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| April
2001 Contents Determinations Explanatory Memorandum
Annex
A Respondents to the consultation Determinations Published on 11 April 2001 WHEREAS:
1 Condition 56
of the Licence granted by the Secretary of State for Trade and Industry
to Vodafone Ltd ("Vodafone") ("the Licensee") under
section 7 of the Telecommunications Act 1984 (the "Licence")
provides for a power of the Director General of Telecommunications ("the
Director") to determine the Licensee to be an Operator having Market
Influence in relation to any particular telecommunications market specified
by him; 2 On 28 March 2000,
the Director determined that the Licensee was an Operator having Market
Influence in relation to the market for mobile telephony in the UK;
4 The Telecommunications
(Licence Modifications) (Amendment No.2) Regulations 2000 S.I. 2000
No. 2998 entered in to force on 10 November 2000; 5 The Director
maintains that Vodafone has Market Influence and therefore in the interests
of legal certainty, the Director considered it appropriate to remake
the original determination; 6 The Director
considers that for the time being the Market for the purposes of making
a determination of Market Influence under Condition 56 of the Licence
is the market for mobile telephony in the UK; 7 In accordance
with the consultation procedure set out in paragraph 6 of Part 1 of
Schedule 1 of the Vodafone licence the Director issued a Notice on 22
December 2000 inviting comments on his intention to remake the original
determination; on 16 March 2001 the Director issued a Draft Decision
to proceed with the proposed MI determination and Oftel's response to
comments received during the first stage of the consultation process.
Oftel invited comments on the Draft Decisions by 3 April 2001; 8 In making this Determination the Director has taken into consideration representations and observations received as part of the consultation process, and the matters described in the Explanatory Memorandum to this Determination; NOW THEREFORE
THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE, AND HAVING
CONSIDERED THE ARGUMENTS OF THE LICENSEE AND INTERESTED PARTIES, HEREBY
DETERMINES THAT: 1 The Licensee
is an Operator having Market Influence as referred to in Condition 56
of its Licence in the market for mobile telephony in the UK, for the
reasons given in the Explanatory Memorandum which accompanies this Determination.
2 Words and phrases
in this Determination shall have the meanings ascribed to them in the
Licence or the Telecommunications Act 1984 as appropriate. 10 April 2001 (signature) DETERMINATION
UNDER PARAGRAPH 6(a) OF PART 1 OF SCHEDULE 1 OF BTCELLNET'S TELECOMMUNICATIONS
ACT LICENCE (THE "LICENCE") THAT BTCELLNET HAS MARKET INFLUENCE
AS REFERRED TO IN CONDITION 56 OF THE LICENCE WHEREAS: 2 On 28 March 2000,
the Director determined that the Licensee was an Operator having Market
Influence in relation to the market for mobile telephony in the UK;
Summary
4 These Determinations are not related to and will not influence the decision making process to be used to assess market competitiveness in the mobile review (Effective Competition Review: Mobile, February 2001). Oftel intends to publish in July 2001 the final conclusions that are drawn from the mobile review.
Introduction
10 As previously discussed in the Notice and in the Draft Decisions, these MI Determinations are not related to and will not influence the decision making process to be used to assess market competitiveness in the mobile sector review (Effective Competition Review: Mobile, February 2001). However, the High Court's judgment (in the case referred to above) makes it necessary for Oftel to issue a determination that Vodafone and BTCellnet, as operators with market power, have MI. This is in order to preserve the current level of legal certainty for all players, including Independent Service Providers ("ISPs"), in the market pending the outcome of the mobile sector review. Oftel intends to publish in July 2001 the final conclusions that are drawn from the sector review. The mobile sector review consultation proposes that if the mobile sector is found to be effectively competitive all triggered mobile sector specific regulation will be removed. This includes any MI designations that are in place.
