, as the services become more established in the sector. Pre and post pay mobile services B.54 On the demand side, it appears that pre and post pay are in the same market; they are adequate substitutes for each other, because if a hypothetical monopoly supplier increased the price of pre-pay, consumers can easily switch to post pay. Consumer evidence indicates that 45 per cent of mobile owners said that they would consider switching from pre-pay to post pay or vice versa if it was significantly cheaper for their needs. The consumer research suggests that post-pay packages users were more likely to consider switching to a pre-pay package (60 per cent) than vice versa (37 per cent). This is possibly because consumers are (typically) tied into a contract for up to a year. But once the contract is over, there are no significant barriers to switching to pre-pay. The largest factor in the willingness of pre-pay customers to switch to post-pay is probably the value that prepay customers place on being able to control costs (27 per cent of prepay customers gave this as reason for not switching, and 26 per cent stated this as a reason for their choice of package). The level of savings needed to persuade the remaining prepay consumers to switch to contract is unclear, but there are no significant structural barriers to changing to a post-pay tariff. B.55 On the supply side, it is clear that a mobile network operator could quickly switch resources into developing pre-pay platforms within a short time-scale. Wholesale market B.56 Wholesale services are the packages of calls and access provided to service providers, call origination for indirect access, international roaming and domestic roaming for '3'. The hypothetical monopolist test can be applied to a wholesale market to determine whether or not it is distinct from the corresponding retail market. The relevant question on the demand side is whether purchasers of the wholesale service have any viable alternatives to switch to, in response to a small but significant non-transitory price increase. Due to the distinct nature of mobile telephony, there are no substitutes on the demand side. Due to the absolute entry barriers, there are clearly no substitutes on the supply side. There is potentially some asymmetry because wholesalers can easily enter the retail market, although it may take time to build up brand image etc, but supply side substitution is not likely to be effective, because all mobile network operators already supply services identified as demand side substitutes. As such their entry has already been taken into account so supply-side substitution cannot provide an additional competitive constraint on a hypothetical monopolist retail of mobile services. Oftel believes therefore that separate retail and wholesale markets can be defined. Wholesale data markets B.57 Oftel has considered whether it is possible to identify separate wholesale markets for Data/GPRS. It is possible that these form part of the overall wholesale market since resellers, for example, service providers purchase the complete bundle of mobile services from mobile network operators, including access, voice call origination (domestic and international calls) and other mobile services (including SMS and calls to the Internet). However the (potential) markets are relatively immature and it is not clear whether they will develop as distinct markets over time. Wholesale market for SMS B.58 The reasoning for a lack of demand and supply side substitutability applies at the wholesale level as well as at the retail level. B.59 The cluster market analysis would suggest that SMS should be included in the overall market for calls and access due to similar competitive conditions. This follows on from the analysis on the retail market definition for SMS: the fact that SMS is sold in a bundle with a common pricing constraint. Wholesale market for Data/GPRS B.60 The wholesale data service is likely to be of interest to Internet service providers to bundle with their wider service before being sold to end users. As noted mobile data services are still in relatively early stages of development, which makes detailed market definition a difficult task. It is possible that a distinct wholesale market for data services will emerge, although this will depend on the availability of demand and supply side substitutes. It seems likely that there will be no substitutes on the demand side. However, there may be some supply-side substitutability between voice and data services, depending on technological developments. B.61 As a result Oftel is again not inclined to define a separate wholesale economic market with any precision, although it may be that such a market will emerge. Wholesale international roaming B.62 The 'international roaming' service at the retail level is the ability of UK customers to use their mobiles abroad. Wholesale roaming services can be thought of as providing temporary network access to the customers of overseas mobile network operators (i.e. individuals have the ability to make and receive calls while in the UK) as well as call conveyance. From a demand perspective this can be defined as a distinct market from call conveyance and access. If roaming prices increased at present it seems unlikely that an overseas mobile network operator would find the wholesale services sold to service providers to be an effective substitute. B.63 On the supply side, however, it seems more likely that wholesale roaming services (sold to international mobile network operators) and wholesale call origination and access (sold to service providers) are substitutable. For example, if a monopoly supplier of roaming services increased its price then it seems possible for a supplier of call origination