A Statement issued by the Director General of Telecommunications

Contents

Summary

Chapter 1 Introduction

Growth of the UK mobile sector
Market definitions
The regulatory framework

Chapter 2 Indicators of effective competition

Consumer outcomes
Consumer behaviour
Market structur
Supplier behaviour

Chapter 3 Which operators have market power?

Chapter 4 Appropriate regulation

Annex 1 Market definitions

Annex 2 Price, quality, choice, satisfaction and consumer behaviour Annex 3 SIM locking

Annex 4 Comments on market structure

Annex 5 Proportionate regulation and MI designations

Annex 6 Competition on price

Annex 7 Comments on Oftel’s measure of profitability

Annex 8 Comments on Oftel’s economic framework

Annex 9 Pricing above the competitive level ; Annex

10 Market power in the mobile market; Annex

11 Cost of capital

Annex 12 Comments received: miscellaneous

Annex 13 Respondents to the consultation

Glossary

Summary

S.1 In the last five years mobile telephony has become an essential part of everyday life. It has changed from being a product marketed almost exclusively for business people to a mass consumer item, with 70 per cent of the population now owning a mobile phone.

S.2 This transformation of mobile phones into a mass consumer product and an integral part of business life in the UK has been delivered through competition. Competition has been the spur for companies to drive down prices, widen their customer base and provide new services that consumers want to buy and use. As usage of mobile phones continues to grow, Oftel must ensure that the mobile market continues to deliver new services and innovative products with competitive pressure on prices to consumers.

S.3 This document presents the results of Oftel’s review of competition in the broad mobile sector covering services bought by mobile subscribers. It is published together with Oftel’s conclusions from a complementary review of whether regulatory controls on the wholesale price of calls to mobiles should continue when the current controls expire in March 2002.

S.4 These reviews are designed to ensure that regulation remains appropriate to the

level of competition. Regulation is justified when competitive pressures are insufficient to enable consumers to get a good deal in terms of quality, choice and value for money. Under-regulation is not in consumers’ interests. Nor is over-regulation which can deter investment and hinder innovation.

S.5 Oftel’s conclusion is that for services bought by mobile subscribers, the market is prospectively competitive. In the light of growing competitive pressures Oftel can start to reduce regulation. The market is not yet effectively competitive but there are a number of positive indicators that competition is developing and that competitive pressures will increasingly deliver a good deal for consumers. Oftel therefore proposes to lift the designations of Market Influence from Vodafone and BT Cellnet. But there remain some problem areas, notably a lack of consumer awareness of different prices and tariffs (particularly for international roaming services), relatively high prices of some types of call (international roaming and ‘off net’ mobile to mobile calls) and barriers to consumers’ switching networks. Competitive pressures should emerge to remove these problem areas but Oftel proposes further co-regulatory initiatives to encourage this.

The state of competition

S 6 In many respects, the UK consumer is getting a good deal:

• UK mobile prices are some of the cheapest in Europe;
• there is evidence of a long term trend of declining prices in the mobile sector;
• consumer satisfaction is high; and
• competition on quality is evident.

S.7 However, there are factors that prevent Oftel from concluding that the

mobile sector is now effectively competitive. The key factor is that some operators are pricing above the level that would be found in an effectively competitive market. The main indicator of this is that Vodafone’s profits have persistently and significantly exceeded the cost of capital. After taking into account factors such as differences in the size of operators, the costs of running different types of network and the relative prices of the mobile operators, Oftel concludes that both Vodafone and BT Cellnet are pricing above the competitive level and have market power, defined in Chapter 3. After considering all of the available evidence, Oftel concludes that Orange and One 2 One are not currently pricing above the competitive level and therefore do not have market power.

S.8 Other factors which cause Oftel concern are:

• consumer awareness of different tariffs remains low. There is considerable room for improvement in the provision of advice to consumers. For competition to be effective, consumers must be knowledgeable enough to take advantage of competition;
• there are particular concerns about the relatively high (compared to other call types) prices of "off net" calls from one mobile network to another and the high prices of international roaming; and
• the full benefits of Mobile Number Portability have yet to be realised and the continuing practice of locking handsets to SIM cards hinders consumers’ ability to switch provider.

S.9 Looking ahead, Oftel believes that competition should continue to develop. A fifth operator will enter the market when Hutchison 3G launches services; the changing nature of mobile services is likely to 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. That is why Oftel believes that the sector remains prospectively competitive.

The appropriate regulatory response

S.10 This evidence suggests that formal regulation of the mobile sector should be reduced to the minimum. The existing UK regulation triggered by a finding of Market Influence, imposes an obligation on Vodafone and BT Cellnet to supply service providers, prohibits undue discrimination and requires them to maintain certain regulatory accounts. Oftel proposes to remove these obligations by lifting the designation of Market Influence. The operators believe these obligations inhibit their ability to offer competitive wholesale services and products. Although the designation of these operators as having Significant Market Power (SMP) under the EC Interconnection Directive will remain, Oftel currently has no intention of imposing additional access obligations on mobile operators designated with SMP. For example, Oftel has confirmed its current policy that MVNOs should not be mandated under the ICD.

S.11 Oftel believes that competition will continue to erode operators’ abilities to price above the competitive level. Oftel believes that a number of co- regulatory initiatives should be pursued to help reinforce these trends. T hese include action to improve tariff transparency, reduce or remove SIM locking and improve number portability procedures. Oftel will also work with the European Commission and regulators in other Member States to address wholesale international roaming rates.

S.12 Oftel’s next review of the mobile sector will be undertaken after the new European Directives, currently being negotiated, enter into force and in accordance with the framework set by the new Directives.

S.13 Chapter one of this statement outlines Oftel’s market definitions for the mobile sector and relates these market definitions to the current regulation.

S.14 Chapter two contains Oftel’s findings for each of the groups of indicators of effective competition (consumer outcomes, consumer behaviour, market structure and supplier behaviour) and summarises the evidence that the market is not yet effectively competitive.

S.15 Chapter three presents the basis for the conclusion that Vodafone and BT Cellnet are pricing above the competitive level and therefore have market power.

S.16 Chapter four sets out Oftel’s view of appropriate regulation for the mobile sector, given the finding that the sector is prospectively competitive but two operators still have market power.

S.17 There are 13 Annexes to this statement, which contain updated data, results of specific analysis and Oftel’s response to the comments, data and analysis submitted by the 40 respondents to Oftel’s consultation document. Inclusion of data or analysis in an Annex does not indicate that Oftel places less weight on it than on the material contained in the main document. Oftel thanks all respondents for their contribution to Oftel’s 2000/01 review of the mobile sector.

