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SummaryChapters: 1 2 3 4Annex 1 2 3 4 5 6 7 8 9 10 11 12 13GlossaryAnnex 1Market DefinitionsA1.1 In the consultation document, Oftel’s initial view was that:
Definition of markets A1.2 One2One queries the use of the theoretical test of the hypothetical monopolist, arguing that it is inappropriate since, in reality, MNOs could not switch all resources into one service following a price rise by a hypothetical monopolist. One2One gives the example of an MNO switching into the supply of SMS, following a hypothetical monopoly supplier of SMS raising the price. It argues, that "in the worst case scenario, this would lead to a situation where MNOs no longer offer other services, because all resources are allocated to providing SMS." A1.3 Vodafone suggests that Oftel’s view of markets requires "full substitutability", which is not grounded in sound economic assessment, whereas the appropriate test should be to determine whether "enough people are likely to find the two products are effective substitutes in order for the price of one to constrain the price of another." Oftel’s response A1.4 As outlined in the consultation document, Oftel’s approach to market definition follows that used by the UK competition authorities, and is in line with those used by European and US competition authorities. Market boundaries are determined by identifying constraints on price setting behaviour of firms. As stated in the consultation document, Oftel does not require full substitutability on the demand side, rather it assesses whether a sufficient number of consumers would switch to an alternative product in response to an increase in the price. A1.5 The ‘hypothetical monopolist’ test is not intended to be a representation of the actual market situation but it can be constructive in trying to set the boundaries to the relevant product market in terms. One2One’s argument would have some merit where actual capacity constraints exist. In this case, these capacity constraints should be considered. Consider One2One’s example of an SMS supplier. Oftel would not accept that an SMS supplier (for the purpose of this example, a supplier of two-way paging services could be considered) could switch into supplying voice services unless appropriate spectrum was made available and the supplier of SMS could easily adapt its network. However, unless the supplier of voice services is constrained in a similar fashion, a supplier of mobile voice could move into supplying SMS. Are fixed and mobile in the same market? A1.6 Three respondents, including Vodafone, comment that the distinction between fixed and mobile phones is being eroded, and that Oftel has overstated the distinction between fixed and mobile services. Vodafone submitted survey results in support of its argument. Oftel’s response A1.7 Oftel has considered the arguments put forward during consultation, and has commissioned new consumer survey evidence in order to consider again the issue of whether or not fixed and mobiles are substitutable. As explained in more detail below, on the basis of available evidence Oftel still considers that, on balance, fixed and mobile services form distinct markets.
A1.8 Separate markets can be distinguished by considering possibilities for demand side and supply side substitution. On the supply side, there appear to be few opportunities for substitution between fixed and mobile services. New entrants into either the mobile or fixed markets will face considerable barriers to entry. In particular, an absolute barrier to entry into the mobile market currently exists in the unavailability of spectrum, although this may diminish over the longer term with the development of spectrum trading. In addition, there are high sunk costs involved in building a mobile network, which cannot be recovered on exit. The level of sunk costs is high because there are significant economies of density associated with mobile networks; a new entrant would have to achieve a national coverage in order to compete effectively with incumbents. A1.9 On the demand side, mobile phones may be viewed by consumers as ‘added value’ versions of fixed line phones; the latter are attached to a place, the former belong to a person and can travel with that person. This suggests that fixed lines are unlikely to act as substitutes for mobiles. The fact that mobiles have evolved implies that they have created a market of their own. This would further imply that if the price of fixed line phone calls decreased, there would be no material impact on mobile phone usage. This argument is backed up by a consumer survey by Oftel, investigating consumer responses to the introduction of the BT Talk Together Package. This package, which offers free unlimited evening and weekend calls, is taken as a proxy for a significant price reduction in fixed line calls. Consumers who subscribe to the BT Talk Together package {This gives a free unlimited evening and weekend local calls to fixed lines for a price of £14.99 including VAT} were asked whether or not the unlimited free calls had affected their mobile phone usage. 