26 November 2002

Contents

Summary

Chapter 1 – Background

Chapter 2 – Assessment of policy options

Chapter 3 – Conclusion

Summary

S.1 ‘SIM-locking’ stops mobile handsets from being used to get competitors' services. Oftel’s last review of competition in the mobile sector concluded that SIM-locking was a barrier to switching suppliers, and that the removal of locking, or easing of its terms, would benefit competition.

S.2 In this statement, Oftel assesses three options for how to address its concerns and achieve consistency with Oftel's strategy of appropriate regulation. These options are to use formal powers to end locking or ease its conditions; to avoid regulation and guidelines but promote improved customer awareness of SIM-locking practices; and to improve compliance with existing guidelines.

S.3 Oftel has decided that improved consumer awareness of SIM-locking is the best way to address the issue. Some of the key reasons for this decision are that a limited number of consumers may benefit from a very interventionist approach; heavy regulation would be disproportionate given the general findings of the last mobile market review; and the difficulties of achieving meaningful and practical guidelines.

S.4 Oftel is accordingly writing to mobile providers to ask how they can ensure reasonable consumer awareness of SIM locking conditions. In the light of the responses, Oftel will consider if it needs to take more direct action to raise awareness. Oftel will monitor changes in awareness and advice.

S.5 Prior to this review Oftel policy was expressed in its 1998 SIM-locking guidelines, which set certain boundaries on how SIM locking should operate. As of the date of this statement, those guidelines are withdrawn.

Chapter 1

Background

SIM-locking: definition and processes

1.1 A mobile handset contains a small chip called a SIM card; ‘SIM’ stands for Subscriber Identity Module. Each SIM card is identified by unique numbers, including a mobile phone number, and it enables services to be delivered by one UK provider. ‘SIM-locking’ is the practice whereby handsets are locked so that they can only be used to obtain the services of the original provider of the mobile service. It is more accurately termed ‘handset locking’. The SIM card itself is not actually locked, as it can be used with other handsets (that are not locked to other networks). SIM cards can be bought separately from handsets, though generally only for pre-pay tariffs.

1.2 Handsets are locked by handset manufacturers, at the request of mobile networks. The manufacturers also provide codes to networks to enable handsets to be unlocked. Most handsets can be unlocked by means of the network providing the customer with a code to enter into the handset.

Current UK SIM-locking practices

1.3 Table 1 below shows the current practices of the largest mobile providers.

Table 1 – Mobile providers’ handset locking policies, November 2002

* T-Mobile will be reducing its unlocking fee to £15 in early 2003.

Contract customers typically must also pay the outstanding subscriptions for the remaining period of the contract before being unlocked.

Oftel’s current position on SIM-locking

1.4 Oftel’s review of effective competition in the broad mobile sector was completed in September 2001. It concluded that SIM-locking was a barrier to consumers switching suppliers, and that the removal of locking, or easing of its terms, would benefit competition in a number of respects, including price, consumer choice and entry barriers.

1.5 Oftel’s policy before that review was contained in the following 1998 guidelines:

• SIM-locking may be justified by objective reasons, including for handsets that are subsidised;
• customers should be able to unlock their phones once the handset subsidy is recovered, which should in general be by the end of 12 months, if not before; and
• any administration fee charged for unlocking should be related to the costs associated with unlocking.

1.6 Oftel also looked at how mobile providers met the concerns of the European Commission guidance (as stated in 1996):

• end-users should be made aware at the time of purchase whether their handsets are locked;
• network operators/service providers should tell end-users that unlocking is possible, or provide upon request the information necessary to unlock;
• the existence and amount of the handset subsidy (and any conditions for repaying monies due under the contract) should be made clear to customers at the time of purchase; and
• handsets need not be unlocked until the subsidy has been repaid.

Views of stakeholders

1.7 Oftel obtained views during its last review of competition in the mobile market. It seems unlikely that these views are very different now, and indeed Oftel has not been given any indication of significant changes. Mobile operators did not generally see SIM-locking as a problem. Most non-mobile operators, plus service providers and consumer groups, either opposed SIM-locking fully or had concerns about its detailed operation – mainly on consumer advice and unlocking fees.

Chapter 2

Assessment of policy options

2.1 Oftel has looked more closely at the arguments concerning SIM-locking, taking into account market changes since September 2001. The key issues can be considered by comparing the advantages and disadvantages of the following three options available to Oftel:

• Option 1 – using formal powers against locking practices, whether to end locking or to reduce the charges and/or qualification periods for unlocking;
• Option 2 – withdraw guidelines and avoid regulations, but promote consumer awareness of SIM locking practices; or
• Option 3 – leave guidelines unchanged and monitor/promote compliance without formal regulation.