Chapter 1

Introduction

1.1 In January 2000, Oftel published a statement of its strategy – Achieving the best deal for consumers. Oftel’s strategy is to match the level of regulation to the level of competition in telecommunications sectors, reducing formal regulation as competition develops, while continuing to protect and inform consumers where effectively competitive markets cannot do so. In Proposals for implementing Oftel’s strategy, April 2000, Oftel set out its intention to carry out market reviews in a number of broad market sectors, including mobile. The aim of market reviews is to assess the level of competition in a particular sector and to ensure that regulation is appropriate to the state of competition. Oftel has published guidelines, Effective competition review guidelines, August 2000, which set out how Oftel conducts effective competition reviews.

1.2 This review of the mobile sector began in September 2000 with a ‘kick-off’ statement: Oftel’s 2000/01 review of the mobile market. Oftel published a consultation document, Effective Competition Review: Mobile (‘the consultation document’) in February 2001. This statement completes Oftel’s 2000/01 review of the mobile sector.

1.3 This statement details Oftel’s:

• conclusions for each indicator used to assess the state of competition;
• final assessment of the state of competition in the mobile sector, including which operators have market power; and
• final proposals for appropriate regulation of the mobile sector.

Growth of the UK mobile sector

1.4 Since Oftel’s 98/99 review of the mobile sector, another 25 million consumers have bought mobile phones, bringing the total number of mobile subscribers to over 43 million (about 71% penetration).

Table 1: The UK mobile sector continues to grow*

Source: Oftel market information and Oftel estimates

* Oftel's market information has been updated, to reflect more accurate data, since the consultation document was published. All market information in this document should be regarded as Oftel's best estimate at this point in time.

1.5 The trends identified in the consultation document continue. Rental and domestic calls now account for just over 40% of total revenue.

Figure 1: Revenue from access and domestic calls is declining as a percentage of total revenue

Source: Oftel market information and Oftel estimates

1.6 Other services continue to grow in importance:

• off-net mobile to mobile calls (ie calls to a mobile on a network other than the one to which the consumer subscribes) now accounts for 13% of all revenue generated;
• Short Message Service (‘SMS’) now represents around 6% of the total revenue;
• international roaming accounts for 8% of all revenue and with the recent introduction of these services to pre-pay consumers, revenue is expected to continue to increase as a percentage of total revenue;
• revenue from international calls accounts for about 2% of total revenue; and
• call termination revenues account for 24% of total revenue.

1.7 Oftel has begun to collect information on calls to mobile Internet services and GPRS services but the revenue from these services is still not significant.

Market definitions

1.8 Oftel consulted on its market definitions for the mobile sector. Comments from respondents on the market definitions and Oftel’s response can be found in Annex 1.

1.9 Oftel concludes that:

• there are distinct markets for fixed and mobile services;
• incoming mobile calls are a separate market from outgoing mobile calls;
• pre and post paid mobile services are part of the same market;
• it is possible to define distinct wholesale and retail markets; and
• a distinct market for wholesale international roaming services exists.

1.10 As discussed in Annex 1, following the consultation, Oftel still considers that it may be possible to define different markets for different types of calls (such voice and data calls), SMS and enhanced services such as the mobile Internet. Some of these services are only just emerging and it is too early to make any definitive statements about their effect on the definition of markets in the mobile sector. In addition, since the competitive conditions for different outgoing retail services are likely to be the same, for the purposes of this review, Oftel has carried out its competition analysis using separate retail and wholesale markets for all outgoing mobile services.

1.11 This statement does not consider call termination on mobile networks, which is the subject of Oftel’s Review of the Charge Control on Calls to Mobiles, September 2001.

Figure 2: Oftel’s updated view of market definitions for the mobile sector

The regulatory framework

1.12 Currently there are two separate triggers that apply regulation in the mobile sector. A designation of Significant Market Power (‘SMP’) triggers regulatory obligations in licences under the EC Interconnection Directive (‘ICD’) (Directive 97/33/EC). Designations of Market Influence (‘MI’) trigger other obligations in the UK mobile operators’ licences. An operator may be designated as having either or both SMP and MI.

The EC Interconnection Directive, SMP and Indirect Access

1.13 The SMP test under the ICD is not a strict economic test. As explained in Oftel’s February 1998 document, Identification of Significant Market Power for the Purposes of the Interconnection Directive, an SMP designation reflects the position of an operator in the sector in which it operates rather than its behaviour within any particular telecommunications product or services market. This means that an SMP designation under the ICD reflects the position of an operator in the broad sector (fixed, leased lines or mobile) in which it operates rather than in a specific economic market. The broad mobile sector is shown in Figure 2. The test for SMP under the ICD is described in Annex 4.

1.14 Vodafone and BT Cellnet are currently designated as having SMP in the mobile sector for the purposes of the ICD. As a consequence, amongst other things, they must not unduly discriminate in the provision of interconnection services, including Indirect Access (‘IA’) and must meet all reasonable requests for access. In December 1999, following a dispute brought by INMS under the ICD, the Director General imposed the obligation to provide IA on Vodafone and BT Cellnet {Determination under the Provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of disputes between Intelligent Network Management Services (UK) Ltd ('INMS') and BT Cellnet and INMS (December 1999); Determination under the Provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of disputes between Intelligent Network Management Services (UK) Ltd ('INMS') and Vodafone (December 1999).} on a retail minus basis ie IA operators pay Vodafone and BT Cellnet retail prices less certain costs avoided by the retail operations of the network operators.

Market Influence

1.15 The term MI is defined in the mobile PTO licence and means that an operator has market power, so that it has 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. Oftel consulted on its view that the most relevant market to use for MI designations is the market for wholesale mobile telecommunications shown in Figure 2. This remains Oftel’s view.

1.16 A determination by the Director General that a mobile operator has MI triggers a number of obligations including:

• to provide mobile airtime to qualifying service providers on request; and
• not to show undue preference or undue discrimination in the provision of various services.

1.17 In April 2001, the Director General remade MI determinations on Vodafone and BT Cellnet which had been rendered unlawful by the judgment in R v. Secretary of State for Trade and Industry, Ex parte Orange Personal Communications Ltd. Vodafone and BT Cellnet are currently, therefore, subject to the MI-triggered obligations. The Director General made clear that these determinations were without prejudice to the findings of this review.