75% of respondents stated that it did not affect their usage at all, while only 11% said that they used their mobile less. This points to a conclusion that fixed prices do not constrain mobile prices. A1.10 MNOs have, however, argued that mobile phones can be substitutable for fixed phones, since they have the same function as a fixed phone with a mobility element. The question here involves an asymmetry; ie whether mobiles constrain fixed phone usage, but not whether fixed phones constrain mobiles. More specifically, what is the degree to which mobiles can be substituted for fixed phones, since it is evident that there is at least some degree of substitutability. A high degree would imply that a hypothetical monopoly supplier of fixed phones would not be able to sustain a 5% price rise, as this would induce consumers to switch to mobiles. A1.11 In order to determine the degree of substitutability between mobile and fixed, Oftel has commissioned quantitative research and in depth qualitative research to gain a thorough insight into consumer calling behaviour. For the qualitative research, consumers were told to record exact details of their calling patterns over a specified period of time, which they subsequently discussed in an interview. On balance, it was found that the qualitative results were more reliable than the quantitative results because consumers were forced to note down exactly what they did (survey results can sometimes be unreliable, since consumers cannot always remember exactly what they do, and there is a divergence between what they actually do and what they think they do). A1.12 The quantitative results obtained indicate that some substitutability exists. The survey results from February 2001 indicate that:
A1.13 However, both the older age group (over 55s) and low users, which form 30% of dual users do not substitute at all between fixed and mobile phone calls. This represents a sizeable proportion of the mobile phone owning population, significantly higher than the 6% of mobile only users. A1.14 One of the main messages coming through from the qualitative results is that a vast majority of mobile phone calls made by consumers are short convenient calls such as calling someone whilst walking home from the station – the type of call that, by definition, cannot be made from a fixed line. The qualitative analysis suggests that the advent of the mobile has, to a significant degree, expanded the market for making calls, rather than substituting fixed calls, implying that a large majority of mobile calls are complementary to fixed calls. The diary information implies that mobile calls seem to be mainly local, to close friends and family, and that national and international calls and long ‘chatty’ calls tend to be reserved for fixed lines. The reasons for this mainly revolve around cost, as well as the perceived health risks of mobiles. A1.15 Some off-peak mobile call prices are cheaper than some fixed line call prices. However, overall there is still a premium attached to the extra functionality of mobile phones, particularly at peak times. For comparable usage packages, Oftel’s analysis suggests that mobile prices are on average 39% higher than BT’s prices. This, coupled with indications that some consumers are choosing one means of calling over another in order to get the best deal, provide quantitative evidence that fixed and mobile phones form distinct markets. If mobile services have a significantly higher price than fixed services, then two distinct markets must exist. A1.16 Survey results indicate that consumers who, probably for lifestyle reasons, prefer to use the mobile as their main method of phone calls, form roughly 15% of UK adult mobile consumers. However, 7 out of 10 of these users have a fixed line at home. Oftel’s May 2001 survey of residential consumers indicates that 79% of consumers still consider their fixed phone as their main method of making and receiving calls. Consumers who choose predominantly to use only mobiles appear to do so due to the distinguishing feature of mobiles (ie the mobility element). Oftel’s survey results suggest that these consumers spend on average £28 per month on mobile phone bills, which is more than the average mobile user’s bill (£18) and significantly more than the average fixed phone bill. This suggests that price is not a key factor in explaining their behaviour, which would further point to defining separate markets for mobiles and fixed phones. A1.17 When dual users in the survey were asked the amount that their fixed phone bill would have to increase in order to induce them to switch exclusively to mobile, the figure averaged to an increase of roughly 100%. In addition, 29% of dual users stated that they would never completely switch to mobile phones. A1.18 The Oftel research highlighted above supports a definition of separate markets for fixed and mobile services. A1.19 As previously argued by Oftel, future developments in the competitiveness of UK telecommunications markets may encourage the extent of substitution between fixed and mobile, as mobile networks expand, evolve to cater for more advanced forms of data transmission, voice quality matches that of fixed and as mobile prices fall. However, mobile operators’ traffic sensitive costs are expected to remain