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Draft decision and statement on the Director General’s intention to determine that Vodafone and BTCellnet have Market Influence under Condition 56 of their respective licences |
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The reasons for the Director General’s draft decisions Oftel’s response to points raised in consultation Annex B - Respondents to the consultative process 1. In November 1999, Oftel published notices of determinations that Vodafone Ltd (Vodafone) and Telecom Securicor Cellular Radio Ltd (BTCellnet) have Market Influence in the market for mobile telephony in the UK. Oftel invited comments on the notices by 7 December 1999. Comments were received from 5 respondents (though only 1 of these was received within the deadline). There was then a further period of consultation – to 11 January 2000 – during which period interested parties had the opportunity to comment on the responses made during the first stage of consultation. Oftel received comments from 1 respondent during this stage of consultation. A list of respondents to both stages of the consultation to date is at Annex B of this document. Oftel is grateful to all who have participated in this consultative process. 2. This statement contains the Director General’s draft decision, in the light of comments received. It also contains Oftel’s reaction to points raised in responses to the consultation. 3. As required by paragraph 6 (f) of Part 1 of Schedule 1 of the licences of Vodafone and BTCellnet, this draft decision and statement of reasons is being sent to Vodafone, BTCellnet and the interested parties who commented on the draft notices. Oftel will also publish the draft decision and statement on its website. Comments are invited by 3 March 2000. They should be addressed to: Chris
Taylor Tel: 020 7634 8850 4. The Director General will consider any comments received. 5. Having taken due account of comments received during consultation on Oftel’s notice to determine that Vodafone and BTCellnet have Market Influence, the Director General has decided to proceed with the making of the determinations. The full text of his draft decisions is at Annex A to this document. The reasons for the Director General’s draft decisions 6. The Director General’s has taken his draft decisions on the basis of the information available to him and taking account of representations made to him during consultation on the notices of the determinations. Oftel’s response to points raised in the responses to consultation is included with this statement (see from paragraph 8 below). 7. The representations have not altered the Director General’s conclusion that Vodafone and BTCellnet have Market Influence in the market for mobile telephony in the UK. This conclusion was reached following an assessment of the market in 1999. The results of that assessment were published in November 1999 together with the notices of the Director General’s intention to make the determinations. Oftel’s response to points raised in consultation The concept of Market Influence 8. Some respondents to the notices expressed concern that the Market Influence trigger introduces new forms of regulation in the mobile market. This is not so. A determination of Market Influence activates certain licence conditions which existed in mobile licences before the introduction of the Market Influence condition. The condition has therefore not added any new regulation, but has ensured consistency between licences as required by the Licensing Directive. 9. Respondents also expressed the view that the concept of Market Influence gives the regulator too much discretion about how to define markets and when to impose certain regulatory controls. The method of market definition used to test for Market Influence and applied in this case to the UK mobile market is a well established and recognised test used by competition authorities around the world. This test is sometimes referred to as the ‘hypothetical monopolist’ test. Oftel has published draft Guidelines on Market Influence which includes an explanation of the methodology for measuring Market Influence. The Guidelines have been further developed to take account of comments received on the draft and will be published during February 2000. 10. Respondents also questioned the need for regulatory controls on operators which have a level of market strength below dominance (ie Market Influence). The important point is that regulation should be proportionate to the degree of market power which a firm possesses. Dominance may justify quite intrusive regulations such as price control or requirements to offer cost based prices for access. This is not so for Market Influence for which less rigorous forms of regulation are appropriate – like the rules requiring no undue discrimination between independent and tied service providers triggered by a determination of Market Influence in the mobile markets. These requirements are appropriate to ensure that market power is not leveraged from the networks into retail markets by means of a margin squeeze. 11. One respondent suggested that Oftel has applied a higher threshold for regulation in the fixed market than in the mobile market. The respondent cited Oftel’s recent deregulation on certain international fixed line routes as evidence of this. The concept of Market Influence is the same in both fixed and mobile licences, but the conditions triggered by a Market Influence determination are different. This is because of the very different characteristics of the fixed and mobile markets and, in particular, the need to ensure non-discrimination in downstream markets by mobile networks with Market Influence. Oftel applies the Market Influence test consistently in different markets. It is worth noting that different factors will be significant in testing for Market Influence in the fixed and mobile markets – for example, the barrier to entry to mobile created by the lack of available spectrum for GSM networks (this issue is discussed in further detail below). Structure