Chapter 2

Indicators of effective competition

2.1 In line with Oftel’s Effective Competition Review Guidelines, the consultation document set out four groups of indicators of effective competition: consumer outcomes; consumer behaviour; market structure; and supplier behaviour. This chapter summarises Oftel’s conclusions for each of these indicators.

Consumer outcomes

UK consumers shown to enjoy ‘best or near best deal’ in comparison with consumers in similar economies

2.2 In the consultation document, based on the results of Oftel’s benchmarking of mobile prices in February and August 2000, Oftel stated an initial view that the target of the "best or near best" deal was being met, but because more data was needed, Oftel did not infer a trend for the UK in the benchmarking.

2.3 Respondents fall in one of two broad groups. The first group, consisting of consumer groups, fixed operators and service providers, argues that the benchmarking results are not a reliable indicator of competition because Oftel’s benchmarking was carried out before the May 2001 pre-pay handset price increases in the UK. In addition, although a favourable result in the benchmarking suggests that competition in the UK is more effective than in other European mobile markets, it does not necessarily mean that effective competition exists in the UK.

2.4 The second group of respondents, mainly consisting of the mobile network operators, argues that the benchmarking result is evidence that a competitive sector is delivering a good deal for consumers. These respondents argue that since Oftel’s overriding objective is to ensure that the consumer gets a good deal, regulation is not justified when the sector is meeting Oftel’s objective.

2.5 Since publication of the consultation document, Oftel has conducted another benchmarking exercise {International benchmarking study of dial-up PSTN Internet access, mobile and fixed line services, Oftel, June 2001.}based on prices in February 2001. This latest exercise shows that the UK has maintained its position. The UK’s position relative to other countries has improved in comparison with the results detailed in Oftel’s December 2000 benchmarking report.

2.6 Oftel has examined the impact of the recent price increases in pre-pay handsets on its latest benchmarking results. In April 2001, the UK operators announced price rises of around £30 for pre-pay phones in the UK to take effect from May 2001. The impact of a £30 price increase in the handset used in the benchmarking narrows the gap between the UK and other countries but prices in the UK remain lower than elsewhere.

2.7 In conclusion, Oftel believes that the benchmarking results do indicate that the UK consumer is getting a relatively good deal compared to other European countries and hence is a positive, although far from conclusive, indicator of effective competition.

A wide range of services

2.8 In the consultation document, Oftel stated that the range of mobile services available in the UK was comparable to that found in other major European mobile sectors. There were only a few comments on this view, which can be found in Annex 2 along with Oftel’s response.

2.9 Developments since the consultation document was published include:

• the launch of General Packet Radio Service (‘GPRS’) by Vodafone;
• the availability of monthly packages with inclusive text messages as well as minutes from One 2 One and Vodafone;
• an offer from Orange of pre-pay tariffs with no contract but the ability to pay by direct debit rather than vouchers;
• increased availability of international roaming to pre-pay consumers; and
• an increase in Subscriber Identity Module (‘SIM’) only products with Vodafone launching a service that allows multiple mobile devices to use the same phone number using an additional SIM card for each device.

2.10 Given the available information and the fact that only a few respondents commented on Oftel’s initial conclusion, Oftel considers that the range of tariffs and packages in the UK is satisfactory and this is a positive indicator of competition.

Consumer satisfaction

2.11 In the consultation document, Oftel stated that:

• overall consumer satisfaction is consistently high (Oftel surveys show that 90-95% of consumers are satisfied with their mobile service) but a much lower proportion of consumers are satisfied with some services (such as off-net mobile to mobile calls, international roaming and rural coverage);
• complaints to Oftel about mobile services are falling relative to customer numbers;
• most consumers not switching provider state that they are satisfied with their current provider;
• despite price reductions, many residential customers do not feel that they are getting the best available deal; and
• business consumers may be benefiting less from competition than residential consumers.

2.12 Most responses to the consultation emphasise the parts of Oftel’s data that supports their view. Few respondents question the main conclusions on consumer satisfaction or present alternative data, apart from one respondent who commented that Oftel should not place weight on a positive result of consumer satisfaction when consumer awareness of prices and services is low. A summary of responses to the consultation, Oftel’s response to these comments and the latest data on consumer satisfaction can be found in Annex 2.

2.13 Data collected during the consultation period supports the view that Oftel expressed in the consultation document and there has been a notable improvement in the statistics on complaints about mobile services. As explained in Annex 2, Oftel agrees that the consumer satisfaction figures from Oftel’s surveys may be inflated because consumer awareness is low but satisfaction levels are high and this is a positive indicator of competition.

2.14 Oftel consulted on its view that business consumers may be getting a poor deal compared to residential consumers. A few respondents question this, arguing that the evidence does not support Oftel’s view. Data collected during the consultation period (see Annex 2) appears to support these respondents’ arguments. In the light of this data and the responses, Oftel has revised its view and considers that it is not the case that business users have a worse deal than residential users.

Indicators of effective competition: consumer behaviour

Consumers able to access and use information to help make effective choices and take advantage of market opportunities

2.15 Oftel consulted on its suggestion that many mobile customers are either not confident about selecting the best deal or not knowledgeable about prices, or both. Oftel suggested that, over time, mobile consumers tend to become more knowledgeable about tariffs and the way they use mobile phones. Almost every respondent comments on this view. More details can be found in Annex 2.

2.16 In response to Oftel’s consultation, consumer groups point to the difficulty facing consumers when making comparisons because of complex tariffs, "confusion marketing" and lack of comparable information on prices and services. These respondents argue that low consumer awareness of prices is detrimental to consumers and is evidence that the mobile sector is not effectively competitive.

2.17 Network operators tend to disagree that low consumer awareness is a problem, citing tariff optimization schemes or ease of switching as factors that offset low consumer awareness. Some network operators stress that even if consumer awareness is low, this does not mean that the mobile sector is not effectively competitive.

2.18 Oftel’s consumer research since the consultation document shows that problems with consumer information persist as:

• only half of SMEs surveyed in February 2001 found price comparisons easy to make;
• only half of residential consumers are aware of the price differences between on-net and off-net mobile to mobile calls (about the same are aware of peak and off-peak charges);
• only a quarter of residential consumers are aware of the cost of using a mobile phone abroad; and
• mystery shopping exercises have indicated that consumers receive poor advice at the point of sale.

2.19 In the light of comments from respondents and the additional data, Oftel’s conclusion remains as stated in the consultation document. There is considerable room for improvement in the provision of adequate advice to consumers and in consumers being aware of this information. In addition, as detailed in Annex 2, Oftel has some reason to doubt that its initial view that consumer awareness increases over time is justified.

