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Notice of determination to remove the determination that Vodafone has Market Influence under Condition 56 of its Licence Notice of determination to remove the determination that BT Cellnet has Market Influence under Condition 56 of its Licence Explanatory Memorandum Chapter 1 Introduction Chapter 2 The impact on competition of the MI triggered regime Chapter 3 Conclusion Chapter 4 Consultation details Annex A A summary of the costs and benefits of the MI regime S1 In April 2001, Oftel issued determinations that Vodafone and BT Cellnet have Market Influence ("MI") under Condition 56 of their respective licences. S2 This document contains Notices that the Director General intends to remove these determinations. S3 A determination of MI, made under Condition 56 of the standard mobile PTO licence triggers additional licence conditions that require the licensee to, amongst other things:
S4 Under Condition 56 of the mobile PTO licence, the Director General has discretion to impose, or remove, a designation of MI on an operator with market power. S5 In September 2001, Oftel published its statement on the review of competition in the mobile sector, Effective Competition Review: Mobile ("mobile review statement"). It found that, although Vodafone and BT Cellnet still possess market power, competitive pressures are growing in the mobile sector and that the sector is prospectively competitive. S6 The Effective Competition Review: Mobile consultation, published in February 2001("mobile review consultation") asked stakeholders to comment on the appropriateness of the MI determinations. In the light of the growing competitiveness of the mobile sector and some of the arguments made in support of removing formal regulation, the mobile review statement proposed removing the MI determinations. S7 The Explanatory Memorandum attached to the Notices sets out the basis for the Director General’s decision to remove the MI determinations from Vodafone and BT Cellnet. In summary, the Director General considers that there is evidence that suggests:
S8 Oftel invites comments on the Notices and analysis set out in the Explanatory Memorandum by 18 January 2002. S9 In a separate but related consultation, Oftel is also considering whether Vodafone and BT Cellnet should continue to supply quarterly returns of financial data as part of the ‘Oftel formula return’ (The Oftel Formula Return consultation – December 2001), should the MI designations be removed from Vodafone and BT Cellnet. NOTICE OF DETERMINATION TO REMOVE THE 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: 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. The Licensee has been determined by the Director as being 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 the Determination published on 11 April 2001. 3. The Director has taken into consideration the matters described in the Explanatory Memorandum to this Notice in accordance with Condition 56 of the Licence; 4. 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. NOW THEREFORE THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE HEREBY NOTIFIES THAT: 1. Publication of this Notice, and the accompanying Explanatory Memorandum, constitutes the start of the consultation procedure applicable to a determination to be made under paragraph 6 of Part 1 of Schedule 1 of Vodafone’s Licence; 2. At the end of this consultation, and subject to the views expressed during the consultation, the Director intends to remove the determination that the Licensee is an Operator having Market Influence as referred to in Condition 56 of its Licence, for the reasons given in the Explanatory Memorandum which accompanies this notice.
12 December 2001 Chris Kenny NOTICE OF DETERMINATION TO REMOVE THE DETERMINATION THAT BT CELLNET 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 BTCellnet’s Licence) WHEREAS: 1. Condition 56 of the Licence granted by the Secretary of State for Trade and Industry to BTCellnet Ltd ("BTCellnet") ("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. The Licensee has been determined by the Director as being 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 accompanied the Determination published on 11 April 2001. 3. The Director has taken into consideration the matters described in the Explanatory Memorandum to this Notice in accordance with Condition 56 of the Licence; 4. 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. NOW THEREFORE THE DIRECTOR, FOR THE PURPOSES OF CONDITION 56 OF THE LICENCE HEREBY NOTIFIES THAT: 1. Publication of this Notice, and the accompanying Explanatory Memorandum, constitutes the start of the consultation procedure applicable to a determination to be made under paragraph 6 of Part 1 of Schedule 1 of BTCellnet’s Licence; 2. At the end of this consultation, and subject to the views expressed during the consultation, the Director intends to remove the determination that the Licensee is an Operator having Market Influence as referred to in Condition 56 of its Licence, for the reasons given in the Explanatory Memorandum which accompanies this notice. 12 December 2001 Chris Kenny