of the market 12. Network operators who responded to the consultation expressed the view that the limitation of GSM networks to 4 (Vodafone, BTCellnet, Orange, One2One) is not the result of barriers to entry, but of the natural consolidation of the market. These commentators point out that other operators have attempted to launch mobile networks at various stages in development of the mobile market, and that one of the current licences was obtained following a merger between two separate applicants for mobile licences. Oftel has explained in the past why it does not agree with this argument. If the market was unable to support more than 4 networks in the past, this does not mean that that is necessarily the case now. Indeed, it seems unlikely that the current market which is characterised by rapid growth and the entry of significant new brands at the resale level could not support one or more new networks. Operators have also indicated that the arrival of new brands, and the possibility of service providers offering services over indirect access will increase the competitiveness of the market. Oftel would agree that these developments are likely to enhance competitiveness at the retail level. However, these developments depend on the availability of wholesale airtime from the 4 existing networks and so do not significantly impact on competitiveness at the network level. 13. Respondents expressed the view that market share figures used in the test for Market Influence should not include airtime resold by independent service providers (ie account should only be taken of direct sales from the networks to end users). This raises the question of whether sales to tied services providers and the direct businesses of the networks should be regarded as part of one market also including sales to independent service providers, or whether the latter should be regarded as a separate market. This depends on whether they are subject to a common pricing constraint. Oftel considers that they are so subject because independent service providers, tied service providers and direct businesses compete with one another at the retail level. Therefore there is one wholesale market covering all sales by the networks to their own and other downstream businesses. Moreover, the degree of control exercised by the networks over the retail tariffs of independent services providers (by virtue of their control of wholesale tariffs and influence over the retail tariffs of tied service providers and direct businesses) further suggests that independent service providers should be included when assessing market shares. It is worth noting that exclusion of sales to independent service providers - as some have advocated - would tend to indicate a slower decline (or even increase) in the market shares of Vodafone and BTCellnet because the market share of independent service providers is declining. 14. One respondent suggested that it would be relevant to look at the business and residential sectors of the mobile market separately. Oftel agrees that this might have some merit though reliable data is not available. A separate look at the business sector would, for example, provide a more in depth indication of the impact of Dolphin (providing mobile services to business users using spectrum in the TETRA frequency range) though it is clear that the impact of Dolphin is not sufficient to be a constraint on pricing by the 4 GSM networks. The point has been made that Vodafone and BTCellnet retain higher market shares in the business sector because of their advantage in being first to market. This seems consistent with Oftel’s finding of Market Influence because one would expect competition to have equalised market share more rapidly in the business than the residential sector. 15. Some respondents commented on the growing trend to substitutability between fixed and mobile calls, though none suggested that there was yet full substitutability between fixed and mobile services. Oftel agrees with this and, in its analysis of fixed markets as part of the review of controls on BT’s retail prices and network charges, has analysed current substitutability and its likely development. Oftel considers that the cost of mobile telephony remains a barrier to full substitutability. Whilst some mobile packages provide bundled mobile minutes at very low rates (or even free) at certain times of the day, mobile prices remain higher than fixed when measured across the full range of service and tariff periods. 16. Some of the network operators who responded to consultation expressed the view that regulation of the relationship between networks and service providers was likely to result in a sub-optimal outcome and that vertical integration of the network and service provision functions might be the most efficient and best outcome for consumers. In particular, one network suggested that separation of network and service provision carries with it a risk of ‘double marginalisation’ – ie the earning of supernormal profit at both the network and service provider level resulting in higher than necessary prices. Oftel believes that excessive pricing is more of a risk where networks have market power and can leverage this into downstream markets. Hence, the continuation of requirements on networks to provide wholesale airtime to services providers and prohibition of undue discrimination between the tied service providers and direct businesses of networks and independent service providers is appropriate for networks with market power (as Oftel has found to be the case for Vodafone and BTCellnet). Double marginalisation is only a risk where market power exists at both the network and retail (service provider) layers of the market. As there is no market power present in the downstream service provider market, double marginalisation is unlikely to be an issue in practice. Price levels 17. Network operators have questioned how there is evidence of prices being above their competitive level when the mobile market is characterised by price reductions. Oftel has stated that it believes that the current downward trend in mobile prices is an indicator that the market is becoming more competitive, though not yet to the extent that Vodafone and BTCellnet no longer have Market Influence. Price reductions do not themselves indicate that prices are at a competitive level if reductions are being made from a level well above the competitive level to start with. The persistence of very high profits earned by Vodafone and BTCellnet (see below for detailed discussion of this) suggests that this is the case in the mobile market. 