and access services to switch resources into supplying the international roaming market (and vice versa). There are likely to be some minor modifications to the network required, but otherwise the service is similar, requiring recognition of a SIM (whether it belongs to the operator’s own or another network) and the provision of airtime capacity. This would point towards defining a single wholesale market for access and airtime services. B.64 However there is a strong indication that such supply-side substitutability would not be effective. In order for an alternative supplier to constrain the price of a monopolist the potential competitor would need to be able to attract customers from the hypothetical monopolist making the price rise unprofitable. However price signals are not likely to have a significant impact on customers' (ie overseas mobile network operators) behaviour given that they appear to enter into roaming agreements with all mobile network operators and given their limited ability to direct traffic flows with any certainty. Moreover the lack of a direct relationship between the UK supplier of the service and the end user limits the ability of overseas subscribers to respond to prices set by UK mobile network operators. B.65 As a result of this analysis, Oftel is considering a separate wholesale market for roaming services. This is consistent with the view reached by Oftel in its mobile market review ending in September 2001. Geographic scope of market B.66 The markets are considered to be national since mobile prices are uniform over this geographic area. Moreover, the geographic scope is not likely to be widened since, although a foreign mobile network operator could provide services in the UK if it obtained a roaming agreement with a UK mobile network operator, the price of roaming (certainly at current price levels) makes this uneconomic; tariffs applied to mobile calls placed from another network while using roaming facilities far exceed the mobile retail calls placed from the subscribed network. In other words, demand side substitutability from an overseas mobile network operator is ineffective due to the price differential: a hypothetical monopolist supplier of domestic mobile calls and access would not be constrained by an overseas mobile network operator, because consumers could not switch to buying services from a foreign mobile network operator. Supply side substitutability from an overseas mobile network operator is also ineffective, because an overseas mobile network operator could not easily switch into providing domestic calls and access; it would need to build a new network. The quickest way would be through a roaming agreement, but this requires an agreement to be set up. Forward look: GSM (2G) and 3G services B.67 The arrival of '3' and launch of 3G services raises the question as to how 3G services fit within the market definition. The precise definition of the market is likely to revolve around the exact nature of the new services, and the competitive conditions surrounding them. This information is necessary to effectively apply the hypothetical monopolist test. At present this is unclear, so it is difficult to reach a definitive view. However, with reference to some analysis undertaken by the European Commission, Oftel considers some views on how the retail market definition for outgoing calls is likely to develop over time. The following analysis applies to mobile network operators that run a 2G and 3G network. It is currently unclear as to when the existing 2G mobile network operators will begin to offer 3G services. 3G voice services – retail market B.68 It is useful to consider voice and data services separately in the context of 3G. The mobile network operators are likely to offer ‘seamless’ 2G and 3G voice and data services by providing both types of services on a single SIM. It could be argued that the balance between voice and data services will shift fundamentally: whereas 2G data are largely limited to fax and SMS, and voice services typically account for a large majority of revenue, for 3G services (like teleshopping, video conferencing and video telephony) eventually a majority of revenue may be generated by data services. It is useful to analyse voice and data separately. B.69 First, considering voice services, in principle on the demand side, voice services are likely to be considered to be demand side substitutes, because consumers are likely be indifferent to making voice calls on a 2G or 3G network, and are not likely to know the difference. B.70 However it is conceivable that voice services may be sold as a bundle with data services. Consumers may then be offered bundles including voice and basic (2G) data or voice and enhanced (3G) data. Oftel’s view is that services within a bundle are likely to be subject to a common pricing constraint. But it is less clear that 2G and 3G bundles will be subject to a single pricing constraint. This would suggest that a separate market consisting of 3G voice and data can be defined. It is possible that, over time, 'rich voice over 3G networks' services may develop that consist of voice services integrated with data services such as consumer videophones and multimedia conferencing that go beyond the capacity of 2G and 2.5G networks. Hence it is possible that a distinct market for 3G voice services will develop, or indeed that 3G voice and data services will merge into a single market. Data services B.71 A fundamental difference between 2G and 3G is the functionality which, in general, is the basis for market definition on the basis of demand-side substitution. It is arguable that, because services and content available over 3G networks are expected to be considerably improved in relation to 2G