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Notice of determinations that Vodafone and BTCellnet have Market Influence under Condition 56 of their respective licences |
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December 2000 Notice of determination that Vodafone has Market Influence under Condition 56 of its Licence Notice of determination that BTCellnet has Market Influence under Condition 56 of its Licence NOTICE OF DETERMINATION THAT VODAFONE HAS MARKET INFLUENCE UNDER THE PROVISIONS OF CONDITION 56 OF ITS TELECOMMUNICATIONS ACT 1984 LICENCE NOTICE OF DETERMINATION (Under Paragraph 6 of Part 1 of Schedule 1 of Vodafone’s Licence) Whereas:
NOW THEREFORE THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE, HEREBY GIVES NOTICE THAT:
22 December 2000 CHRIS KENNY A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act.
NOTICE OF DETERMINATION THAT BTCELLNET HAS MARKET INFLUENCE UNDER THE PROVISIONS OF CONDITION 56 OF ITS TELECOMMUNICATIONS ACT LICENCE NOTICE OF DETERMINATION (Under Paragraph 6 of Part 1 of Schedule 1 of BTCellnet’s Licence) Whereas:
NOW THEREFORE THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE, HEREBY GIVES NOTICE THAT:
22 December 2000 CHRIS KENNY A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act.
The Director General of Telecommunications hereby gives notice that he intends to determine that Vodafone and BTCellnet have Market Influence ("MI") in the market for mobile telephony in the UK. These determinations are intended to reinstate obligations that were triggered following the Director General’s March 2000 determinations that Vodafone and BTCellnet had MI. The March 2000 determinations have since been invalidated following the Court’s decision in the case R v Secretary of State for Trade and Industry ex parte Orange Personal Communications Ltd. These determinations are therefore being made to ensure that Vodafone and BTCellnet, as operators with MI, are legally bound, for example, to supply wholesale airtime to service providers. These determinations are not related to and will not influence the decision making process to be used to assess market competitiveness in the mobile market review, which officially started with the publication of Oftel’s 2000/1 review of the mobile market in September 2000. However, the Court’s judgement in the case referred to makes it necessary for Oftel to consider remaking the MI determinations in order to preserve the current level of legal certainty for all players in the market pending the outcome of the sector review. The final conclusions that are drawn from the sector review will be made known in the summer of 2001. Oftel’s conclusions in relation to this consultation will not restrict the Director General’s ability to reach different conclusions in the mobile market review in the light of further evidence, developments and analysis at that stage. A Market Influence determination made under Condition 56 of the standard mobile PTO licence has the effect of triggering licence conditions that would require the party concerned:
These determinations are based on an analysis of the mobile market that was undertaken to assess whether any of the four network operators – Vodafone, BTCellnet, Orange, and One2One – possess MI. The method and findings of this analysis are explained in the Explanatory Memorandum. The Director General maintains that Vodafone and BTCellnet possess MI. He therefore plans to determine that this remains the case, subject to his consideration of any views that may be expressed during the consultation. Oftel would welcome comments on the Notices of determinations by 22 January 2001.