18. One of the networks made the point that it is difficult to establish the competitive level of pricing for services characterised by high levels of common cost. Oftel regards high profitability as being an indicator that prices are above their competitive level. As common costs are accounted for in the ROCE calculation of profitability, it is not necessary to allocate common costs between services to establish that overall pricing levels are high. 19..Respondents commented that lower prices levied by Orange and One2One when they first entered the market were more likely to be the result of a deliberate strategy of ‘penetration pricing’ rather than indicative of the ability to charge premiums by Vodafone and BTCellnet deriving from market power. This may be so. Also, as has been pointed out by some respondents, price differentials between the networks are not so noticeable as they were and the trend in prices is generally downwards. However, profitability (particularly for Vodafone) remains significantly above the cost of capital and Oftel maintains that this is indicative of the possession of Market Influence and continuation of prices above their competitive level. Profitability 20. As stated elsewhere in this statement, Oftel believes that the persistence of high profitability (as evidence by levels of return on capital employed (ROCE) well above the cost of capital) is an indicator of the presence of Market Influence. Respondents have commented on this. 21. One respondent made the point that ROCE and the cost of capital are not directly comparable because ROCE is a backward looking measure of profitability whereas the cost of capital is a forecast of the return required to attract investment. Oftel accepts that ROCE is an imperfect measure of economic profit, but it is still a widely used indicator and likely to be a reasonable approximation for practical purposes. In an effectively competitive market, it is reasonable to expect that ROCE would approximate to the cost of capital as any supernormal profits are competed away. The levels of profitability earned by BTCellnet and particularly Vodafone suggests that this is not happening in the mobile market. 22. Oftel has cited the cost of capital calculated by the MMC (now the Competition Commission) in their investigation of calls to mobile as its measure against profitability of the mobile networks. One respondent felt that this was not a valid comparison as Oftel’s Market Influence work focuses on outbound not inbound calls. However, the cost of capital used by the MMC was a weighted average cost of capital relating to the whole of the business and did not separate inbound and outbound services. It therefore seems appropriate to apply the MMC cost of capital in analysis of the mobile market. 23. One respondent suggested that analysis of ROCE is inappropriate as ex-post scrutiny of profitability by regulators can reduce incentives to invest. Current market valuations do not indicate that mobile networks have difficulty in raising capital, or that regulation is causing a disincentive to invest. Conclusion 24. Comments received during the consultative process have not altered Oftel’s view that Vodafone and BTCellnet have Market Influence in the market for mobile telephony in the UK. The primary indicators of this are the profitability of the networks and their market shares combined with the barrier to further market entry by GSM networks caused by the lack of further available spectrum. 25. Oftel has stated that there are signs that competition is continuing to develop in the mobile market, though it is not yet sufficiently effective to conclude that Vodafone and BTCellnet do not have Market Influence. Oftel
Draft decisions Draft DECISION UNDER PARAGRAPH 6(a) OF PART 1 OF SCHEDULE 1 OF VODAFONE'S TELECOMMUNICATIONS ACT LICENCE (THE "LICENCE") THAT VODAFONE HAS MARKET INFLUENCE AS REFERRED TO IN CONDITION 56 OF THE LICENCE
DECISION WHEREAS:
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:
(date) (signature) A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act 1984
Draft DECISION 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
DECISION WHEREAS:
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:
(date) (signature) A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act 1984
Respondents to the consultative process 1st stage of consultation – ending 7 December 1999 BT 2nd stage of consultation – ending 11 January 2000 BT
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. GSM 900/1800 – Global System for Mobile Communications in the 900 and 1800 MHz frequency band. Market Influence/market power – The ability to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable. Network operator – the operator of a telecommunication network with a Public Telecommunication Operator (PTO) licence, which provides, amongst other things, network services. Radio spectrum – the range of wavelengths used, for example, for broadcasting radio, terrestrial television and satellite television. Usable wavelength ranges from about 100 KHz to about 400 GHz although there are as yet no broadcasts above about 12 Ghz. Return on Capital Employed (ROCE) – the ratio of accounting profit to capital employed. The measure of capital employed can be either historic or current cost accounting. 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). Vertical integration – When a company is active in more than one stage in the production and supply of a good or service.
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