above those of fixed networks. Consumers may well be prepared to pay some premium for the additional convenience of mobiles, but full substitutability of residential fixed lines by mobile is unlikely as long as significant price premium remains. Incoming mobile calls are in a different market from outgoing calls A1.20 In the consultation Review of Charge Controls on Calls to Mobiles, February 2001, Oftel defined separate markets for incoming and outgoing calls while acknowledging that the two are linked to some extent. Oftel’s Statement on Calls to Mobiles considers the consultation responses to these market definitions. Pre and post pay services are in the same market A1.21 In response to Oftel’s consultation, the mobile operators generally agree that pre and post pay mobile services are in the same market. MISP considers that the retail market has distinct pre and post-pay categories. Oftel’s response A1.22 Oftel maintains the conclusion reached in the consultation document that post paid and pre paid services are in the same market. This is due to the similarities between pre and post-pay services from consumers’ perspective, ease of switching, and the ease of supply side substitutability. Discrete markets for different retail products A1.23 All the mobile operators are opposed to defining discrete markets within the wholesale and retail sectors. They argue that products are sold in bundles and consumers do not choose elements of the different bundle from different operators. One2One warns against regulating individual products, arguing that this would deter investment in new products and services. Orange says that it finds Oftel’s narrow market definitions surprising, given the role that convergence has to play in the communications sector. Consultants employed by a mobile operator, suggest that by defining separate markets, Oftel is alluding to the level of competitiveness in the market, or presuming that regulation is required. Oftel’s response A1.24 Oftel reviews market definitions at the outset of a new consultation. Market definitions can be expected to change over time. The factors that led Oftel to consider whether separate markets for different retail services exist included such market developments as the entry of innovative suppliers of single services (such as international roaming services) and the prospect of IA operators offering select services and/or call types. The fact that Oftel has defined discrete markets does not necessarily imply that regulation will be imposed on the basis of there being discrete markets. As explained in Oftel’s Effective Competition Review Guidelines, reviews are carried out on broad sectors and this review considers the broad retail sector covering all outgoing mobile services. A1.25 Oftel accepts that consumers purchase bundles of outbound services (inbound services are distinguished by the fact that the calling party pays). However, the feasibility of supply side substitution varies among services. This leads Oftel to believe that there is a good case for distinguishing some services, which may be of increasing importance as services develop. A1.26 In response to Orange, it is true that convergence is developing but it is still very much in its infancy. Oftel, therefore, considers that establishing wider market definitions based on predictions of convergence would be premature. As convergence intensifies, Oftel expects to keep relevant market definitions under regular review. A1.27 Respondents made various specific points about Oftel’s proposal that separate retail markets for different services can be identified, generally revolving around the issue of substitution within the bundle. These comments, and Oftel’s response are summarised below: Access A1.28 Vodafone and Orange commented that access is not a separate retail market, since consumers would not wish to purchase the capability of making and receiving calls without actually doing so. Oftel’s response A1.29 It is possible that currently, access alone is of limited value at the retail level and customers are not likely to buy the capability of making and receiving calls without actually wishing to make calls. However, theoretically, there are no substitutes on the demand and supply side, so a hypothetical monopolist could feasibly raise the price of access. Oftel accepts that prepaid services have increased substantially, implying that calls and access are now combined for a large majority of customers, but Oftel does not believe that this bundling of calls and access significantly changes the analysis. In terms of analysing the competitive conditions, Oftel accepts the bundling point. Calls and access are usually consumed together. This is a buy through argument – access is necessary to make calls. However, innovations such as indirect access would suggest that calls could be supplied by a number of suppliers, not just the access supplier. Data/GPRS A1.30 Two respondents argue that data/GPRS are in the same market as other services. Orange points out that GPRS is an enabler (technology) and not a service. Orange goes on to argue that data transfer is a new service on mobile networks and given the dominance of the fixed sector in respect of data