Explanatory Memorandum Introduction 1.1 In its 1999 review of competition in the mobile market (Oftel’s review of the mobile market – July 1999), Oftel concluded that Vodafone and BT Cellnet had market power. In March 2000 Oftel determined that Vodafone and BT Cellnet had MI in the market for mobile telephony. 1.2 As a consequence of the Judgment in R v. Secretary of State for Trade and Industry, Ex parte Orange Personal Communications Ltd, the March 2000 determinations were made invalid. Therefore, in April 2001, the Director General re-imposed the MI determinations on Vodafone and BT Cellnet. At that time the Director General made clear that this decision was without prejudice to the findings of the mobile review consultation that was ongoing at the time. 1.3 In September 2001, Oftel published the mobile review statement, concluding that the mobile sector is prospectively competitive and that in many respects, the UK consumer is getting a good deal. It stated that:
1.4 However, the mobile review also concluded that Vodafone and BT Cellnet continue to possess market power. Looking to the future, Oftel concluded that competition in the mobile sector should continue to develop. A fifth operator will enter the market when Hutchison 3G launches services; the changing nature of mobile services may bring countervailing power in the form of new content providers and providers of mobile Internet services; competition between the existing operators should continue to develop and prices should continue to fall. In light of these findings, Oftel concluded that the mobile sector is prospectively competitive and that the evidence suggests that formal regulation of the mobile sector should now be reduced to the minimum. 1.5 In the mobile review statement, Oftel explained that:
1.6 For these reasons, Oftel proposed this consultation on removing the MI determinations from Vodafone and BT Cellnet. 1.7 The following Explanatory Memorandum sets out, in more detail, the reasons for the Director General’s decision to publish Notices to remove the MI determinations from Vodafone and BT Cellnet. Market Influence 1.8 A determination that a mobile operator has MI triggers a number of obligations in the operator’s licence. The following obligations are triggered by an MI determination:
1.9 MI is defined in the PTO licence as "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". In the mobile review statement, Oftel concluded that both Vodafone and BT Cellnet were pricing above the level that would be found in an effectively competitive market and have market power. Under Condition 56 of the mobile PTO licence, the Director General has discretion to impose, or remove, a designation of MI on an operator with market power. The obligation to supply service providers: background 1.10 The present regulatory requirement on mobile operators to supply service providers was introduced over 16 years ago, when Vodafone and BT Cellnet were first granted licences to run mobile telecommunication systems. At this time Vodafone and BT Cellnet were the only operators providing mobile telecommunications services and the obligation to supply was intended to promote competition, by providing alternative providers of mobile services. 1.11 Although originally the licences of Orange and One 2 One also contained an obligation to supply service providers, this was suspended for a two year period and then removed altogether following Oftel’s 1997 Fair trading in the Mobile telephony markets statement. 1.12 At the time that the obligation to provide service providers was introduced, the mobile market was in its infancy with only two network operators and it was appropriate to mandate the supply of wholesale airtime to alternative service providers. In 1997, when the decision was made to maintain the obligation to provide service providers on Vodafone and BT Cellnet as operators with market power, One 2 One and Orange were relatively new entrants in the mobile sector and Vodafone’s and BT Cellnet’s market shares were around 40%. Vodafone and BT Cellnet also had fully rolled out networks and significant first mover advantages. 1.13 The situation in the mobile sector is very different today. There are four established network operators with roughly equal market shares. A fifth mobile network operator will enter the market when Hutchison 3G launches services. While not yet effectively competitive, the mobile market is certainly more competitive now than it was when the service provision obligations were first introduced. The incentives for Vodafone and BT Cellnet to cross-subsidise their TSPs to effect a margin squeeze on ISPs were also greater than they are today. As markets move towards competition it is important to reduce regulation accordingly. Unnecessary or disproportionate regulation may have unintended adverse effects on the development of competition. 1.14 The next section looks more closely at the impact of service providers on competition in the mobile sector. 