Absence of barriers to consumers switching suppliers

Number portability

2.20 In the consultation document, Oftel stated that the use of Mobile Number Portability (‘MNP’) had constantly increased since its introduction in early 1999, although as a proportion of total mobile subscribers, the number of mobile number ports remains low.

2.21 In response to the consultation, operators point to the important role played by MNP in increasing consumer switching and highlight industry moves to improve the technical and transfer processes for porting. Other respondents comment that the practical inconvenience and difficulty of porting limit the attractiveness of MNP and its role in reducing the barriers to switching in the mobile sector.

2.22 Oftel welcomes recent moves by the industry to improve the procedures for MNP. However, if consumers are to take advantage of MNP, it is important that consumers receive accurate advice. The findings of an Oftel-commissioned mystery shopping exercise (published in July 2001) showed that four-fifths of customers received inaccurate (or no advice at all) about whether or not they could port their number and the prices and timescales involved. Oftel awaits the mobile operators’ responses setting out the action they plan to take following the mystery shopping exercise. Oftel will assess what, if any, further action might be needed in the light of those responses.

2.23 Oftel considers that the full benefits of MNP remain to be realised. For this to happen, consumers need to be able to port their mobile number easily rather than being deterred by poor advice or elaborate processes.

SIM locking

2.24 In the consultation document, Oftel suggested that the continuing prevalence of SIM locking (all four operators lock pre-paid handsets to the SIM which is sold with the handset) may act as a barrier to consumer switching and, in the future, could hinder consumers from using different operators for different services.

2.25 The views expressed in response to consultation were divided between: mobile operators who think that SIM-locking is not a barrier to switching; and virtually all other respondents who comment that SIM-locking is anti-competitive and should be ended and/or that specific problems with fees and processes should be addressed.

2.26 Oftel’s assessment of operators’ compliance with current Oftel and European Commission guidelines on SIM locking can be found in Annex 3. Oftel concludes that the prices for unlocking a handset should probably be lower and that current prices deter consumers from switching network. The guidelines relating to customer information on SIM locking are clearly not being met. Mystery shopping has revealed that very poor advice is given to consumers about SIM locking, both generally and at the point of sale.

2.27 Oftel’s research of consumer behaviour and mobile tariffs in Italy, Portugal and Finland (all without SIM locking) indicates that there is the potential, in the absence of SIM locking, for a segment of particularly active consumers to act in more sophisticated ways, and in so doing to exert a competitive impact on prices. In Annex 3, Oftel explains why it believes that SIM locking represents a barrier to consumer switching. It goes on to say that and a reduction in, or an end to, SIM locking would have positive benefits for competition in terms of: increased pressure on prices generally; increased pressure on specific call types; easier entry for providers of SIM only products; easier switching; and more choice for consumers.

Switching behaviour

2.28 In the consultation document, Oftel pointed to a high level of consumer switching between provider and/or tariff and considered this a positive indicator of competition.

2.29 In response to the consultation, mobile operators discuss the opportunities for switching, developments (such as pre-pay tariffs) that have made switching easier and evidence that switching in the mobile sector compares well with other industries. The mobile operators also stress that satisfaction with a current provider is the main reason consumers give for not switching. However, other respondents suggest that handset subsidies and competition between handset manufacturers explains the levels of switching rather than competition between mobile operators ie consumers are switching network in order to obtain a new, subsidised, handset rather than because they are searching for a better tariff package.

2.30 Data collected since the consultation document was published shows that the level of network switching remains as discussed in the consultation document but switching of packages and, for SMEs, tariffs, has increased. New data and Oftel’s responses to the comments received can be found in Annex 2.

2.31 Oftel considers that it is possible that the current levels of switching are partly supported by handset subsidies because these subsidies lower the cost of switching when handsets are SIM locked. Oftel disagrees that a large amount of consumers switch only to obtain a new handset. Nevertheless, the level of switching in the mobile sector is high (23% of all residential mobile consumers have switched mobile networks) and is a positive indicator of effective competition.

Market structure

2.32 Oftel consulted on its view that the structure of four mobile operators operating in a sector where there are high barriers to entry might result in a range of outcomes, from vigorous competition to collusion between the operators.

2.33 Once again, those respondents who commented on Oftel’s view broadly fall into one of two groups. The first group, mainly consisting of the mobile network operators, argue that a small number of operators in a sector is not of concern in itself and Oftel must concentrate on what the sector delivers not the structure of the sector.

2.34 The second group of respondents argues that the structure of the sector adds weight to a finding that the sector is not effectively competitive. One respondent in this group argues that effective competition cannot be expected until the current structure of the sector changes.

2.35 Oftel does not believe that the structure of the mobile sector of itself determines the present state of competition. The current structure of the sector is compatible with a range of outcomes, from effective competition to collusion between the operators. Equally, the limited number of players may lead to interdependencies between the operators, which in turn leads to a muted form of competition. Oftel disagrees that the sector cannot become effectively competitive until the structure changes. It is perfectly possible that the behaviour of the players will change, regulatory action will move the sector closer to effective competition, or that current market dynamics will make the sector effectively competitive. These factors are not, of course, mutually exclusive.

Market shares by network operator

2.36 Table 2 shows subscriber market shares. The change in market shares between March and June 2001 is due to a change in the way the mobile network operators reported subscriber numbers. The numbers for BTCellnet and Orange are for subscribers that have made or received a call in the last three months. The number for Vodafone is for subscribers that have made a call in the last three months and so are likely to be understated compared to BT Cellnet and Orange. Dolphin continues to have a negligible share of both mobile subscribers and retail revenue and is not included in Oftel’s published market data.

Table 2: Market shares: mobile subscribers

Source: Oftel market information

2.37 Table 3 shows the estimated retail revenue shares by network operator. This revenue is total retail revenue in the broad retail mobile sector attributed by the network to which the retail consumer subscribes, either via the operator’s own retail operation or an ISP. Note that Oftel’s estimations of retail revenues have been revised since the consultation document to reflect more accurate information.

Table 3: Estimated retail revenue by network operator

Source: Oftel market information and Oftel estimates

2.38 In the consultation document, Oftel stated that the fact that Vodafone and BT Cellnet are able to take a higher market share by value than by volume may indicate that they are able to retain high value customers (or charge higher prices), which may indicate an element of market power resulting from first mover advantage. The updated data in Tables 2 and 3 indicate that now, only Vodafone has a larger market share by value than volume. Orange has achieved broadly the same level of revenue market shares as BT Cellnet but has a higher volume market share.