both as concerns data speeds and the range of services that is consequently enabled, any substitutability between 2G and 3G is likely to be limited. Moreover, the effectiveness of demand side substitution is low here given the cost differential between 2G and 3G. In other words, it does not seem likely that a hypothetical monopolist provider of 2G services would be constrained in raising prices by five per cent because the price of 3G services is likely to be significantly higher. B.72 This leads to the conclusion that 2G and 3G services are likely to be separate markets. Although it appears clear that there will be some overlap between 2.5G and 3G services, as 2.5G allows services like mobile e-mail, multi-media messaging and continuous Internet access, 2.5G does not have data transmission rates that are sufficient to provide the high end of data services that are expected to emerge on 3G networks. It therefore appears that there may be an emerging market for the provision of 3G mobile data services. B.73 The difference in data applications between 2G and 3G can be compared to the differences between fixed narrow band and broadband that has warranted Oftel to define separate fixed markets. The main differences that warrant separate markets are:
B.74 On the supply side, a mobile network operator providing 3G services is likely to be able to switch into providing 2G services if a hypothetical monopolist supplier of the latter raises prices. The same, however, cannot be said in reverse because of spectrum requirements. This debate is however academic, because in reality the same mobile network operators provide both services. A hypothetical monopoly supplier of 3G services will not face any additional supply side constraints from 2G mobile network operators, because any potential providers of 2G services will already be captured on the demand side, because they already provide 3G services. Therefore there are no additional constraints on prices due to supply side substitution. B.75 To conclude, it is unclear whether 2G and 3G are in the same market. It is also unclear as to whether 3G voice and data are a single market or not. The relevant market definition for 3G is therefore left open. However, this does not affect the conclusions of this review regarding SMP in the mobile market. Summary of market definition B.76 At the wholesale and retail level, fixed and mobile calls form separate markets. Access and call origination (outgoing markets) are part of the same market. All outgoing calls (call origination) and SMS also form a single market due to cluster markets. Call termination services are not in this market. It is unclear as to whether 2G and 3G services are separate markets or not. Relationship between this market definition and the Commission’s B.77 As noted in Chapter 1, Oftel is required to take utmost account of EU Guidelines in its market analysis, including the Commission’s Recommendation on relevant product and service markets. B.78 Oftel has given careful consideration to the markets listed in the Commission’s Recommendation and has defined this market largely in line with that of the Commission’s Recommendation. It is unclear whether the market defined by the Commission also includes SMS. Oftel has taken the view that SMS should be included in the outgoing calls market at the retail and wholesale level.. Oftel has concluded that the assessment of SMP is not significantly different due to the inclusion of SMS in the market definition.
Criteria for assessing collective dominance for the purposes of the EU market reviews C.1 Article 14(2) of the Framework Directive provides that an undertaking has significant market power in a market if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers. C.2 Article 14 (2) adds that when assessing whether two or more undertakings are in such a joint dominant position, Oftel must act in accordance with Community law and take into account the guidelines on market analysis and the assessment of significant market power ('SMP') published by the Commission (the 'SMP Guidelines'). It must also use the criteria set out in Annex II of the Framework Directive. C.3 Importantly, the list of criteria set out in Annex II of the Framework Directive is not an exhaustive list but rather a list to illustrate the sorts of evidence to support a conclusion that joint dominance exists in a market. The criteria to be used to measure the market share of the undertaking(s) concerned will depend on the characteristics of the relevant market. Ultimately, it is for the national regulatory authorities to decide which criteria are the criteria most appropriate for measuring market presence. The criteria listed in Annex II are:
C.4 In the new regulatory framework, the definition of SMP is aligned with the European Courts' definition of dominance. The case law on collective dominance has been set out in the SMP guidelines. C.5 In addition to the analysis set out there, and as previously mentioned, the Court of First Instance (CFI) in the Airtours judgment (see paragraph 3.117) has recently clarified that three conditions are necessary for a finding of joint dominance:
C.6 Therefore, two or more undertakings can be found to be in a collectively dominant position where they operate in a market the structure of which is considered to be conducive to co-ordinated effects. C.7 Oftel’s guidelines for assessing SMP give more guidance on how Oftel will meet its EU obligations. See http://www.oftel.gov.uk/publications/about_oftel/2002/smpg0802.htm. C.8 In making this assessment, the Director confirms that he has used the criteria in Annex II of the Framework Directive 2002/21/EC, and had the utmost regard to the Commission’s SMP Guidelines; and Oftel’s Market Review Guidelines.