Option 1 – using formal powers

2.2 Formal powers could be applied either to end locking or to reduce the charges and/or qualification periods for unlocking. One option for exercising formal powers might be reference to the Competition Commission under the recently passed Enterprise Act.

Advantages

2.3 When considering the advantages outlined below, the size of the benefits would naturally vary according to the precise action taken. Whilst these benefits should also apply to the other two Options, under Option 1 the effects would probably be quicker and more certain as the changes in locking practices would be more directly specified by Oftel.

• more and faster switching between providers of customers’ whole mobile service, producing increased competitive pressure on the average price of outgoing calls. According to Oftel’s November 2001 residential mobile consumer survey, of those who had not previously switched whilst keeping the same handset, and did not know that they could do this, about 20 per cent expressed an interest in doing so;

• splitting mobile services between two or more providers using one handset using two (or more) SIM cards. This would enable consumers to select a preferred network according to call type and time of day. This should lead to increased competitive pressure on margins for specific call types. For example, Oftel calculated that in August 2001 even those already on the best package for their usage pattern could save a further six to 16 per cent on the cost of off-net calls by using one extra SIM card to effectively convert calls to one other network into on-net calls. This calculation does however pre-date the widespread availability of contract tariffs with off-net minutes in the inclusive call allowance. Oftel comparative international research in spring 2001 showed Italy’s use of multiple SIM cards to be quite active, at 13 per cent of mobile customers, relative to the UK’s four per cent. Tariff comparisons done at that time suggest that on and off-net tariffs are more similar where more consumers are using multiple SIM cards, suggesting that the experience and possibility of using multiple networks can constrain off-net prices;

• more options for call coverage and signal quality, as consumers could switch between networks by using multiple SIM cards;

• competitive pressure on handset prices. More retailers could compete in handset sales. Currently some locked pre-pay handsets sell for more than their non-locked equivalents, a position that would be less tenable if unlocked handsets were more widely available;

• greater customer choice. Currently, the networks offer different handset ranges. Some consumers wanting to combine a specific handset with a specific network, or get access to services available over a specific network, may therefore face sub-optimal choices;

• greater transparency of pricing. handsets and tariffs could be compared separately by consumers;

• lower entry barriers. By offering SIM-only products, new entrants could sign up customers more quickly after launch, producing a quicker payback on start-up costs. Service providers such as Virgin Mobile, Fresh and One Tel Mobile have all made SIM-only connections a prominent part of their marketing; and

• protection from undue restrictions in relation to handset subsidies. Many individual customers seem to be locked for too long in relation to the handset subsidies to be recovered, especially as handset subsidies have fallen. Indeed, many customers have owned their handsets for long enough to have repaid their subsidies. Oftel’s November 2001 residential survey showed that 56 per cent of pre-pay customers and 45 per cent of contract customers had owned their mobiles for over a year, by which time the average handset subsidy should be recovered.

Disadvantages

2.4 However, there are also some potential arguments against strong action to reduce or remove SIM-locking, the first of which relates specifically to Option 1:

• potential inconsistency with mobile sector regulation. The last Oftel review of the mobile sector concluded that the market was prospectively competitive, and that regulation should in general be reduced. Even if Oftel still has concerns about the impact of SIM-locking on switching behaviour, that impact needs to be considered alongside the various other criteria used to assess competition in the mobile sector. Formal regulation on SIM-locking may be inappropriate and unsustainable if the market is, overall, moving towards effective competition. Of course, there may still be sufficient consumer protection aspects to SIM-locking policy that would justify regulatory intervention;

• operators would be less able to differentiate their service to consumers. Providers need bases on which to compete, and as new services are introduced they may increasingly try to compete partly on the basis of specialised handsets and the services that they can offer over those handsets. By removing locking, operators would have less incentive to compete in this way because it would be more difficult to sustain an advantage over their competitors. There is a risk of a ‘chicken and egg’ situation, whereby providers would not develop services without being sure of having enough available handsets with the functionality to deliver them, but manufacturers would not add this functionality without more certainty that it would be used;

• removing/reducing SIM-locking may have a limited impact on switching. The proportion of mobile customers that have ever switched – at 26 per cent of residential consumers (Oftel survey, August 2002) – is about the same as for fixed telephony, and if anything the mobile figure is still rising. This is despite the cuts in mobile handset subsidies since spring 2001, since when any clear effects on switching should have been evident. Oftel’s November 2001 residential survey showed that about 90 per cent of mobile consumers change their handset when choosing additional or alternative providers. Whilst some customers in that survey were unaware that they could keep their handset with additional or alternative providers, only about a quarter of those unaware consumers actually expressed an interest in doing so. This equates to only about ten per cent of mobile customers in total, and in practice some of these customers would not in practice keep their handset when changing mobile provider. Furthermore, it is also important to note that other reasons for not switching may well persist. These reasons include satisfaction with current providers, weaknesses in retail advice on switching processes, and limits to consumer awareness of mobile charges. Finally, directly changing the policies of the mobile providers may have limited effect if consumers are not sufficiently aware of the changes in locking practices;