Consultation
process
Market Influence
and indicators of Market Influence
Market definition 17 Presently, Oftel considers that the relevant market for the purposes of a MI determination is the single mobile telephony market in the UK. In response to the Notice, one respondent maintained that Oftel should have carried out a SSNIP (Small but Significant Non-transitory Increase in Price) test. Another respondent stated that Oftel's appeal to the SSNIP test, even in an aggregated and simplified form, in such a dynamic market as mobile communications in the UK where prices are falling rapidly and barriers to switching are low, is not compelling. Arguments were also put forward that the relevant market for the purposes of a MI determination is the communications market as a whole and not simply the mobile telephony market. 18 Oftel's market definitions for these MI Determinations are based on Oftel's published analysis, on which Oftel consulted during the 98/99 review of the mobile market (see in particular Competition in the mobile market, February 1999). Oftel's current mobile review is consulting on a revised set of market definitions for the mobile sector, but a decision on whether or not to adopt these market definitions will not be made until the conclusion of the current mobile review. 19 In order to examine the pricing constraints on a firm, the concept of the 'hypothetical monopolist' can be a useful analytical tool for identifying close demand and supply-side substitutes. Although it is not intended to be a representation of the actual market situation, the 'hypothetical monopolist' can be constructive in trying to set the boundaries to the relevant product market in practical terms. Oftel sees no reason why it should be inappropriate to use this type of analysis in the mobile market. 20 In principle, mobile services could substitute for fixed services to an extent. GSM networks can cater for both voice and data, and provide many of the enhanced services available on the fixed networks. However, fixed lines are not considered to be close substitutes for mobile telephony services since they are linked to the place of the telephone, not to the person. The convenience of being able to make and receive calls on the move suggests that mobile and fixed systems are not effective substitutes for consumers. Oftel research shows that only some 5% of households use mobile services as an alternative to fixed phones. 21 However, mobile and fixed systems do not need identical functionality to be considered part of the same market, although consumers have to consider them to be sufficiently good substitutes for the price of fixed telephony to constrain the price of mobile telephony. In fact, Vodafone asserts that mobile and fixed services fall in the same market on the grounds that some mobile tariffs are cheaper than some fixed ones. 22 Whilst this is true of some mobile tariffs, there still appears to be a premium attached to the extra functionality of mobile phones, particularly at peak times. Oftel's in-house analysis of the period December 1998 to July 2000 indicates that BT's prices (assumed to be 'typical' for fixed telephony services) have fallen much more slowly than mobile prices. This has led to a narrowing in the gap between mobile and fixed telephony prices. However, for comparable packages (the analysis compares trends in the best deal that customers could get - using either BT or the cheapest mobile package available - for a range of usage profiles), mobile prices still exceed BT's prices by between 24% and 55%. 23 In addition to the higher prices, it has been suggested that the lower quality of mobile phone calls prevents full substitutability between mobile and fixed services. Mobile calls are dropped more often and the quality of speech is inferior compared with calls on the fixed network. 24 On the supply side, there appear to be limited opportunities for supply-side substitution in response to a price increase by a hypothetical monopolist in the mobile market; operators who are not currently mobile network operators will face considerable barriers to entry. An absolute barrier to entry currently exists in the unavailability of spectrum, although this may diminish over the longer term if spectrum trading becomes established. Number of operators 25 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 (approximately 50,000 subscribers) 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 constrains the current pricing behaviour of the four GSM operators. Barriers to entry 26 The threat of entry may constrain the pricing behaviour of incumbents. A firm is unlikely to possess Market Influence if entry barriers are low (although high barriers to entry do not necessarily indicate ineffective competition). 27 The current lack of spectrum constitutes an effective barrier to further market entry by mobile operators, although the recent auction of the 3rd Generation spectrum has created the opportunity for a fifth GSM operator to enter the mobile market. However, since 3G services are unlikely to be launched until 2002, it is unlikely that the threat of entry by Hutchison is presently constraining the existing mobile operators. 28 Another potential entry barrier is the high cost of building a mobile network, with a substantial element of sunk costs (in the sense that costs could not be recovered if the operator decided to exit the industry) . The extent of sunk costs is relevant to the height of barriers to entry to a market. 29 In response to the Notice, Vodafone maintained that:
31 It is true that markets, left to their own devices, tend to an equilibrium structure. This is not necessarily an optimal number, from the consumer's perspective. While the equilibrium number of players reached is likely to be efficient, in the sense that costs would be increased by the presence of additional firms, it will not be in the consumer's interest if that number is small and competition is ineffective. Market shares 32 Table 1 shows trends in market shares for the four mobile operators in terms of subscriber numbers, revenues and minutes. This market information is the most up to date information available to Oftel. Some historical data has recently been revised since new data was submitted. Table 1: Subscriber numbers, volumes and revenues
33 Retail revenue market shares shown in Table 1 are share of revenue from outgoing voice calls and rentals and is the estimated retail revenue shares by network operator. That is, the retail revenue from outgoing voice calls and rentals attributed by the network to which the retail consumer subscribes, either via the operator's own retail operation or an ISP. 34 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. 35 Oftel's MI Guidelines state that, in the context of Market Influence determinations, Oftel considers that a market share of 25% can be used as a rule of thumb below which operators are unlikely to possess Market Influence. Although the revised figures for BTCellnet show that BTCellnet has, on some measures, a market share that has dropped slightly below 25%, this relatively small change does not alter Oftel's view, expanded upon below, that the market share of BTCellnet remains consistent with a finding that BTCellnet has market power. Vodafone's market share is consistent with a finding of market power. 36 In its response to the Notice, Vodafone argued that Oftel's concentration on cumulative market shares is misleading and an analysis based on a one or three year analysis of customer growth shows that neither BTCellnet nor Vodafone has achieved leadership in these periods and, therefore, by this measure alone they cannot be deemed to have MI. 37 Regardless of the method used to calculate market shares, Oftel maintains that it is important to consider a range of factors and it is not appropriate to reach a conclusion on MI only from an examination of market share. 38 Oftel takes the view that it is inappropriate to concentrate on shares of "a market for net new customers", for a number of reasons. First, it is not clear that net new connections can be defined as an economic market. Although there will be some switching costs, it seems likely that new and existing subscribers are in the same market as each other. In principle, it seems likely that the same factors which encourage retention of existing subscribers also attract new ones, possibly aided by switching costs which tend to favour operators with large existing subscriber bases. Second, it is worth noting that an analysis based on shares of net new subscribers appears to lead to illogical outcomes. For example, a company starting with a complete monopoly in a slow-growing market would very likely suffer a net loss of subscribers, ie a negative share of net new subscriptions if an element of competition (however limited) was introduced. This would not, however, mean that the incumbent firm had no market power. Market shares and retail prices 39 The examination of market share by both volume and value is important. The fact that firms are able to take a higher market share by value than by volume of minutes may indicate that these firms are able to charge higher prices than other operators (and retain high value customers) which may be an indication of market power. 40 Comparisons show that both Vodafone and BTCellnet have, historically, possessed higher market shares by revenue than by volume although the difference between value and volume market shares has reduced over time, particularly for BTCellnet. In addition, Vodafone and BTCellnet have typically enjoyed higher revenue per minute figures than the other operators, although BTCellnet's revenue per minute figure now only marginally exceeds that of Orange in the last quarter (see Annex C for the absolute numbers supporting the market shares of Table 1). However, a single quarter result (particularly when that quarter includes the seasonal fluctuations from the Christmas period) is not sufficient to change the overall picture that both BTCellnet and Vodafone have a higher revenue per minute figure than both One2One and Orange. 41 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 December 2000) supports the conclusions that can be inferred from the market information. That is, that both Vodafone and BTCellnet maintain price premiums over both Orange and One2One. 42 In its response to the Notice, Vodafone stated that it does not accept Oftel's assertion that it maintains a price premium over Orange and One2One, which is an indicator of MI. Vodafone maintained that price differences will arise through different usage patterns of which international roaming is known to be just one factor. Vodafone also points out that significant price reductions have been made by Vodafone since the timing of data used by Oftel in its calculations and Vodafone's own comparisons on a like for like tariff basis show that it is not charging a premium. In addition, Vodafone maintains that even if price premiums are charged, these may be justified by a higher quality of service provided to customers. 43 Oftel uses two key sources of information about the prices of mobile services charged by operators. Oftel collects quarterly information from the mobile operators on a range of indicators, including revenue and minutes by call type. It is possible to calculate prices per minute for each service and operator using this information, although it is not possible to publish the results given that the data is provided in confidence (although the data that Oftel holds and uses for each mobile operator is available to the relevant mobile operator). In addition, in 1999, Oftel set up a detailed price index to monitor the evolution of mobile prices to consumers. This index enables Oftel to compare the cost to consumers on the optimal tariff for their usage pattern on each of the four networks. 