The impact on competition of the MI triggered regime Impact on competition 2.1 Oftel’s goal is to ensure that consumers get a good deal in terms of quality, choice and value for money. Oftel believes that the best way to ensure that consumers get a good deal is through the development of sustainable and effective competition. Where market forces fail to deliver competition, Oftel will apply appropriate and proportionate regulation. It is important to remember, however, that regulatory intervention comes at a cost. Regulation should therefore be kept to the minimum required to achieve a particular outcome. 2.2 In the mobile review statement, Oftel suggested that it was likely that the costs of the MI regime outweighed the benefits. The following sections look in turn at the impact that the MI regime has on consumer outcomes and competition in the mobile sector. These considerations are summarised and presented in the form of a cost benefit analysis in Annex A. Impact on end user prices 2.3 The MI-triggered obligations to supply service providers and the associated prohibition of undue discrimination has the potential to increase consumer choice, by increasing the number of suppliers and retail products that are available. It appears, however, that the existence of service providers has had little impact on end user prices. Figure 1 shows the long-term trend of declining prices in the mobile sector. Figure 2 shows the downward trend of independent service providers ("ISPs") market share over the same period, although the actual number of consumers provided by an ISP has remained fairly constant over that time. Figure 1 – Results from Oftel’s mobile price index
Figure 2: Percentage of subscribers supplied by ISPs trend over time
2.4 Between June 1999 and June 2001, overall mobile retail prices have decreased by over 17%, while the market share of ISP’s, in terms of subscribers, shows a decrease of nearly 6%. These trends show a decline in prices at the same time as a decline in the market shares of ISPs. This information is consistent with a view that the impact of ISPs on the downward trend of overall retail prices is likely to have been relatively small. Impact on choice and quality 2.5 During the review of competition in the mobile sector, ISPs argued that they have the potential to increase the quality of mobile service provision, increase the range of services and tariffs, and provide a bespoke service that business consumers value. 2.6 Consumer satisfaction surveys continue to show a high level of consumer satisfaction with mobile services. Oftel’s latest research shows that 74% of consumers rated line quality as good, very good or excellent and 76% rated customer service as good, very good or excellent. Oftel’s most recent consumer satisfaction survey, found that 94% of consumers said that they were satisfied with mobile services overall. 2.7 The mobile review statement reported several new tariffs and service options, including the launch of GPRS by Vodafone and the availability of inclusive text messages from Vodafone and One 2 One. New tariff packages have continued to emerge, with all operators offering tariffs with inclusive off-net minutes and Vodafone and BT Cellnet offering an increased number of pre-pay tariff packages. 2.8 In the mobile review consultation, Oftel consulted on the range of services in the UK mobile sector and concluded that this range is comparable to that found in other major European countries. Oftel also concluded that the statistics on coverage and comparative call success rates coupled with information that the operators submitted to Oftel on the level of annual investment in their networks (extending coverage, capacity and quality), customer care and billing, suggests that there is active competition on quality in the mobile sector. 2.9 Oftel recognises that some ISPs do provide a service that consumers, in particular business consumers, value. This is evidenced by the fact that a number of ISPs have built up large customer bases and can count many large corporates and institutions amongst their customers. However, given the statistics on overall consumer satisfaction, (which have for the past 12 months been at or above 90%) the quality and the range of services available, it does not appear that regulatory intervention to improve overall consumer satisfaction, extend the range of tariffs and services, or support alternative providers to increase the quality of mobile services is justified or necessary. New, innovative deals at the wholesale level 2.10 Oftel expressed a view in the mobile review consultation that the MI framework causes some service providers, which resell airtime branded and tariffed by the network operator, to rely unnecessarily on regulation to secure the appropriate wholesale components. It is possible that the presence of the current regulatory framework distorts commercial negotiation as service providers can resort to a standard model offered by the network operator to meet its regulatory obligations. 2.11 In addition, the existence of a set of regulatory obligations which have been in place, substantially unchanged, for 16 years, may tend to focus regulated operators’ attention on minimising the impact of these obligations and avoiding the setting of precedents which might broaden the scope of current obligations. Many service providers which have chosen to rely on regulation have tended to focus their attention on optimising the terms on which this particular form of relationship is offered. These factors may have given a disproportionate weight to one business model at the expense of others. 2.12 Vodafone asserted in its response to Oftel’s mobile review that the MI framework constrains rather than facilitates innovation in the retail market. Telia too observed in its response that with one or two exceptions, the mobile telephony supply chain has remained basically unchanged in the years since mobile services have existed. It is Oftel’s view that it may be the case that, as discussed above, service providers and network operators have unduly focused on the single business model which has grown up around the obligation to supply. Successful ISPs and the MI regulation 2.13 The segment of the supply chain below the service provider tier has never been subject to regulation. Nevertheless, all four operators have chosen to build relationships with an extensive network of distributors and retailers through whom the networks’ own services are supplied to end-users. These relationships have been developed through commercial negotiation without any regulatory obligation, and provide a high degree of consumer choice at the retail level. 