• SIM-locking is becoming less of an issue as the proportion of customers with pre-pay has fallen. Already, since handset subsidies were cut from Spring 2001, there has been a change to mobile ownership, in terms of a fall in the proportion of residential users with pre-pay phones. From May 2001 to May 2002 this fell by seven per cent. SIM-locking seems less of an issue for contract phones because the contract usually locks in the customer anyway for 12 months or more;

• removing locking could increase handset prices. Mobile providers often justify SIM-locking chiefly on the basis of the need to protect handset subsidies, and thereby promote faster penetration. If this were true, a rise in handset prices would be expected if SIM-locking were to end. Handset subsidies have already fallen a lot, so there does not seem to be enormous potential for handset price increases in the near future. In the absence of SIM-locking, it is possible that handset prices would be higher in some cases. The counter-argument is that handsets would still have to be priced at a level that consumers would buy them. Overall, the balance of arguments is not clear, but there is at least a risk that higher handset prices would apply in the absence of SIM-locking; and

• mobile handset theft. It has been suggested on occasion that the practice of SIM locking acts as a deterrent to mobile phone theft. Oftel does not consider this argument to be persuasive, partly as removing the SIM-lock has been relatively straightforward. Barring the handset from use across all networks seems to be a far more important deterrent, and the ability to do this now exists due to the networks’ sharing of stolen handsets’ unique IMEI numbers.

Option 2 – withdraw guidelines and avoid regulations, but promote consumer awareness of SIM-locking practices

2.5 As stated in Option 1, many of the arguments should also tend to apply, but the effects would be less certain under Option 2 as the outcomes would be based on the actions of providers and customers, rather than being specified by Oftel.

Advantages

• the market, based on aware consumers, would determine the importance of SIM-locking. With effective competition in prospect in the mobile sector, a market-based approach would be better in the long run, and also therefore consistent with Oftel’s strategy. The unlocking terms set by mobile providers are not in themselves necessarily prohibitive, although Oftel is not convinced that unlocking charges are clearly based on the costs involved, nor that locking periods necessarily relate closely to the time required to recover handset subsidies. It is not however easy to know how much consumers care about current locking terms, as they are not sufficiently able to factor locking policies into their decision-making. To do this, consumers should be aware – especially before purchase – about locking policies and unlocking costs/conditions;

  However, whilst many consumers seem to know that mobiles can be used on other networks, they do not seem to know about the locking of mobiles. In February 2001, only just over a third of residential consumers were aware that their handsets could be locked to their current supplier, and only a quarter were aware that they might be charged for unlocking. More broadly, only 17 per cent of residential subscribers said they were aware before they bought their phone of the procedures and potential costs involved in switching supplier later.

  Whilst consumers aware of SIM-locking may be taken properly through the unlocking process, it seems that a minority of consumers have a good chance of getting to this position. Oftel arranged mystery shopping in March 2001 on retailers, call centres and providers’ head offices. This showed that under half of all mystery shoppers were given the correct advice about whether SIM unlocking was possible, and only eight per cent were given the correct advice about all aspects of unlocking (including charges, time to unlock and ability to use during the unlocking process).

  More recent qualitative research suggests that awareness of SIM-locking remains low. Focus groups in April/May 2002, used to develop Oftel's general mobile consumer guide, showed the concepts of SIM-fee phones and SIM-only products to be new to most group members. In October 2002, research into views on the published consumer guide, the ability to use mobile phones with additional or alternative providers was specifically cited by some consumers as new information, and the section in the guide on changing SIM cards was among those most often identified as useful;

• advice to consumers can be targeted to good effect in terms of the timing, content, and medium of the advice. Such flexible targeting applies to communications by both providers and Oftel. However, it does seem likely that point-of-sale advice on SIM-locking is a key contributor to consumer awareness, and there is no obvious reason why should be limited to certain customers; and

• broad consistency with the European Commission’s 1996 concerns on SIM-locking. The Commission was mainly concerned that if SIM-locking were to exist that consumers should have sufficient information to enable them to consider SIM-locking in their decision-making.

Disadvantages

2.6 All but the first two of the disadvantages of Option 1 may apply here also, albeit that the exact outcomes would be less certain. One further potential problem would exist:

• time to build awareness could be significant, either due to poor advice to consumers or due to generally low consumer receptivity to the information. It is consistent with Oftel strategy to seek to rely mainly on mobile providers to ensure that their customers – regardless of distribution channel – receive the right information, at the right time, on SIM-locking policies. Oftel could also however disseminate information directly to consumers, depending on its expectations and assessment of providers' actions to provide accurate and timely information.