Annex DFurther criteria for assessing dominance in this market Links between the undertakings Formal links D.1 Annex II of the Framework Directive states that two or more undertakings can be found to be in a jointly dominant position, even if in the absence of structural or other links between them, they operate in a market which is considered to be conducive to co-ordinated effects. One factor to be considered in assessing the nature of the market is the existence of various kinds of informal or other types of link between the undertakings concerned. D.2 A finding of collective dominance does not rely on the existence of formal links between the undertakings concerned. However, the existence of a number of different formal links between the undertakings would provide strong evidence of the ability to co-ordinate behaviour. D.3 The types of formal link that would support a finding of collective dominance have been illustrated in a number of cases. These links have included joint ventures and distribution agreements between the companies concerned. Oftel is not aware of specific formal links of this type between UK mobile network operator. Oftel is however aware that some agreements between mobile network operators have been notified to the Commission (in order to obtain exemption or clearance from the provisions of Article 81 of the EC Treaty, which prohibits agreements that prevent, restrict or distort competition). D.4 In February 2002, O2 and T-Mobile notified the Commission of an agreement to share infrastructure networks for the third generation (3G) of mobile phones. Oftel had previously considered the possible effects on competition of infrastructure sharing agreements, and concluded that it is necessary to assess each agreement on a case by case basis (see http://www.oftel.gov.uk/publications/mobile/infrashare0501.htm). The UK has expressed concerns to the Commission about certain aspects of the agreement (see http://www.oftel.gov.uk/publications/oftel_response/2002/share1002.htm). The Commission has reached a preliminary conclusion (September 2002) that the agreement would be eligible for an exemption from Article 81(1) of the EC Treaty (under Article 81(3) of the EC Treaty) and that safeguards are in place to limit the exchange of commercially sensitive information between the parties. Informal links D.5 Oftel is aware that mobile network operators participate in a number of industry groups, across a range of issues. These include the development of new codes of practice, number portability processes, and the standardisation of new technologies. An examination of the purpose, scope, procedures and membership of such groups does not indicate the existence of any specific competition concerns. In fact, Oftel staff attend a number of the meetings. D.6 Such self and co-regulatory activity is also in line with government policy and Oftel strategy. Oftel considers that joint industry working can have a number of benefits, both in terms of the development of new policies and products, and to identify and address areas of concern in the market. D.7 In conclusion, the formal and informal links identified above do not appear to raise specific competition concerns, but Oftel would welcome views on this issue. Lack of active competition on non-price factors / Homogenous product D.8 Alongside price competition, it is important to consider the level of competition on non-price factors. The mobile network operators could compete by seeking to differentiate their products and services less on price and more in terms of quality and/or variety. However, the more similar the products are (or are perceived to be by customers) the greater the need to compete on price instead, which can facilitate a co-ordinated outcome on price. This is because greater product homogeneity increases the ability to detect secret price cutting. Also, greater homogeneity increases incentives to collude, since consumers are likely to be less brand loyal, and are more likely to switch in response to price cuts. This leads to 'tough' price competition and lower profits unless mobile network operators can agree not to undercut each other. D.9 In August 2002 Oftel asked residential consumers how far they thought the mobile network operators differed on a variety of aspects of service. The aspect on which mobile network operators were most thought to vary was geographic coverage, but even on this measure only 30 per cent of consumers thought that mobile network operators differed by 'a lot'. There were lower figures for quality of connection/reception, range of services (15 per cent) and quality of customer service/after sales care (11 per cent). The corresponding figure for price was 25 per cent. Whilst at least as many more consumers thought that mobile network operators differed by 'a little' on each aspect, it is not clear how far mobile network operators could compete for customers on the basis of such perceived differences. D.10 A separate Oftel survey in November 2002 asked residential consumers to name the best and worst mobile mobile network operators for a number of aspects of service. For each measure, between a quarter and a half of consumers named their own network as the best one, but typically about 40 to 50 per cent of consumers answered 'don’t know'. Over three-quarters of consumers could not identify a worst MNO for each aspect. These figures indicate a degree of uncertainty about the differences between mobile network operators, although this is to an extent