2.39 BT Cellnet argues that Oftel should not assume that Vodafone and BT Cellnet have market power because they are able to take higher market share by value rather than volume. BT Cellnet maintains that retention of high value customers reflects innovation, value for money and quality of service. Oftel accepts that higher market shares by value than volume can reflect a number of factors. However, if differences between established players and newer players reflected barriers to Orange and One 2 One being able to obtain high value customers, it may be evidence of Vodafone and BT Cellnet’s market power. Nevertheless, Oftel accepts that Orange appears to be firmly established in the mobile sector. Although the market shares do not suggest that One 2 One can still be considered to be a new entrant, there is a greater difference between One 2 One’s revenue and volume market shares than for the other operators.

2.40 Oftel received many comments from respondents about market shares, in particular about the 25% indicator for a finding of market power and the concentration of the UK mobile sector compared to other sectors and/or other European countries. These comments, and Oftel’s response, can be found in Annex 4.

Market shares: network operator and independent service providers

2.41 In the consultation document, Oftel pointed out that while a significant proportion of consumers are supplied via ISPs, the market share of ISPs continues to fall (only 7% of all consumers are currently supplied via ISPs). Oftel attributed the fall in market share of ISPs to the inability of ISPs to offer pre-pay services (see Wholesale pre-paid mobile services, Oftel July 2000). Nevertheless, some ISPs have established significant customer bases, and the ISP sector can count many large corporations and institutions amongst its customers, suggesting that ISPs continue to fulfil a role in the industry and are valued by consumers.

2.42 Figure 3 shows the trend of subscribers connected by ISP and by network operator. In the consultation document, Oftel commented on the trend evident from September 2000 figures: the fall in the number of subscribers connected via ISPs to the networks of BT Cellnet and Vodafone is beginning to be offset by the number of subscribers connected via Virgin (supplied by One 2 One). March 2001 figures show an increase in the number of connections via ISPs. Although the number of subscribers connected to the BT Cellnet network via ISPs continues to fall, the number of customers connected to the Vodafone network via ISPs is now increasing. Overall, there has been a 40% increase in the number of subscribers connected via ISPs in the last year. This still represents a fall in the market shares of ISPs, since the total number of subscribers is growing faster than the connection of subscriber via ISPs.

Figure 3: Estimated number of subscribers supplied by ISP by network: variation over time

Source: Oftel estimates from information submitted by service providers

Limited entry barriers which would make the threat of entry a competitive discipline

2.43 The extent to which the actions of existing players are constrained by the threat of entry into a market is a significant factor in assessing the degree of competition. If entry barriers are low or non-existent, then the possibility of new competitors entering the market may provide an effective constraint on behaviour whatever the value of market share. A firm operating in a market with low entry barriers is unlikely to have market power.

Barriers to entry at the retail level

2.44 Oftel consulted on its suggestion that, because of the current regulatory framework obliging operators with MI to supply wholesale airtime, entry barriers at the retail level are, in theory, low. Oftel noted that, despite the regulatory framework, the number of service providers continues to decline.

2.45 In response, Mobile Independent Service Providers (MISP) and some ISPs claim that the decline in ISPs is due to: the exclusion of ISPs from pre-pay services; margin squeezing by the network operators; the change in incentive payment schemes; and the inability of Oftel to enforce the requirements of the MI-triggered licence conditions and the prohibition on unfair cross-subsidy.

2.46 The network operators present arguments pointing to the success of some ISPs as evidence of an effective wholesale market while stressing that, if anything, the current MI triggered regulation is suppressing the development of this wholesale sector. One 2 One and Vodafone argue that when ISPs offer value to consumers, network operators are keen to supply these ISPs and regulation is not required to support ISPs that offer value to consumers. All operators expressed the view that where service provision is mandated by regulation, innovation is dampened, particularly by the prohibition on undue discrimination. As a result, partnership arrangements that meet wholesale customer needs become more difficult to devise and fewer in number.

2.47 This issue polarised views, which Oftel discusses in more detail in Annex 5. In summary, Oftel believes that there is growing evidence that some network operators recognise the role that service providers can play in the competitive delivery of services. There is evidence that the commercial strategies of the mobile operators, rather than regulation, are the factor that determines how many ISPs develop a successful relationship with a network operator. Oftel believes that the current regulation may have unduly focused service providers and network operators on the single business model that has grown up around the regulated obligation to supply. It also may be the case that the willingness of operators to develop innovative wholesale deals is being deterred by the prohibition on undue discrimination.

Barriers to entry at the network level

2.48 In the consultation document, Oftel described the entry barriers at the network level as ‘absolute’, due to spectrum scarcity, and the high sunk costs associated with building a network. Oftel discussed strategic barriers to entry, which are often associated with first mover advantages and reinforced by economies of scale and scope not available to new entrants. Oftel consulted on the conclusion that Orange and One 2 One have become firmly established in the mobile sector and there is little evidence of any first mover advantages available to Vodafone and BT Cellnet but unavailable to Orange and One 2 One.

2.49 In response, all mobile operators argue that scarcity of spectrum does not justify regulation or indicate market failure. BT Cellnet and Vodafone state that Oftel overemphasises the importance of entry barriers. BT Cellnet argues that there are already five players, including Dolphin and there will be more entry in the future. BT Cellnet, Vodafone and Orange also argue that the natural equilibrium of the sector is likely to be four or five firms or fewer.

2.50 Oftel maintains that there is an absolute barrier to entry at the network level. Spectrum is not available and new entrants are not free to enter the mobile sector. The existing mobile operators do not face a persistent threat of new entry. The mobile operators argue that the number of operators is likely to be four or five regardless of the availability of spectrum and therefore barriers to entry are unimportant. Oftel is not convinced by this argument. Regardless of the nature of the factor that restricts the number of players (lack of spectrum and/or cost of entry), the fact remains that entry barriers in the mobile sector are high and the number of players is limited. Oftel recognises that developments in both European and UK law are likely to make spectrum trading possible in the medium-term. It also welcomes the Government’s decision to establish an independent review of the management of spectrum, which it hopes will contribute towards the development of an effective spectrum trading regime. Nevertheless, Oftel does not expect developments from this policy initiative to impact on competitive conditions in the period of this review. Oftel agrees that the presence of entry barriers alone does not justify a finding that the sector is not effectively competitive but it is important to consider the entry barriers in conjunction with the other indicators of competition.