services, it is likely that fixed services will influence the development of mobile data services. Oftel’s response A1.31 Oftel acknowledges that it uses the term GPRS to refer to various data services that will be enabled by GPRS. A1.32 As discussed in the consultation document, data services on mobile networks are very immature, so it is difficult to reach a definitive conclusion on market definition. Mobile Internet A1.33 Orange argues that the mobile and fixed Internet distinction is increasingly blurred and it considers that Oftel is moving towards defining 2G and 3G in separate markets. Oftel’s response A1.34 Call origination on mobile networks is not an effective demand side substitute for call origination for Internet access on fixed networks. Internet access on a mobile phone currently offers considerably less functionality than using a fixed network. In addition, given that Oftel has taken the view that fixed and mobile phones are in separate markets, Oftel may, for similar reasons, take the view that fixed and mobile Internet access are in separate markets. However, again, as discussed in the consultation document, these services are very immature and it is too early to be definitive about market definitions for the mobile Internet. A1.35 Oftel has not proposed that 2G and 3G services are in different markets. SMS A1.36 Three MNOs argue that SMS is a substitute for voice due to demand, and supply side factors. According to Vodafone’s research, 86% of mobile residential consumers use SMS as a substitute for voice calls sometimes or often. Some two thirds of the residential mobile consumers see SMS as a substitute for some, many or all voice calls. Vodafone obtained similar results for the business market. Oftel’s response A1.37 Oftel considers that there is an asymmetry regarding supply side substitutability; a supplier of SMS would not be able to switch into the provision of voice services, following price rises in voice services, due to spectrum constraints but a supplier of voice would be able to switch into SMS. Regarding the demand side, Oftel’s latest qualitative research suggests that text messaging is mainly used by younger respondents who admit that, while sending text messages may have started as an economical alternative to voice calls, it has now become a unique phenomenon in its own right. The medium has its language and symbolism, and is an imperfect alternative to voice, since text messages do not take place in ‘real time’ and have a slightly different role. In addition, it is not obvious that sending a text message is a low cost alternative to a voice call (constant exchanges of SMS to hold a ‘conversation’ would cost a significant amount). A1.38 Oftel’s qualitative research findings suggest that text messages are largely additional to voice calls, and have expanded overall demand. Text messaging is increasing in volume, with apparently superficial contacts producing large numbers of responses. Results from Oftel’s Consumer Survey on Mobile telephony (February 2001) suggests that on average, consumers who send text messages send about ten a week. This number is considerably higher amongst those under the age of 24 (on average 16 per week) compared with those over 65 (on average five per week). Only eight percent of mobile users over the age of 65 said that they send text messages. Half of mobile customers who send text messages said that messages comprise less than a quarter of total calls they make on their mobile. Three in ten said that text messages comprise at least half of their total mobile calls. A1.39 To conclude, evidence of consumer behaviour regarding SMS on the demand side, and supply side constraints leads Oftel to suggest that SMS and voice services may not be in the same market. Distinct retail and wholesale markets A1.40 MISP and RSLCOM agree that the mobile sector comprises distinct wholesale and retail markets. A1.41 BT Cellnet argues that the wholesale and retail distinction is artificial; since the wholesale market has always existed (as a result of regulation), and that it is unclear to them why Oftel had changed its view of the market. BT Cellnet consider effective competition to be assessed in terms of a single mobile telephony market. It queries the fact that Oftel has referred to indicators based on retail data. A1.42 Vodafone states that the wholesale and retail market should not be considered in isolation, and that they are inextricably connected in complex ways. One2One also disagrees with the wholesale retail market split. However, Orange accepts that there may be a separate wholesale market. Oftel’s response A1.43 Oftel has not changed its view on the distinction between wholesale and retail markets. In previous reviews, Oftel did not consider there was a need to make the distinction explicit, given that attention was always focussed at the wholesale level. To re-iterate the point made in the consultation document, the wholesale market is distinct, because retail and wholesale services are not demand or supply side substitutes. On the demand side, it is clear that consumers could not switch between retail and wholesale services in response to a price rise. On the supply side, it is clear that