2.14 The ISP sector has been subjected to widespread restructuring and rationalisation over recent years, and this trend appears to be continuing. Whilst, in many instances, ISPs have been acquired by network operators, it is also the case that some ISPs have been acquiring the customer bases of their competitors and, by doing so, have built a significant base of their own. The resulting pattern of supply to ISPs across the four mobile networks is very variable, and the variations do not follow the pattern of regulation. Statistics as of June 2001 show that nearly 42% of contract customers (15% of all Vodafone customers), connected to Vodafone’s network are now connected through ISPs. Only 8% of contract customers (3% of all BT Cellnet’s customers) are connected to BT Cellnet through ISPs. 2.15 Both Vodafone and BT Cellnet are subject to the same MI triggered obligations, and the differences in the extent of involvement with ISPs seems likely to reflect a different commercial approach rather than a different approach to compliance with these obligations. 2.16 A comparison of the position between One 2 One and Orange, neither of whom is obliged to supply ISPs, also provides a striking contrast. One 2 One’s strategy of negotiating service provision arrangements with selected organisations has resulted in 12% of all consumers using the One 2 One network being consumers of an ISP. Compared with BT Cellnet, there are now four times as many consumers connected by ISPs to One 2 One’s network. However, the proportion of consumers using the Orange network connected by ISP is still less than 1%, despite the announced MVNO venture between Orange and Energis. 2.17 The MI regulation therefore appears to have had little impact on the extent to which each of the mobile networks uses ISPs to deliver services to consumers. Indeed there appears to be no correlation between successful ISPs and the regulated framework, which suggests that the regulated obligation to supply is now redundant. Reasonable demand from service providers 2.18 There is growing evidence that some mobile networks recognise the role that third parties can play in the competitive delivery of services to end users. The joint venture between Virgin and One 2 One is perhaps the most visible of the commercially negotiated arrangements for delivery of services. This deal has attracted worldwide interest, but there are others, such as Carphone Warehouse, through its Value Telecom service provision brand, and Telecom Plus, which have negotiated supply arrangements with One 2 One in the absence of any regulatory obligation to supply. Orange too has reported that it has in place relationships with third parties such as Energis and NTL. 2.19 Conventional service provision, where the third party service provider has a direct contractual relationship with the end user, is not the only model which has evolved. Although perhaps less well known than its Value Telecom brand, Carphone Warehouse has in place commercially negotiated arrangements with BT Cellnet under which Carphone Warehouse acquires and manages customers on behalf of BT Cellnet, providing all of the customer contact including billing, customer service and marketing. It is notable that already more consumers are now managed by Carphone Warehouse in this way than are managed by any ISP other than Virgin Mobile and Singlepoint, notwithstanding that the arrangements were first put in place less than two years ago and without reference to any regulatory obligations. 2.20 As discussed in the previous section, there is very little correlation between successful ISPs and the regulatory framework. Both One 2 One and Orange have agreements in place with ISPs, while there are large variances in the number of Vodafone and BT Cellnet customers supplied through ISPs, despite the MI regulations applying to both operators. 2.21 The Director General has a general duty under Section 3 (1) ("Section 3(1) duty") of the Telecommunications Act 1984, to ensure that all reasonable demand for telecommunications services is met. The interpretation of this duty as it applies to service provision was clarified by the Judgment in R v. the Director General of Telecommunications, Ex Parte Cellcom Limited. 2.22 Oftel fully expects that in the absence of regulation, all reasonable demand from service providers will be met. This does not mean however that all demand will be met or that all operators will meet each kind of demand. Rather that Oftel believes that service providers that have some value to add will be supplied by mobile operators, in the same way as those operators that are not bound by the MI determinations supply ISPs today. 2.23 If the Director General decides to remove the MI determinations on Vodafone and BT Cellnet, Oftel will continue to collect information on the supply of services to service providers, to ensure that its view that market forces will meet demand from service providers is correct. As part of this monitoring activity, Oftel will also meet ISPs and operators as necessary to ensure that this is the case.
Conclusion 3.1 On the basis of the arguments set out in Sections 1 and 2 of this document, the Director General has decided to publish Notices of his intention to remove the Market Influence determinations, currently on Vodafone and BT Cellnet because:
Consultation details 4.1 In accordance with paragraph 6 of Part 1 of Schedule 1 of the Licences of both Vodafone and BT Cellnet, the Director General invites comments by the Licensees and interested parties on the Notice to remove the determinations of Market Influence made under Condition 56 of the Licences of Vodafone and BT Cellnet. 4.2 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 18 January 2002.