Potential for leverage of market power in the mobile sector

2.51 Oftel consulted on its view that, if the mobile sector is not effectively competitive, there may be the incentive and potential for network operators to adversely affect competition in the downstream retail markets by leveraging market power. Oftel explained that currently, retail service provision is largely limited to the resale of the network operators’ basic service. However, in the future, there should be much more scope for retail service providers to add value as more sophisticated services are developed and m-commerce transactions grow in volume. Oftel expressed a view that if mobile operators have market power in the future, there may be increased incentive to leverage market power in wholesale call origination markets to limit the extent of competition at the retail level, particularly for new, value added services.

2.52 In response to Oftel’s consultation, service providers and potential service providers argue that ISPs are already being locked out of the market for new, value-added services and action by Oftel is necessary to prevent foreclosure of these markets. In addition, these respondents argue that Oftel has underestimated the technical advantages available to the provider of the gateway to the mobile Internet (ie the network operator) and action from Oftel is required. Oftel should publish guidance on access, exclusive arrangements, gateways and interfaces for service providers including the availability of network information, including location data. Service providers argue that ISPs increase consumer choice and it is important that Oftel acts to ensure that appropriate wholesale products are available for GPRS and 3G. Some ISPs also argue that unfair cross subsidies (in the form of cheap access calls to operator owned Internet providers and free SMS alerts) are already commonplace and markets are already being foreclosed.

2.53 The mobile network operators express very different views from service providers and potential service providers. The operators argue that they have no incentive to restrict competition at the retail level given the uncertainty about demand for new services. BT Cellnet stresses that there is strong countervailing power from likely players in mobile Internet and the current players in retail distribution (Tesco, Sainsbury’s and Asda) and this countervailing power will offset any ability that the mobile operators have to leverage market power into the downstream market. Orange argues that the convergence of fixed and mobile Internet markets would weaken any power the mobile network operators have. Vodafone states that it needs partnership arrangements in order to develop services that consumers value and are willing to pay for and it is not at all obvious that network operators will have greater power than content providers in the negotiation of partnership deals.

2.54 Oftel discusses the polarised views of respondents in Annex 5. Oftel continues to hold the view that, at present, it is not appropriate for Oftel to issue any guidance on the type of products that should be offered to third parties wishing to move into the provision of mobile Internet services. Oftel believes that it is important that regulation should not distort the development of the mobile Internet market and Oftel is reluctant to take action that might dictate a particular business model when it is possible that better results could be achieved by commercial negotiation. Oftel believes that, given the potential for significant players to bring countervailing power to negotiations with the mobile operators, the best way to identify the roles that third parties will play is by commercial negotiation free from regulatory constraints.

Supplier behaviour

Active competition on price

Access and domestic outgoing calls

2.55 In the consultation document, Oftel discussed the results from its mobile price index work (as of September 2000) and concluded that mobile prices had fallen consistently since the mobile price index began in 1999. The model includes the price of access (and a reduction that represents the handset subsidy) and the price of calls to fixed and mobile numbers.

2.56 Some respondents state that rapidly falling prices are a clear sign of effective competition. Vodafone submitted a modified version of the Oftel’s price index model, prepared by consultants LECG showing that: "Vodafone is not an outlier in pricing levels or dynamic trends. Vodafone’s average prices closely follow the sector price trend and are generally not the highest in the market in either pre-pay, monthly or advance contract segments". LECG’s model produces broadly similar result for the average price index as the NERA model does, but extends back in time to show that prices for contract customers have been declining since 1996.

2.57 Other respondents, including Energis and SACOT, point out that economic theory suggests that, in a period of declining costs, one would expect to see price reductions even in a market characterised by less than effective competition. These respondents suggest that it is possible that the observed reduction in prices reflects a reduction in costs rather than an increase in the level of competition.

2.58 The price index model has been updated with prices to the end of March 2001. There has been little price movement in call prices on monthly contract and pre-pay packages since October 2000. All operators increased the price of initial connection to pre-pay packages around April/May 2001. It appears from published retail prices that the average price increase is around £30-£40. There is no evidence so far of any corresponding decrease in call prices. This information suggests that average pre-pay prices may now be around 10 percentage points higher than in March 2001. The estimated effect of the pre-pay handset price increase on the NERA index is shown in Figure 4.

Figure 4: Results from Oftel’s mobile price index (figures to March 2001, estimates to June 2001)

Source: Oftel estimates and results from Oftel’s mobile price index developed for Oftel by NERA

2.59 Although from October 2000 to June 2001 the previous reduction in prices levelled out, it would be wrong to conclude prices will now increase. But this does indicate that the evidence of falling prices supporting a finding that the market is effectively competitive weakened in the period.

2.60 After considering the comments, Oftel’s view is that falling prices do not necessarily imply that the mobile sector is effectively competitive. Falling prices can be taken as an indication that some competitive pressures exist. Taking into account the updated price index, Oftel concludes that there is a long-term trend of declining prices in the mobile sector, which is evidence of some degree of competition between the UK operators.

Prices for off-net mobile to mobile and international roaming calls

2.61 Consumer concerns prompted Oftel to examine the prices for off-net mobile to mobile and international roaming calls. In the consultation document, Oftel expressed the view that the prices for these calls are, relative to other types of mobile calls, high and static. Oftel’s examination of price trends for some specific services prompted respondents to comment on whether or not Oftel intended to impose retail price caps on individual call types.

2.62 In the consultation document, Oftel suggested that if the mobile sector were effectively competitive, what a consumer lost on one type of call, a consumer would gain on another type of call or the price of another service. Oftel expressed the view that, if the mobile sector is moving towards effective competition such that overall, retail price caps are not justified, there is no justification for retail price caps on any individual service. This does not mean that high, static prices for some services (in a sector that falls short of effective competition) should be ignored.

Off-net mobile to mobile call prices

2.63 In response to Oftel’s views that the prices of off-net mobile to mobile calls are high and static, some respondents argue that an absence of price competition for off-net mobile to mobile calls supports an argument that the broad mobile sector is not effectively competitive. Other respondents either disagree with Oftel’s view that there are weak competitive pressures on off-net mobile to mobile call prices and/or agree with Vodafone’s view that: "competition bears down unevenly in a dynamic, hetrogeneous marketplace such as mobile. Suppliers are engaged in a struggle for competitive advantage against a background of varying degrees of price elasticity and changing patterns of consumer demand. This produces the different and in some cases divergent price trends identified by Oftel". BT Cellnet points to reductions in off-net mobile to mobile call prices as evidence of competitive pressures and suggests that prices have fallen in real terms relative to 1997/98 prices. BT Cellnet and a consultant for another operator argue that it is economically efficient to charge different prices for different services where different prices reflect different price elasticities associated with each call type.