Explanatory memorandum Introduction This document contains Notices published by the Director General of Telecommunications, which explain that he intends to determine that Vodafone and BTCellnet have Market Influence ("MI") in the market for mobile telephony in the UK, under paragraph 6 of Part 1 of Schedule 1 of the standard mobile PTO licence. The proposed determinations would be made under Condition 56 of the standard mobile PTO licence. The reasons for the proposed determinations and details of the consultation are set out in this Explanatory Memorandum. In March 2000, the Director General determined that Vodafone and BTCellnet had MI in the market for mobile telephony in the UK. These determinations were made following a review of the mobile market in 1999. In that review, evidence indicated that Vodafone and BTCellnet had market power in the market for mobile telephony in the UK. This remained the case having considered updated data for the MI Determinations. Both operators were therefore obliged to continue to provide mobile airtime to service providers. As a consequence of the judgement of the High Court in R v Secretary of State for Trade and Industry ex parte Orange Personal Communications Ltd (the "judgment"), mobile PTO Licence Condition 56 (as inserted in the mobile PTO licences by The Telecommunications (Licence Modification) (Standard Schedules) Regulations 1999 S.I. 1999 No. 2450 (the "Regulation") was declared unlawful. Thus, the MI Determinations made under the new standardised licence conditions were rendered unlawful. The above case was not directly concerned with the substance of the MI Determinations made in March 2000 or the process by which they were made. Thus, Oftel’s underlying reasoning for making those MI Determinations and the conclusions it reached were not challenged. The judgement stated that the statutory instruments to give effect to the changes in accordance with the Licensing Directive should have stated that they had effect notwithstanding the provisions of sections 12 to 15 of the Telecommunications Act 1984 (which provide for the modification of the Licences). In order to rectify the situation, a further statutory instrument was laid before Parliament. This was The Telecommunications (Licence Modifications) (Amendment No.2) Regulations 2000 S.I. 2000 No. 2998. It entered in to force on the 10th November 2000. As that statutory instrument does not have retroactive effect, and as the original MI Determinations based on Condition 56 are invalid, the Director General wishes to remake the MI Determinations. The Director General’s draft determination is based on current market information. Oftel needs to re-determine that Vodafone and BTCellnet have MI in the UK market for mobile telephony in order to trigger the following conditions within their licences:
The Director General maintains that presently, Vodafone and BTCellnet possess MI. The Director General has to reissue the determination that Vodafone and BTCellnet have MI to provide regulatory and legal certainty. This determination does not pre-empt any decisions that may be taken in the mobile market review. In the mobile market review, Oftel will consider the full range of effective competition indicators and take a forward-looking approach to see how these might develop in the following two years. It will also consider whether the current measures used to promote competition in the mobile market continue to be appropriate in the market environment that is identified in that review. Market Influence Condition 56 of the standard mobile PTO licence defines MI as being when an undertaking has the ability to raise prices above the competitive level in the market for a non-transitory period without losing sales to such a degree as to make this unprofitable. Market definition Oftel’s approach to market definition is consistent with that used by UK competition authorities and is broadly similar to the approach used by European and US authorities. Oftel’s approach to market definition focuses on the existence of constraints on firms’ abilities to set prices without regard to competitors. Constraints are characterised by the possibility of demand-side substitution – that is the ability of customers to respond to a price increase by switching to alternative products – or supply-side substitution, which occurs when a firm producing other products switches its resources into producing a product the price for which has increased. Presently, Oftel considers that the relevant market for the purposes of a MI determination is the single mobile telephony market in the UK. Oftel does not consider that mobile services effectively substitute for all fixed services. Although Oftel acknowledges that there is evidence to suggest that some substitution between fixed and mobile services does take place, mobile telephony prices remain at a premium to fixed prices. The key point for the purposes of market definition is whether there is a common pricing constraint between fixed and mobile services. Oftel continues to believe this is not the case. Other factors to take into consideration when defining that fixed and mobile services are in separate markets are: the different nature of mobile and fixed telephony (ie the ability to call a person or a place); the differences in the costs of establishing fixed and mobile networks; differences in quality between fixed and mobile networks; and the lack of opportunities for supply side substitution in response to a price increase by a hypothetical monopolist in the mobile market. Market Influence in the mobile market Oftel measures MI against key indicators. For the mobile market, these key indicators were used in the 1999 mobile market review and again in the later MI Determinations. For these proposed MI Determinations, Oftel has again measured the operators against similar indicators and has considered updated market share and revenue data. Number of operators There are currently four mobile network operators that are deemed to be in the UK mobile market for telephony: Vodafone; BTCellnet; Orange; and