to be expected as most consumers have never switched mobile network operator; switchers were more commonly able to name a specific mobile network operator as best or worst. There were also some differences in terms of how far customers selected their own mobile network operator as best, and in terms of which mobile network operator was named as second best. D.11 Vodafone has provided information from market research conducted on its behalf that indicates that business consumers do perceive differences between which mobile network operator is best in different respects. Whilst to some extent these differences might reflect market shares, the different relative performance of the mobile network operators for specific aspects of service indicates that business users are better able to compare mobile network operators than residential users. D.12 The mobile network operators certainly consider non-price issues to be important, for example featuring favourable quality of service results in their promotions. All the mobile network operators have also devoted significant resources to promotion, partly as two of them have re-branded themselves recently. There is also increasing differentiation on non-voice aspects, including branded handsets, picture messaging and propositions such as Vodafone Live or T-Mobile's 't-zones'. D.13 On some measures of quality the mobile network operators appear to be relatively close. Examples can be found in the mobile industry's call success rate surveys ('mobile CPIs') and Oftel's consumer satisfaction surveys. But consumers seem to vary in how far they perceive and value the differences between mobile network operators. It does not seem necessary for all consumers, or even a majority, to perceive and value differences in order for those differences to provide mobile network operators with a basis for competition. Overall there seems to be sufficient incentive to compete on non-price factors and sufficient evidence that the mobile network operators are doing so. Absence of excess capacity D.14 Where there is no excess capacity, providers are not able to try to raise their overall profits by combining an increase in supply with a price cut. In this situation there is more reason not to diverge from a co-ordinated outcome. D.15 In a mobile network there comes a point where increasing capacity becomes increasingly expensive: the cost of increasing capacity to win customers from other mobile network operators is greater than the cost to the mobile network operator losing those customers of maintaining service for those customers. Oftel considers that, given current levels of mobile penetration, this point may have been, or will shortly be, reached. D.16 When 3G networks are widely implemented this should offer extra network capacity; 3G services will be supplied using new spectrum. However, the impact of this extra capacity depends on when and how the services are introduced, and how far the traffic that they generate cannot be handled efficiently on existing 2G networks. It is therefore currently uncertain what the impact of the new 3G spectrum will be. Overall size of the undertaking D.17 This criterion refers to the potential advantages, and the sustainability of those advantages, that may arise from the large size of a firm. Such advantages may accrue from activities of the firm in other markets. D.18 In terms of UK subscriber numbers the four established mobile network operators are now very close together. The gaps have also narrowed on revenue and traffic shares. Looking at activities outside this market, all of the mobile network operators are part of international groups, although the extent of this differs quite considerably. The mobile network operators have commented on this criterion to Oftel, and in summary they do not consider that significant and sustainable advantages exist. Comments made included the existence of a fluid market for ownership of companies (that could limit the sustainability of any advantages) and that all mobile network operators have opportunities for synergies in other markets. Oftel has not collected significant data that would contradict this view, but invites stakeholder comments on the issue. Access to capital markets/financial resources D.19 There are some differences between the mobile network operators in terms of their ease of access to the capital markets and the terms (ie cost) on which external finance can be obtained. However, it is not clear that these differences are substantial. Although borrowing costs may currently be higher for some mobile network operators than others, the differences are not necessarily enduring, they can change over time, and can be influenced by the companies themselves changing their strategies (eg by changing capex, or balance sheet changes such as new equity issuance). D.20 However, there are structural differences that have some impact too. As three of the four currently operating mobile network operators are subsidiaries of much larger groups (the UK operations of Orange, Vodafone and T-Mobile) they may benefit from access to capital at more favourable terms than MmO2. This might be due to one or more of the following:
D.21 Oftel does not consider that these factors are sufficiently substantial or sustainable to support a finding of single or collective dominance. Product/services diversification (eg bundling) D.22 It is not apparent to Oftel that bundling is a significant competitive issue in this market. All mobile network operators bundle their services but this does not prevent competition between them. In a market such as this, bundling is necessary to win the consumer, due to the economies of scope inherent in supplying various services together. Whilst handsets and subscriptions are typically bundled together, pre-pay consumers at least are able to buy handsets and subscriptions separately. Moreover, Oftel has defined the market on the basis of bundling. Retail products are sold as a bundle with a common pricing constraint, and consumers react to changes in the price of the overall bundle. Economies of scale D.23 Vodafone and Orange have much higher traffic volumes, but limited advantage in terms of subscriber numbers. Greater traffic volumes allow Vodafone and Orange to benefit from scale economies, i.e. their average cost is lower since fixed costs are being spread across more volumes. This further implies that part of Vodafone's profits is consistent with a competitive market, because it reflects efficiency. Economies of scope D.24 It is possible that Vodafone especially could gain from its big footprint across international markets, in terms of branding, R&D, and marketing intelligence. But the mobile network operators do not see particular advantages in such issues, and in terms of sustainability such advantages can arise from acquisition, joint ventures and other strategic alliances. It could be argued that there will be some economies of scope advantage for the current mobile network operators in terms of both the legacy customer base and network roll-out, although to an extent the latter would be reduced by 3's roaming agreement with O2 and the lack of a legacy network with which to co-ordinate. Vertical integration D.25 In this market most end users are supplied by providers that integrate their wholesale inputs, billing relationship and sales. Some aspects are outsourced, such as customer service, but access to each network is fully controlled. This does not necessarily represent a problem for potential mobile service providers, as discussed above in the barriers to entry section at paragraphs 3.16 to 3.31. A highly developed distribution and sales network D.26 The mobile network operators all have a strong high street presence, although the size of their branded branch networks varies. Hutchison 3G's brand, '3', will be sold in The Carphone Warehouse, The Link and Phones4U, as well as Superdrug (which it has bought) and some own-branded stores. It is therefore possible for a new entrant to gain mass-market access through independent retailers and non-specialist retailers rather than just replicating large branded retail networks. For smaller providers this is likely to be a lot harder. Virgin, for example, was not distributed in The Carphone Warehouse until it had three per cent of UK mobile subscribers. But where a product is likely to be compelling to consumers, there are enough independent retailers to significantly qualify the advantages of existing suppliers' distribution networks. This is particularly the case for sales of pre-pay products, which tend on average to be associated with much less retail advice.
Annex EMarket shares Measurement of 'active' subscribers E.1 For pre-pay subscribers and on certain post-pay tariffs (such as, for example, as a Virgin Mobile customer), it is possible for a customer to have a mobile connection but to not use that mobile connection for long periods of time without incurring costs. Clearly a distinction must be drawn as to whether that mobile connection is not used as, for example, the customer considers it an emergency facility or whether that customer has ceased to use that connection. E.2 Until approximately two years ago the Director did not consider subscriber inactivity as an issue, then Vodafone informed Oftel that approximately 8 per cent of its entire subscriber base was inactive. At that point the Director approached the mobile network operators and inactivity definitions of each mobile network operator was determined as follows:
E.3 Approximately 12 months ago:
E.4 Therefore currently the mobile network operators define 'inactive' pre-pay subscribers as follows:
Vodafone also consider post-pay subscribers inactive on the same basis. E.5 Oftel is currently in discussion with T-Mobile to order to change its definition in line with the other mobile network operators, to aid comparability rather than because Oftel judges three months to be an objectively 'correct' period. Traffic volume shares E.6 The following chart shows the relative changes in call volumes of each of the mobile network operators over time: Figure E.1 Trends in shares of mobile traffic volume
E.7 This charts shows, as you would expect, that in 1997-98 Vodafone had the largest market share of total volume. T-Mobile had a high market share for the same period, more than O2 which had significantly more total subscribers at that time. However at the time T-Mobile had a number of unique low cost packages that offered unmetered local calls, thus dramatically increasing their volume. Orange’s market share was broadly reflective of its total subscribers market share. E.8 Over time, as T-Mobile phased out its unmetered local call packages and all mobile network operators began offering packages with some inclusive national and on-net minutes, T-Mobile’s market share has dropped and total volumes have become very roughly in line with total subscriber market share. However Vodafone and Orange subscribers appear to produce a higher volume per subscriber.