2.64 Updated price trends for off-net mobile to mobile calls can be found in Annex 6 along with the background to the current structure of high off-net mobile to mobile and low on-net mobile to mobile prices. The revenue per minute figures for off-net mobile to mobile calls published by Oftel is an average for all operators. This is necessary because the underlying operator specific data is confidential. Recent information for 2000/01 suggests that three operators have tended to increase their revenue per minute for off-net mobile to mobile calls and the fourth operator, although showing a slight reduction in revenue per minute, previously had much higher than average off-net mobile to mobile call prices. Oftel maintains that competitive pressure on off-net mobile to mobile call prices is not evident. Oftel notes that recently, the mobile operators have launched price plans that include off-net mobile to mobile calls in the bundle of ‘free’ calls. Whether or not these new plans represent significant price decreases for off-net mobile to mobile calls will not be evident until these changes are reflected in Oftel’s mobile price index and market information.

2.65 In response to the comments by respondents, Oftel accepts that mobile services will be priced differently. However, BT Cellnet’s justification for the difference between on-net and off-net mobile to mobile calls appears unconvincing. No evidence has been submitted to show that price elasticities for off-net mobile to mobile calls and on-net mobile to mobile calls are different. In the absence of such evidence, it seems improbable that pricing off-net mobile to mobile calls at an average level of 25ppm, and on-net mobile to mobile calls much lower is economically efficient. It appears to Oftel that the structure of pricing on-net and off-net mobile to mobile calls at very different rates is likely to be an inefficient structure of pricing. As explained in detail in Annex 6, Oftel believes that the structure of on-net and off-net mobile to mobile pricing points to the presence of strong inter-dependencies between operators in an oligopolistic sector when setting retail prices and call termination prices on mobile networks resulting in an inefficient pricing structure for mobile to mobile calls.

International roaming

2.66 In the consultation document, Oftel stated that competitive pressures on prices for international roaming appear to be weak. Oftel suggested that consumer information on international roaming prices is poor and consumer awareness of these prices is very low. Oftel expressed the view that the structure of the wholesale international roaming market may limit competitive pressure on wholesale prices that underpin the trend for relatively high (when compared to the price of other calls), static international roaming retail prices.

2.67 Once again, respondents fall into one of two groups. The first group agrees that the price trends for international roaming calls indicate a lack of competitive pressure. The second group either disagrees that there is a lack of competitive pressure on the prices for international roaming or asserts that in a competitive market, high, static prices for some services should not be of concern to Oftel. Updated price trend information, further comments and Oftel’s response to these comments can be found in Annex 6.

2.68 During the consultation period, Oftel carried out a benchmarking exercise on European international roaming prices {International benchmarking study of dial-up PSTN Internet access, mobile and fixed line services, Oftel, June 2001.}. On the basis of an analysis of the best deal available in each European country, Oftel concludes that UK prices are below those charged elsewhere. When prices for the two operators with highest market share in each country are considered (ie the GSM 900 operators, expected to have the highest proportion of roaming traffic), the UK position is less good. However, the overall spread of prices for the average index is fairly small and UK prices are not out of line with prices elsewhere.

2.69 Oftel’s surveys show that consumer awareness of international roaming prices is low:

• less than a quarter of consumers (23%) had any knowledge of the price of using a mobile abroad when they bought their phone; and
• of those consumers that frequently use their mobiles abroad, 21% do not know whether or not they pay for incoming calls and 10% positively believe that they do not pay for incoming calls (all consumers pay for incoming calls when roaming).

2.70 With the introduction of pre-pay international roaming tariffs, more consumers will begin to use their mobiles abroad. Of the consumers that have, so far, not used their phones in another country, very few had a high degree of awareness of the tariff they would pay when roaming. For example, only 8% knew that they would pay for incoming calls. The scale of the difference between pre-pay international roaming prices (where incoming calls in Europe can be as high as £1.50 per minute) and national prices strongly suggests that the mobile operators are exploiting a lack of consumer awareness of international roaming prices.

2.71 UK rates are not out of line with rates found in the rest of Europe. However, Oftel believes that competitive pressures on international roaming prices generally appear to be weak. There is some evidence from the European Commission’s investigations that competitive pressures on roaming prices in most European countries (against which Oftel benchmarked the UK) are also weak. As explained further in Annex 6, in addition to the problems regarding low consumer awareness of price, Oftel believes that another reason why retail roaming prices are high and static is due to structural problems in the wholesale market for international roaming.

2.72 On 11 July 2001, Commission inspectors and officials from national competition authorities carried out simultaneous unannounced inspections at the premises of nine European mobile telephony operators located in the UK and Germany. These inspections were part of the follow-up to the EU-wide sector inquiry into mobile roaming that the Commission launched in January 2000. The Commission has stated that there are serious competition concerns regarding pricing practices for mobile roaming that warrant further investigations, in particular in the UK and Germany. The investigation in the UK and Germany is still in a preliminary phase and the Commission has not yet reached any conclusions concerning the companies involved. Separately, as part of the follow up to the sector inquiry, the Commission is also looking at notifications for competition clearance of Vodafone’s Eurocall flat rate roaming scheme, and of the GSM Association’s standard international roaming agreement.

SMS

2.73 In the consultation document, Oftel described the recently introduced interconnect arrangements between the four network operators for SMS and suggested that there may be reasons to believe that, given similar circumstances to off-net mobile to mobile calls, competitive pressure on off-net SMS prices may be muted. Oftel does not have enough historical data on SMS prices to infer a reliable price trend. However, the available data suggests that SMS prices might have been steady over 2000/01. Oftel is not aware of a strong trend towards pricing on- and off-net SMS at different rates although One 2 One now offer a discount on on-net SMS on some tariffs. Oftel will continue to monitor SMS prices. One respondent commented that it is difficult to obtain SMS interconnect with the mobile operators. Oftel discusses this issue in Annex 12.

Operator specific prices

2.74 In the consultation document, Oftel stated that it appeared that although the absolute price differences between the GSM 900 and GSM 1800 operators is reducing over time, it still appeared to be the case that Vodafone and BT Cellnet set similar prices, above those of Orange and One 2 One. Oftel based its view on data from Oftel’s price index model (developed by NERA) and data from Oftel’s market information project.