One2One. Although Oftel considers that Dolphin (the national TETRA operator) may be in the same market as the GSM operators, Dolphin has an extremely small share of the market compared to the four GSM operators and it is unlikely that Dolphin currently constrains the pricing behaviour of the GSM operators. In addition, Hutchison 3G UK Holdings was awarded a 3rd Generation mobile licence and is expected to launch commercial services in 2002. However, Oftel does not believe that the prospective entry of Hutchison presently constraints the current pricing behaviour of the four GSM operators. Market shares Table 1 shows trends in market shares for the four mobile operators in terms of subscriber numbers, revenues and minutes. Oftel’s data suggest that, as of June 2000, Vodafone had over 30% of all subscribers and 34% share of revenue and BTCellnet had over 26% of subscribers and over 29% share of revenue. These market shares are consistent with the possession of MI. Table 1 Subscriber numbers, volumes and revenues
Source: Oftel’s market information and market information updates As the mobile sector is growing rapidly absolute numbers of subscribers and revenues for each operator are increasing, although Vodafone and BTCellnet are losing market share. Market shares and retail prices The examination of market share by both volume and value is important. Comparisons between the volume market shares and the value market shares show that both Vodafone and BTCellnet have higher market shares by value than by volume. The fact that firms are able to take a higher market share by value than by volume may indicate that these firms are able to charge higher prices (and retain high value customers) which can be an indication of market power. Examination of the volume and value market shares over time suggest that Vodafone and BTCellnet have always maintained a price premium over Orange and One2One. Although from the trends presented in Table 1 this premium appears to be reducing, it is still evident in the last quarter results. Another apparent trend is that BTCellnet appears to have a higher ratio of retail market share to volume market share than Vodafone does. The market share information shows that some mobile operators have higher revenue per minute figures than others do. Nonetheless, it is not possible from the market information alone to conclude that this is due to high prices, because it might, at least in part, be due to different types of users and calling patterns. However, in addition to Oftel’s market information, Oftel has the results of its mobile price index model, which calculates the price by operator for 63 different user profiles. Oftel does not publish results by operator from the mobile price index work but this unpublished information (as at June 2000) supports the conclusions that can be inferred from the market information. That is, both BTCellnet and Vodafone still maintain a price premium over Orange and One2One. Profitability The cost of capital is the minimum return on capital needed to attract investment to an undertaking and roughly equates to the return that would be expected on average in a competitive market. It provides a ready benchmark for comparison with ROCE, the return (measured by profit before interest and tax) on capital employed. Although ROCE is an imperfect measure of economic profit it is a reasonable approximation for practical purposes. The cost of capital for a mobile operator was calculated at 16.5% by the Competition Commission (then the Monopolies and Mergers Commission) as part of its investigation into the cost of mobile call termination in 1998. Calculations of the cost of capital are based on a number of factors, some of which change over time and the cost of capital for the mobile operators may have increased or and decreased since 1998. However, the cost of capital for the mobile operators will not have changed sufficiently to alter Oftel’s conclusions from the profitability information presented in this section. Profit levels above the cost of capital can be considered excessive. In previous reviews Oftel reported that Vodafone and BTCellnet have earned very high rates of return on capital and sales, as shown in the table below. Table 2 Profitability
* The higher
of the two figures for 1996/7 is before subtracting the costs of
the Project Force write-off. In the year to March 1998, Cellnet
wrote back (due to earlier over-provision) some costs which were
previously written off. This has the effect of increasing headline
profits in the year to March 1998. The more meaningful figure for
the purpose of assessing Cellnet’s market position is ROCE
before subtracting the costs of writing off Project Force and before
adding back any earlier overprovisions. 1998 figures are also depressed
by an allowance of £9m for the cost of the purchase of Call Connections
Ltd’s customer base. Vodafone and BTCellnet have recently submitted data (March 2000) to Oftel that show a reduction in the measures presented in Table 2. This may be indicative of increasing competitive pressures, although it could also reflect many other factors. For example, a downturn in profitability might be expected to be temporary if the operator is pursuing a strategy of boosting subscriber numbers. Large-scale growth in subscriber numbers will tend, artificially, to depress profits in the short term because of the practice of subsidising subscriber acquisitions. However, the long-term trend has been that Vodafone has enjoyed persistently high profits that have not been substantially eroded by competition. In a competitive market, one would expect prices to be competed approximately to the level of an efficient operator’s costs, including the cost of capital. Oftel believes that Vodafone is a relatively efficient operator. The extent of its profits is therefore indicative of prices being some way above the competitive level, and hence of market power. BTCellnet’s prices are at approximately the same level or even above Vodafone’s. BTCellnet’s lower profits therefore reflect higher unit costs that partly reflect lower