44 Evidence from Oftel's mobile price index work (updated to December 2000) and market information shows that, for the majority of users, the prices of Vodafone and BTCellnet continue to exceed those of Orange and One2One. Moreover, this result does not solely reflect differences in user types or calling patterns. Firstly, the market information enables Oftel to consider revenue per minute on a service by service basis, the results of which support the overall conclusion. In addition, the mobile price index work attempts to account for different usage patterns and it excludes international calls and international roaming, which is consistent with the experience of the majority of end-users. 45 However, as Vodafone notes, the market information figures will be influenced by differences in peak and off-peak calls between operators. In addition, information available to Oftel will inevitably suffer from not being the most up-to-date by the time the data is collected, analysed and published. Oftel can only use the best available information at any point in time and for these Determinations has used the very latest data that is available. Since Oftel does not base its conclusions solely on one indicator, Oftel is confident that the factors referred to above do not detract from the overall result. For example, the persistently high rates of return earned by Vodafone also seem to indicate that prices are above the competitive level, which in the long run would allow an adequate rate of return but not supernormal profits. Vodafone has argued that high prices (and in turn high profits) could be associated with higher quality of service. However, it is not clear to Oftel that Vodafone and BTCellnet have persistently delivered higher quality than Orange and One2One. Profitability 46 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 benchmark for comparison with ROCE, the return on capital employed, so as to indicate whether profits are above the level expected in a competitive market. 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. Oftel currently estimates the cost of capital for the mobile operators to be around 13 – 14%). 47 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
# Capital employed = total assets – current liabilities. 48 Vodafone has submitted data for March 2000 that shows a reduction in the measures presented in Table 2. BTCellnet's statutory accounts for the year ending March 2000 show a ROCE of around 12%. These declines may be indicative of increasing competitive pressures, although they 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. It should be noted that since the Draft Decisions were published both Vodafone and BTCellnet have announced changes of pricing strategy designed to limit the extent to which new pre-pay handsets are subsidised. These moves are widely regarded as a signal that the UK mobile operators are moving away from subsidies as a means to increase the number of new customers and are instead concentrating on increasing profits from higher users. 49 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. In order to determine that level, it is necessary to establish a benchmark of efficiency. Oftel believes that Vodafone is a relatively efficient operator and can serve as such a benchmark. Therefore the test of market power is whether an operator is pricing above the level of Vodafone's costs. The extent of Vodafone's profits is indicative of prices being some way above the competitive level, and hence of market power. 50 Despite BTCellnet's decline in returns over a number of years, until the result for March 2000, BTCellnet still earned profits in excess of its cost of capital. Oftel takes the view that a single year's fall in returns to 12% is not sufficient evidence that BTCellnet no longer possesses market power. Although not conclusive, Oftel has evidence that, until very recently, BTCellnet has set prices at a similar level to Vodafone's. Oftel also has evidence to indicate that BTCellnet may be pricing in excess of the other two operators. In addition, Oftel has considered that BTCellnet may be less efficient than Vodafone (the Competition Commission, for example, concluded that this was the case as part of its investigation into the cost of mobile call termination in 1998). As a result, it is likely that BTCellnet's lower profits 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. 51 In response to the Notice, Vodafone stated that:
52 Vodafone proposes
that there is a conflict between comparing the cost of capital, which
is a forward-looking measure, and accounting measures of returns, which
are historic measures. Although ROCE is an imperfect measure of economic
profit, Oftel believes it to be a reasonable approximation for practical
purposes, enabling comparison of recorded profitability with a firm's
cost of capital. This approach is used by competition authorities, including
the Office of Fair Trading and the Competition Commission. In a competitive
market, one would expect competitive pressure on prices and profits
to reduce returns approximately to the cost of capital, ie the return
on capital needed to attract investment to a firm. Whilst actual returns
in any year might differ from the cost of capital, for example, if a
firm introduced an innovative product, one would not expect to see returns
persistently above (or below) the cost of capital in a competitive market.