2.75 Vodafone prepared a large volume of data in support of an argument that it does not set prices higher than the other operators do and that "there is no evidence that any operator, or pair of operators, is able to sustain prices above those of its competitors in any market segment over time. Annex 6 contains Oftel’s response to Vodafone’s data submission.

2.76 In this review Oftel's comments and conclusions about prices are based on averages and do not necessarily hold for every user and every profile. Oftel has examined the updated minute and revenue information, which is collected as part of Oftel's market information project. This information is available to Oftel by individual call type. Oftel also collected traffic profile information for each mobile operator in order to assess if differences in average revenue per minute are accounted for by differences in the distribution of peak and off-peak traffic between the operators. The NERA model was updated and once again the individual profiles examined on an operator specific basis. Details can be found in Annex 6. The NERA model shows that, over the financial year 2000/01:

• · Vodafone had prices which exceeded the industry average;
  
• · BT Cellnet had prices which exceeded the industry average;
  
• · Orange set prices at or below the industry average; and
  
• · One 2 One set prices significantly below the industry average.

2.77 Oftel agrees with respondents that stated that the prices of all the operators are converging. By the end of the financial year 2000/01, Oftel estimates that:

• · Vodafone's prices declined but remain above average;
  
• · BT Cellnet's prices moved towards the average but remain above the average;
  
• · Orange's prices were at the average;
  
• · One 2 One's prices moved towards the average but remain below average.
  

2.78 There is some evidence that Vodafone and BT Cellnet continue to set higher than average prices. Some respondents commented that converging prices are consistent with a competitive market. Oftel agrees that this is true, converging prices are consistent with a range of outcomes from active competition to collusion.

Active competition in quality

2.79 Oftel proposed 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.

2.80 Generally, the mobile operators agree with Oftel’s view. MISP comment that ISPs offer higher quality than the network operators evidenced by the value that business customers place on the individual services that ISPs are able to offer. Oftel recognises that some ISPs offer quality services valued by business consumers. Oftel concludes that competition on quality is evident.

Absence of anti-competitive behaviour

2.81 In the consultation document, Oftel stated that although Oftel has investigated and considered a number of complaints and representations alleging anti-competitive behaviour by the mobile operators, Oftel’s investigations have found these allegations to be unsubstantiated.

2.82 In response, MISP commented that MISP members have been responsible for making representations to Oftel alleging anti-competitive behaviour by MNOs. MISP state that Oftel takes a considerable amount of time to investigate a complaint and just because Oftel’s investigations have not substantiated the allegations, does not mean there was no anti-competitive behaviour at the time representations were made.

2.83 The mobile network operators point to Oftel’s view as evidence that there is no anti-competitive behaviour in the mobile sector. Vodafone state that the conclusion that there is no anti-competitive behaviour is important and suggests it should strongly influence Oftel’s approach to future ex ante regulation.

2.84 Oftel recognises that the lack of any formal action by the DG does not necessarily mean that there is no anti-competitive behaviour in the mobile sector. Oftel currently has investigations open which involve mobile operators but of the cases investigated and closed during the period since the last mobile review, Oftel has not taken any formal action against a mobile operator as a result of an allegation of anti-competitive behaviour. However, although the Director has not taken any formal action, there have been instances where a mobile operator has modified its conduct as a result of an investigation, and therefore, no enforcement was carried out.

Absence of collusion

2.85 In the consultation document, Oftel suggested that there was no immediate evidence to suggest that price signalling or other tacit collusion is taking place between the mobile operators.

2.86 In response to this suggestion, one respondent stated that: "there is ‘price signalling’ (without this necessarily being evidence of any form of collusion). A recent example is the announcement of an increase in the retail price for pre-pay handsets, which include connection and initial service, by One 2 One; this was almost immediately followed by announcements of similar increases from BT Cellnet, Orange and Vodafone. The experience is of price moves by any one MNO being quickly mirrored by the other three". Another respondent asserted that the mobile operators are effectively operating a cartel, other respondents maintained that the actions of the four operators tend to be collusive and this is not consistent with the existence of effective competition.

2.87 No evidence has been submitted that supports the allegation that the mobile operators are engaged in a cartel. Oftel has very recently received a complaint about the near simultaneous increase in handset prices by two mobile operators and will be investigating this complaint. The increase in pre-pay handset prices adds some weight to the argument that the oligopolistic structure of the mobile sector is conducive to pricing interdependencies between the mobile operators, which may lead to a muted form of competition.

2.88 The Commission, in its statement about the inspections that were carried out as part of its inquiry into international roaming prices stated that: "the first purpose of the inspections in the UK and Germany is to ascertain whether there is evidence of collective fixing of consumer (retail) prices by mobile operators in both countries". The Commission’s investigation is at an early stage and there is currently no indication whether or not the Commission’s concerns are justified.

Profitability and efficiency

Profitability

2.89 In the consultation document, Oftel suggested that profits (measured by Return on Capital Employed (‘ROCE’)) that persistently and significantly exceed the Cost of Capital (‘CoC’) indicate that prices in the mobile sector are higher than would be found in an effectively competitive market.

2.90 Respondents made a number of comments about how Oftel measures profitability. The responses received can be broadly grouped into comments about:

• Oftel’s use of ROCE as a measure of profitability;
• alternative measures of profitability;
• the profitability of the mobile industry as a whole;
• the profitability of the mobile operators compared to firms in other sectors; and
• 3G licensing costs.

2.91 These comments and Oftel’s detailed response can be found in Annex 7. Several operators suggest that there are a number of shortcomings of ROCE as a measure of profitability. As noted in the consultation document, Oftel accepts that ROCE is an imperfect measure of economic profitability. However, Oftel believes it to be a reasonable approximation for practical purposes. Moreover, the approach is consistent with the approach used by other competition authorities. In particular, the Monopolies and Mergers Commission (now the Competition Commission) have used ROCE as a measure of profitability in a large proportion of its investigations under the Fair Trading Act 1973.

2.92 During the consultation period, Oftel commissioned NERA to measure the profitability of the UK mobile network operators and the level of efficiency achieved by the UK network mobile operators. NERA’s report, The Profitability and efficiency of the UK mobile network operators, NERA, August 2001, is available on Oftel’s website.

2.93 The first aim of the NERA study was to provide a view on whether the profitability of different mobile operators, taking into account all UK cellular activities, had persistently exceeded the CoC (or some alternative measure of ‘normal’ profits).

Table 3: NERA’s estimates of ROCE (HCA)

* financial year end

** calendar year