efficiency and lower volumes. This being the case, BTCellnet’s lower rate of return would not then necessarily suggest the absence of market power, rather it would indicate that the rewards of market power were being taken in the form of higher costs than would be sustainable in a fully competitive market. Entry barriers The threat of entry may constrain the pricing behaviour of incumbents. A firm is less likely to possess MI if entry barriers are low, although high barriers to entry do not necessarily mean that competition is ineffective and will remain ineffective. Availability of spectrum The finite availability of spectrum for mobile telephony constitutes an effective barrier to market entry. Since spectrum trading will not be introduced until after the new EU Directives are implemented, significant barriers to entry protect the existing mobile operators. Network build The high cost of network build can be an effective deterrent to market entry since these costs are likely to be sunk (ie not recoverable on exit). For instance, the cost of the 3G mobile licences would not have been the only consideration for bidders and potential bidders in the auction to take into account. They also had to take into account the cost of network rollout as well. The extent of network coverage has typically been important for competition in the mobile market and, within this, particularly for business customers. New entrants need to rollout their networks quickly to provide coverage comparable to that of operators already in the market in order to appeal to a wide range of customer types in the largest possible geographic area. Conclusion This Explanatory Memorandum has assessed Vodafone and BTCellnet’s position in the market for mobile telephony in the UK using a number of key indicators. Although Vodafone and BTCellnet’s subscriber and revenue market shares are declining, these market shares are still at a level that is consistent with a finding that these operators have MI. Vodafone has consistently earned a very high rate of return and there is evidence that BTCellnet is able to maintain similarly high prices to Vodafone. The mobile market is growing rapidly and while market shares of both Vodafone and BTCellnet are declining, despite maintaining a price premium, absolute numbers of subscribers and revenues for both Vodafone and BTCellnet continue to grow. Following the Court’s judgement in the case R v Secretary of State for Trade and Industry ex part Orange Personal Communications Ltd the Director General needs to remake the MI Determinations to give effect to Conditions 56A, 56B, 57 and 58. This determination should not be seen as an indication of the outcome that is likely in the mobile market review, which is a quite separate exercise. Oftel needs to remake these determinations to ensure protection for service providers and to ensure that operators determined to have MI under Condition 56 meet those specific obligations that do not apply to operators that have not been deemed to have MI.
Consultation on notices of determinations under Conditions 56 of the Licences of Vodafone and BTCellnet that Vodafone and BTCellnet have market influence in the market for mobile telephony In accordance with paragraph 6 of Part 1 of Schedule 1 of the Licences of both Vodafone and BTCellnet, the Director General invites comments by the Licensees and Interested Parties on the notice to make determinations under Condition 56 of the Licences of Vodafone and BTCellnet that they have Market Influence in the market for mobile telephony. The Director General would be grateful for comments from the Licensees and other interested parties on the notices and the reasons for them set out in the explanatory memorandum by 22 January 2001. There will then be a 28-day period during which all interested parties may make representations. Oftel will publish the representations at the end of this period. A subsequent 28-day period will allow interested parties to make observations on the published representations. At the end of the second 28-day period, having considered all representations and observations the Director General will, if appropriate, publish a draft determination. All interested parties will have a further 14-day period to comment on the draft determination. The Director General will consider all comments and inform Vodafone and BTCellnet of his final decision at the expiry of that period. Comments should be sent to: Peter Hammond Tel: 020 7634 8841 Representations made during this period will be available for public inspection in Oftel’s Research and Intelligence Unit and, where possible, on respondents’ websites via hyperlinks from the Oftel site. Please contact Peter Hammond to arrange this. Respondents who wish their comments to be treated as confidential should therefore indicate clearly that this is so. In the interests of transparency, respondents are encouraged to keep confidentiality markings to a minimum. Thus the present Notice is published on 22 December 2000. Thus the first period for representations will close on 22 January 2001. Representations will be published on the following day and the second period of 28 days will begin on 24 January 2001. Oftel will publish the comments on representations and having considered all the points made by interested parties, will if necessary prepare a Draft Determination as soon as possible thereafter. Interested parties will have a further 14 days to comment on the Draft Determination. The Director General will consider all comments and inform Vodafone and BTCellnet of his final decision at the expiry of that period. The Licensees and interested parties will then be given a further period ending on 22 February 2001 during which time to make observations on the representations. Thereafter, the Director General will consider representations received before publishing a draft decision. There will then be a further period of fourteen days for parties to comment on the draft determination. The Director General will then make his determination.
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