4.3 This will be followed by a further 28 day period to allow interested parties to make representation on the 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 BT Cellnet of his final decision at the expiry of that period. Comments should be sent to: Chris Handley Tel: 020 7634 8863 e-mail: chandley@oftel.gov.uk 4.4 Representations made during the periods of consultation 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. Respondents should include confidential material in a clearly marked annex. In the interests of transparency, respondents are asked to keep confidentiality markings to a minimum. Timetable 4.5 The Notices are published on 12
December 2001. Making an allowance for the Christmas break, the first
period for representations will close on 18 January 2002. Representations
received during this period will be published, and the second period,
for comments on these representations, will begin on 22 January 2002
and end on 20 February 2002. A summary of the costs and benefits of the MI regime A1. This annex summarises the arguments outlined in Section 2 of this document in the form of a cost benefit analysis. Part A looks at the costs and benefits of keeping the present MI framework. Part B looks at the costs and benefits of removing the MI framework. Part A. Keeping the current MI framework Costs A2. The regulatory framework has the potential to distort commercial negotiations between service providers and network operators. Oftel believes that the MI obligation to supply tends to focus service providers’ attention on maximising the terms of the "standard" wholesale product that has developed around the regulatory framework and the network operators’ attention on minimising the regulatory burden. The service provision model in the UK has barely changed in the 16 years that the regulatory framework has been in place. Freed from regulation, commercial deals between network operators and services providers may be more innovative and may change and adapt as the mobile sector moves to 3G and new services develop. Costs of compliance A3. Regulation also imposes direct costs in the form of costs to the operators to comply with regulation and costs to Oftel (recovered from licence fees) on ensuring compliance. The mobile operators will incur costs associated with:
Oftel incurs the costs of:
Benefits Guaranteed choice of supplier A4. The obligation to supply guarantees the alternative supply of mobile services to consumers. However, as mentioned previously, overall consumer satisfaction remains continually high, being at or above 90% over the last 12 months. Satisfaction on choice and quality also appears high, with over 70% of consumers rating line quality and customer service as at least good. These statistics, set against a background of only 7% of all customers being supplied by ISPs, suggest that the benefit to consumers of guaranteed alternative supply of mobile services is relatively small. Part B. Removing the current MI framework Costs Potential that choice will be reduced A5. An alternative to the mobile operators for the supply of mobile services will no longer be assured. This could have the effect of reducing the choice available to consumers. However, this would only be true if mobile operators stopped supplying wholesale services to service providers altogether. Oftel does not believe that this will be the case. There are a number of service provision deals that have been agreed outside the regulatory framework; deals other than the traditional service provision offering required through the MI regulation have evolved; and there appears to be very little correlation between successful ISPs and the regulatory framework. Benefits Innovation A6. As discussed above, Oftel believes that the current regulatory framework may be unduly focussing attention on the "standard" service provision model. If the MI regulations were removed, Oftel believes that there would be a greater likelihood that bespoke deals between ISPs and mobile operators that may contribute to the development of competition in the mobile sector would emerge. Removal of unnecessary regulation A7. Removal of the MI regulations would also removes the associated regulatory and compliance costs from Oftel and the operators. C. Conclusion A8. In conclusion, Oftel believes that the overall the costs of keeping the MI regime are outweighed by the benefits of removing it. A9. The main cost of the current regime is that it has the potential to distort commercial negotiations, which may hinder the development and emergence of more innovative deals that would evolve as the mobile sector changes. The benefits of the current regime are less well defined - the extent to which competition at the retail level is enhanced or promoted by the current regime is debatable. While consumers may benefit from the MI regulation, evidence suggests that the benefits are small. Furthermore, current service providers appear to have little impact on retail prices and consumers already benefit from high levels of choice and quality. A10. On the other hand, there are few costs associated with the removal of the MI regime. The state of competition in the mobile sector is such that network operators will supply ISPs that bring value to both consumers and network operators. The potential benefits of removing the current regime are an increased likelihood of the emergence of innovative wholesale deals together with the removal of the costs of unnecessary regulation. Consumers also stand to benefit if the regulations are removed, they will still have a choice of supplier of mobile services but in addition will also benefit from the impact at the retail level of increased competition, through innovative deals and partnerships at the wholesale level of the market.
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