Annex FAssessment of technological advantages F.1 In the mobile market the predominant mobile technology currently used is GSM, which has been used in the UK since the early 1990s. There are others such as TETRA in the UK, and CDMA2000. GSM is a worldwide open standard that is used in over 190 countries, and has over 787 million customers (GSM World, January 2003 - www.gsmworld.com). GSM is available from a number of large international vendors, and allows terminals to roam from one network to another. GSM has evolved from a voice and circuit switched data system, to one that is able to offer packet based data services (GPRS). This makes it possible to offer web browsing services and other data services in a more efficient way. The ability to offer innovative and commercially attractive data services will be further advanced by the introduction of 3G services in the UK based on a new technology (wide-band CDMA). WCDMA is also an open standard that is supported by a large number of manufacturers. The new 3G technology is again an open standard. F.2 This ubiquity of the technology, and the ability to source equipment from many suppliers, would seem to make the likelihood of any UK mobile network operator having a technological competitive advantage small, and transitory. The only exception would seem to be from economies of scale in the purchasing of equipment and scope in things like billing platforms. From a technical perspective, any innovative package could be quickly copied by the other mobile network operators. F.3 Oftel has asked stakeholders some technical questions in relation to the UK mobile market. Their responses generally agreed with the views put forward above. One issue that was raised was the relative efficiencies of GSM networks relying on 1800 MHz spectrum such as Orange and T-Mobile, and those using 900 MHz to deliver services, such as Vodafone and O2. In fact Vodafone and O2 have both 900 and 1800 MHz spectrum, but were originally only allocated 900 MHz spectrum. This however effected their original deployment strategies, such as numbers of cell sites to cover a given geographic area. Some were of the view that 900 MHz mobile network operators had an advantage as regards to 1800 MHz mobile network operators. This is due to technical characteristics of 900 MHz spectrum in relation to 1800 MHz. The lower the spectrum frequency, the greater the range (all other things being equal) is normally the rule. In this situation it allows Vodafone and O2 cells to cover a greater range from any one cell, and hence require fewer cell sites to cover a particular area. This is further added to in that for regulatory reasons absolute radio power levels of 900 MHz systems are higher than 1800 MHz systems. However this is countered by the fact that 1800 MHz mobile network operators have more spectrum, which allows them to handle more traffic in any given cell. This means that 900 MHz mobile network operators are forced to 'split' cells more frequently in areas of high traffic demand. Thus 900 MHz mobile network operators have an advantage in rural areas of low demand, and 1800 MHz mobile network operators have an advantage in very dense areas of high traffic demand. The extent to which these two forces balance can only be judged through detailed analysis. F.4 It was further mentioned that 900 MHz mobile network operators have an advantage because that frequency is better able to penetrate inside buildings than 1800 MHz. This would give 900 MHz an advantage in providing in-building coverage. However views were mixed, and it is not clear how significant a factor this is. F.5 It was also mentioned that the use of 2.5G data services (such as GPRS) might give an advantage to mobile network operators with more spectrum, as these services are more bandwidth hungry. That is that if demand for 2.5G is heavy, this might favour 1800 MHz mobile network operators. However this effect is hard to quantify and the fact that such 2.5G services are supposed to be able to take advantage of spare voice capacity might mitigate this; as well as the fact the that Vodafone and O2 now have extra 1800 MHz spectrum. F.6 The Director's initial view is that there is no significant technical advantage between mobile network operators using 2G currently and that the technology is mature. This is primarily due to the fact that the underlying technology is equally open to all mobile network operators, and that none has any significant power to deny 2G technology to the other mobile network operators. The same holds true for 2.5G services such as GPRS. F.7 On the issue of 3G it is not yet clear what impact this will have, as the technology is not mature. It may be that requirement to offer content on data networks will require negotiations with powerful content providers. However to what extent this might occur and when are very uncertain. F.8 It is also too early to tell what impact new technologies such as wireless local area networks (WLANs) will have in allowing extra competition into the market at the network level. Such networks seem likely to offer only very limited geographic coverage (such as stations, airport lounges, coffee shops etc). This might provide competition in some limited locations. However for technical reasons at least such systems are not likely to be ubiquitous, and probably focused on providing services to laptops and PDAs (personal digital assistants) initially. F.9 In conclusion, Oftel considers that