Option 3 – leave guidelines completely or largely unchanged and monitor/promote compliance with guidelines, without formal regulation

Advantages

• less restriction on customer choice may result from clear adherence to the guidelines, producing the benefits listed under Option 1, but to a less certain degree; and

• relatively light touch regulation. Providers would still have scope to set their SIM-locking policies in ways that they each judge best follow the guidelines.

Disadvantages

• it is unclear that handset subsidies should be considered an adequate justification for SIM-locking. The relationship between SIM-locking and handset prices is unclear. SIM-locking may support lower handset prices, but in the absence of SIM-locking providers would still wish handsets to be priced sufficiently low for consumers to buy the right amount. Without SIM-locking, some individual customers' handset subsidies would not be recovered, and this is an implicit basis for the current guidelines. However, even without subsidies might well be recovered across each provider's whole customer base, given that most consumers do not switch frequently: switching of providers stood at only about 11 per cent of customers in the year to August 2002 (Oftel residential consumer survey). Further, even if some consumers did switch, one provider's loss of revenue would be another's gain; the only providers losing out overall would be those who could not retain their customers' loyalty. It is not therefore clear, on closer assessment, that SIM-locking can be justified on the basis of subsidies, and if so it seems inappropriate to maintain guidelines that imply this link;

• practical complications in devising appropriate terms would be significant. If locking periods were set to relate to the level of handset subsidy, it would be necessary to monitor how soon after purchase the net revenue from customers recouped that subsidy. Handset subsidies and the rate of recovery of those subsidies can vary much between providers, between contract and pre-pay phones, and between handsets. Handset prices, and by implication subsidies, also fluctuate much over time according to changes in handset supply and demand. A considerable level of information would be required to accurately monitor even appropriate average locking periods for each provider, let alone monitoring policies based on different locking periods for individual customers. There are also difficulties with monitoring unlocking fees to ensure that they are related to the cost of the procedure. First, providers' unlocking procedures vary. Second, without assessing the cost of an efficient unlocking procedure, and imposing that cost as the unlocking charge, there would be no necessary benefit from having a cost-related charge. Intrusive and prescriptive regulation may therefore be required for guidelines on the unlocking fee to be meaningful;

• risk of setting the wrong restrictions. The guidelines would ideally replicate the SIM-locking conditions that the market – with aware consumers – would support. But incorrect obligations could either unduly constrain the choices of providers or support SIM-locking conditions that were more restrictive upon consumers than the level that the market would sustain; and

• excessive long-run regulatory intervention could be fostered by determining and reviewing the appropriate details of SIM-locking policies regardless of general trends in regulation of the mobile sector. This would particularly be the case were Oftel to prescribe standard locking periods or unlocking fees, as this would tend to constrain providers’ detailed decision-making. It is better to enable market choices than to seek to replicate them in the long-term.

Chapter 3

Conclusion

3.1 In choosing between these options, the key considerations are consistency with Oftel strategy given the size of the problem, the general level of competition in the mobile sector; and what will best actually solve the problem in the long-term. The main difficulty is in assessing the effects of a change in policy, especially in terms of customer behaviour. It is unclear how far more aware consumers would change their behaviour if SIM-locking restrictions were reduced, and what effect this would have on market outcomes such as price. Given this, a heavy level of regulation seems disproportionate and potentially unjustifiable in the long-term.

3.2 The risks of a less interventionist approach do not however seem high, as there does not seem to be an overwhelming demand to use handsets with alternative suppliers, and as most consumers state that they do not switch due to satisfaction with their provider. Of the two less interventionist options, the suitability and effectiveness of guidelines is questionable. Raising consumer awareness does carry a risk of slow results, but it is a flexible tool as it can be done in different ways by different parties, and changing levels of advice and awareness can be measured quickly and easily.

3.3 Oftel therefore concludes that:

• SIM-locking still represents a barrier to switching for at least some consumers;
• but it is inappropriate to use more formal regulatory powers to reduce SIM-locking or change the terms for unlocking, certainly in the absence of a clearer understanding of how far SIM-locking matters to customers;
• the importance to consumers is best promoted by improved customer awareness. Ideally mobile providers will take responsibility to raise awareness; the Director General is asking providers how they can ensure this. Direct Oftel information may also help to raise awareness, building on SIM-locking advice given in Oftel's general leaflet for mobile customers (September 2002), available at www.oftel.gov.uk/publications/consumer/consguides/mob0902.htm;
• the current specific Oftel guidelines on SIM-locking will be withdrawn as they do not provide an effective means to address SIM-locking concerns; and
• Oftel will review the success of this policy later, in the context of its overall monitoring of competition and consumer interests in the mobile sector. If awareness does not improve sufficiently Oftel will consider whether a more prescriptive approach is appropriate.