56 In addition, Vodafone suggests that it is not appropriate to assume that any downturn in figures could be temporary if an operator was pursuing a strategy of boosting customer numbers. Oftel believes that, whilst downward trends in profitability and other margins are encouraging, suggesting that effective competition will be achieved over the longer term, it is not clear that effective competition currently exists. Moreover, Oftel continues to believe that profit measures are subject to fluctuation depending on the commercial activities of operators, and that significant weight must be given to the long term trend, which is one of profits persistently and substantially above the cost of capital. Other points raised during the consultation a) Are the determinations necessary? 57 Some respondents to the Notice stated that the proposed MI determinations are unnecessary because Oftel could preserve the existing arrangements for service providers by means of legally binding undertakings. 58 In response to the Draft Decisions, the Independent Mobile Service Providers Group maintained that service providers do need the legal certainty that the MI determinations will provide. Oftel's response: 59 Oftel believes that MI determinations, rather than reliance on such undertakings gives the industry greater legal certainty. 60 There is some doubt that such undertakings are legally binding in all circumstances. The uncertainty for service providers, who would not know whether they were protected by regulation or not, is undesirable. 61 Assuming an undertaking could be considered legally binding, any breach of that undertaking would have to be pursued through the courts, a process which is time consuming and expensive for either the service provider or Oftel. (There is also an issue as to whether a service provider would have standing to enforce an undertaking entered into between Oftel and a network operator. It would be likely, therefore, to fall to Oftel to enforce the undertaking.) On the other hand, where an MI determination has been made, Oftel can seek to enforce the consequent obligations through the operators' licences by issuing a provisional order or final order - a quicker route than pursuing a breach of an undertaking through the courts. 62 Where undertakings covered only existing arrangements, a potential service provider would not have the certainty that it would be offered service. b) Will the decision to make MI Determinations influence the mobile review? 63 Some respondents to the Notice argued that the decision to proceed to make MI determinations would be prejudicial to the outcome of the mobile sector review. Oftel's response: 64. Presently, based on the available evidence, the Director maintains that Vodafone and BTCellnet have MI. Therefore, he seeks to designate these operators as such. However, the decision to make these Determinations will not prejudice the outcome of the mobile review. If the mobile sector review finds that competition is effective, Oftel will remove any MI designations that are in place. In addition, the mobile review takes a 2 year forward look at the prospects for effective competition. If the mobile review finds that there are strong reasons to believe that the mobile sector will be effectively competitive within 2 years, Oftel will consider whether, and if so when, it is appropriate to remove any MI designations that are in place. c) Are the proposed determinations consistent with Oftel's strategy? 65. Some respondents to the Notice stated that the proposed MI determinations are inconsistent with Oftel's strategy. Oftel's response: 66. The proposed MI determinations are consistent with Oftel's strategy, which is that Oftel will remove regulation when effective competition exists and regulate appropriately when markets are not effectively competitive. Until such time as the mobile market is considered to be effectively competitive, appropriate regulation will be used to deal effectively with any abuse of market power and to promote competition. d) Are the proposed determinations consistent with Oftel's MI Guidelines? 67. In response to the Notice, Vodafone maintained that Oftel's Guidelines on Market Influence determinations, March 2000 ("the MI Guidelines") envisage determinations of market power being made only after market reviews have been concluded. 68. Oftel did take this approach to the MI determinations on mobile operators in March 2000, carrying out designations after the 98/99 mobile market review. However, the Director has clearly set out his reasons (ie to preserve the current level of legal certainty until the mobile review concludes) why it is appropriate to designate BTCellnet and Vodafone with MI before the 2000/01 mobile review concludes. Since the Director maintains that Vodafone and BTCellnet currently have MI, the Determinations will provide legal and regulatory certainty both to operators and service providers pending the outcome of the mobile sector review. Oftel intends to make known in July 2001 the final conclusions that are drawn from the sector review. The sector review consultation proposes that if the mobile sector is found to be effectively competitive all triggered mobile sector specific regulation will be removed. This includes any MI designations that are in place. e) Up to date information 69. In response to the Notice, Vodafone argued that the proposed MI determinations fail to take account of the most up to date information available to Oftel. Oftel's response 70. Market information and accounting data is always historical data due to the time required to report this data. The Notice used the most up to date information that was:
72. Oftel also considered information that had been submitted in confidence, but Oftel cannot publish such data. At the time of the Notice, ROCE figures for Vodafone and BTCellnet were not public. Oftel is now able to include these ROCE figures for March 2000 in its publications. Oftel does have some additional financial information for September 2000 for Vodafone and BTCellnet but cannot publish this information. Vodafone has also submitted data using various measures to illustrate falling profitability and lower future profitability. Oftel cannot publish this data but has considered it and responded to Vodafone's main arguments. Unpublished data used to inform Oftel's view of the relative pricing of the mobile operators consists of the raw market information data that allows Oftel to see revenues and minutes for each operator split down by different call type and the n/e/r/a model results for each individual operator. f) Falling prices 73. In response to the Notice, Vodafone argued that the clear trend of falling prices is consistent with an effectively competitive market (and therefore inconsistent with the presence of market power) and that Oftel ignored this fact in its consultation. Oftel's response: 74. Oftel agrees that a clear indication of developing competition is a downward trend in prices. However, falling prices do not necessarily indicate that effective competition has been achieved. In particular, the persistence of high returns appear to be inconsistent with the view that mobile prices are at the competitive level. Consequently, it is Oftel's view that it is not sufficient to accept that decreasing prices alone indicate the presence of effective competition. g) A forward looking analysis 75. In response to the Notice, Vodafone maintained that a proper assessment of the market when determining whether an operator has market power should include a forward analysis of trends and expected changes in market conditions. Vodafone stated that historic only reviews, which take no account of future trends, run the risk of distorting future competition to the detriment of consumers. Oftel's response: 76. The Director maintains that Vodafone and BTCellnet currently have MI. It is, therefore, appropriate that designations are made so as to ensure legal and regulatory certainty for market players. In the 00/01 mobile market review, Oftel takes a forward look at the prospects for effective competition. If the mobile review finds that there are strong reasons to believe that the mobile sector will be effectively competitive within 2 years Oftel will consider whether, and if so when, it is appropriate to remove any MI designations that are in place. h) Countervailing power 77. In response to the Notice, Vodafone suggested that strongly branded competition at the retail level has emerged where the companies concerned are able to exert significant buying power on the network operators. Oftel's response: 78. Reports that the mobile operators are beginning commercially to negotiate new wholesale deals are encouraging, although there is little evidence that any wholesale deal negotiated by Vodafone and BTCellnet that allows competing retail services to be provided over their networks is, as yet, having a significant impact on competition. i) Triggered regulation 79. Some respondents to the Notice argued that the current regulation resulting from a MI determination (such as the regulatory rules "requiring the same offering to all service providers", the rules on accounting separation and the requirement for price publication) prevents network operators from negotiating deals with a variety of wholesale channels. In addition, one respondent argued that the current regulations promote static forms of competition that suppress diversity and are not in the best interests of consumers. Oftel's response: 80. Consideration of the appropriateness of the triggered regulations falls outside the scope of these MI determinations but is included in the current mobile review. In any event, Oftel does not have any evidence to substantiate the claim that the obligations triggered by MI determinations hinder the development of competition to supply wholesale channels. Oftel will, however, consider any evidence produced during the mobile review in relation to this issue. 81. The MI triggered licence condition prohibits the licensee from practising undue preference and undue discrimination in respect of charges, terms and conditions. Therefore, discrimination and preference are not prohibited as a general rule, rather undue discrimination or undue preference is prohibited. Oftel makes no presumption that price discrimination by an operator with MI is 'undue'. Oftel has issued guidance in the MI Guidelines setting out the circumstances in which discrimination or preference when practised by an operator with Market Influence may be considered to be undue. 82. The Director can waive the requirement to publish prices. In the MI Guidelines, Oftel set out the circumstances in which it might agree that prices should be kept confidential including circumstances where:
83. Oftel has never
been asked by a mobile operator to waive the requirement to publish
prices.
Conclusion 85. In making these MI Determinations, Oftel has considered a range of factors, as set out in the MI Guidelines and in the mobile PTO licences. 86. Vodafone and BTCellnet are operating in a market with a limited number of operators and high barriers to entry. Although high barriers to entry do not necessarily indicate ineffective competition, if entry barriers are low a firm is unlikely to have market power. 87. The most recent market share data has been considered and it remains Oftel's view that the market shares of Vodafone and BTCellnet are consistent with the finding that Vodafone and BTCellnet have MI. 88. There is evidence to suggest that historically BTCellnet and Vodafone have been able to maintain a price premium over One2One and Orange and, although this premium has reduced over time, there is some evidence that presently both BTCellnet and Vodafone still maintain this premium. 89. There is a long-term trend of persistently high profits that have not been substantially eroded by competition. Despite BTCellnet's declining returns, until recently BTCellnet still earned profits in excess of its cost of capital. Oftel takes the view that the recent fall in BTCellnet's returns to 12% is not sufficient evidence that BTCellnet no longer possesses market power. 90. These indicators point to the possession of MI by Vodafone and BTCellnet. Therefore, in the interests of legal and regulatory certainty, the Director has decided to issue determinations that Vodafone and BTCellnet possess MI in the UK market for mobile telephony.
Annex
A
Glossary
Revised market
information
Retail revenue shown
in this table consists of that from outgoing voice calls and rentals
and is the estimated retail revenue shares by network operator. That
is, the retail revenue from outgoing voice calls and rentals attributed
by the network to which the retail consumer subscribes, either via the
operator's own retail operation or an ISP.
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