List of consultation questionsQ2.1 Do you agree with the market definition outlined in Chapter 2 and Annex B? Q3.1 Do you agree with the Director's initial view that no mobile network operator has single dominance? Q3.2 Do you agree with the criteria that Oftel has used to assess collective dominance? Q3.3 Do you agree with Oftel's analysis of the role of independent service providers and future developments in mitigating the impact of wholesale barriers to entry? Q3.4 Do you agree that the patterns of change in relative market shares, pricing and profitability of the mobile network operators do not suggest the existence of collective dominance ? Q3.5 What do you consider to be the extent and impact of problems in this market concerning consumer awareness and switching barriers? Q3.6 Do you agree with Oftel's analysis of the potential impact of countervailing power of strong independent retailers? Q3.7 Do you have any comments on Oftel's analysis of the transparency of market conditions and the existence of potential retaliatory mechanisms? Q3.8 Do you have any other comments on Oftel's analysis of dominance in Chapter 3 and Annex D? Q3.9 Do you have any comments on future developments that might affect Oftel's assessment? Q4.1 Do you have any comments on the implications of removing the current SMP-related conditions in this market, given the alternative regulatory powers available to the Director, and later to Ofcom, to promote competition and protect consumers? Q4.2 Do you have any suggestions for how Oftel and Ofcom could monitor this market, in a non-burdensome way, to ensure timely and effective responses to changing market conditions?
Glossary 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. CDMA: Code Division Multiple Access. The access technology used for 3G mobile systems. Cluster Market: a market which consists of services sold as part of a package to a customer so that they share similar competitive conditions and are thus subject to a common pricing constraint Conveyance: Interconnection between two points. CPIs (Comparable Performance Indicators): quality of service measures on a like for like basis. Mobile CPIs compare successful call rates across the mobile networks. De-racking: a tactic considered in the CFI's Airtours judgment that involves reducing the prominence of a firm's customer brochures where those brochures are available in the distribution outlets of another competing firm. GPRS: General Packet Radio Service GSM: Global Standard for Mobile Communications Hypothetical monopolist test: an economic test used to identify close demand-side and supply-side substitutes. Indirect access: where a customer establishes a connection with a particular operator’s network by dialling a short code to switch through the network on which his exchange line terminates. Such calls are usually billed by the Indirect Access operator. Interconnection: the linking (whether directly or indirectly by physical or logical means, or by a combination of physical or logical means) of one Public Electronic Communications Network to another for the purpose of enabling the persons using one of them to be able: (a) to communicate with users of the other one; or (b) to make use of services provided by means of the other one (whether by the provider of that Network or by another person); LRIC (Long Run Incremental Costs): The costs caused by the provision of a defined increment of output, taking a long run perspective, assuming that some output is already produced. The ‘long run’ means the time horizon over which all costs (including capital investment) are variable. NRAs: the body or bodies, legally distinct and functionally independent of the telecommunications organisations, charged by a Member State with the elaboration of, and supervision of compliance with, telecoms authorisations. Number Translation Services (NTS): telephone services using non-geographic numbers, where that number is translated to a geographic or mobile number for final delivery to the called party. Radio spectrum: the range of wavelengths or frequencies used for radio communication, for example, for broadcasting radio, terrestrial television and satellite television. The primary mobile frequency bands are from around 400 MHz to 3 GHz. GSM uses 900 and 1800 MHz. Return on Capital Employed (ROCE): the ratio of accounting profit to capital employed. The measure of capital employed can be either Historic Cost Accounting (HCA) or Current Cost Accounting (CCA). Schedule 2 Public Operator: those operators who have rights and obligations to interconnect with each other under Article 4(1) of the Interconnection Directive for the purpose of providing publicly available telecommunication services. Service provider: a provider of electronic communications services to third parties whether over its own network or otherwise. SMP: The Significant Market Power test is set out in European Directives. It is used by the National Regulatory Authorities (NRA) such as Oftel to identify those operators who must meet additional obligations under the relevant Directive. SMS: Short Messaging Service. SMSC: Short Message Service Centre – the computer platform that stores and forwards SMSs. 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). TACS network: Total Access Communication System – analogue cellular mobile radio system WLANs: Wireless Local Area Networks.
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