a retailer could not enter into the wholesale market in response to a price rise by a hypothetical monopoly supplier of wholesale services. It is, however, possible that a wholesaler could enter the retail market in response to a price rise by a hypothetical monopolist supplier of retail services. This would make the market asymmetric, with the threat of entry into retail activities by wholesalers constraining prices for retail activities, but with no corresponding constraint on the pricing of wholesale services from the threat of entry into wholesale activities by retailers. A1.44 It should be emphasised that Oftel’s view on whether the market overall is effectively competitive or not does not depend on this market definition. However, defining the mobile sector in terms of distinct wholesale and retail markets facilitates the identification of the sources of any market power, and might aid the identification of what, if any, would be the appropriate reaction to the finding of market power. The presence of vertically integrated network operators implies that there is considerable scope for market power to be leveraged into the retail level from the wholesale level. The potential for leveraging can be identified with greater clarity by defining the wholesale and retail markets separately. A1.45 Regarding BT Cellnet’s last point, indicators based on retail data may be a good indication of the state of the wholesale sector. This is because any market power at the retail level will derive from market power at the wholesale level due to the ability of vertically integrated MNOs to leverage market power. Wholesale international roaming A1.46 There were no substantive comments from respondents on wholesale international roaming. Oftel maintains its view stated in consultation document that there is a separate wholesale market for roaming services. GSM and TETRA are in the same market A1.47 In the consultation document, Oftel expressed the view that the mobile sector includes services provided by TETRA operators, currently Dolphin. Oftel argued that Dolphin’s services appear to have more functionality than GSM services (such as press-to-talk fast calls, group calls and broadcast calls) but GSM operators could provide these extra services with minor network modifications. Consequently, if a TETRA operator attempted to raise their prices, Oftel would expect GSM operators to offer the additional TETRA services. Oftel expressed the view that although there is currently insufficient price trend information on TETRA services to compare to the price trends of GSM services, it appears likely that GSM and TETRA are in the same market. A1.48 Few comments were made about the view that GSM and TETRA are in the same market. Dolphin agrees that TETRA prices are constrained by the GSM operators. BT Cellnet comments that Oftel’s view on whether or not Dolphin is in the same market as the GSM operators is not clear. BT Cellnet states that "if Oftel considers that TETRA is in the same market, it must face up to the fact that the number of licensed operators in the market is 6 with the possibility of further TETRA spectrum being made available". Oftel’s response A1.49 Oftel considers that it is likely that GSM and TETRA services are in the same market. It is not possible to make a definitive statement because Dolphin is a new operator and sufficient data, particularly price trend data, is unavailable. In the main body of the consultation document, Oftel assumed that that TETRA and GSM were in the same market and explained (at paragraph 3.8 and 3.11) that Dolphin is a new entrant, a fringe player and is unlikely to possess market power. The RA has recently stated that "there is insufficient spectrum available for public TETRA services to allow for the licensing of another public TETRA operator" {Spectrum for TETRA mobile services in the 872 - 876 MHz and 917 - 921 MHz BANDS, RA, August 2001}. It is extremely unlikely that there will be new entrants into the mobile market using TETRA spectrum in the near (or medium) future. Conclusion A1.50 Oftel concludes that:
A1.51 Oftel still considers that it is possible to define different markets for different types of calls, such as voice and data calls and enhanced services such as the mobile Internet. However, since these services are only just emerging it is at present too early to make any definitive statements about their effect on definition of the relevant markets.
Annex 2Price, quality, choice, satisfaction and consumer behaviourA wide range of services A2.1 Some respondents to the consultation consider the choice of mobile services in the UK to be unreasonably constrained by a lack of unbundled tariffs from operators, with one respondent stating that tariffs with bundled minutes do not benefit consumers since much of the inclusive call time is unused. A2.2 Some consumer groups raise issues about the needs of elderly and disabled consumers, suggesting that their needs are unlikely to be met by market forces. A2.3 The Independent Committee for the Supervision of Standards of Telephone Information Services (ICSTIS) is concerned about network restrictions on consumers’ ability to make premium rate calls, where consumers are effectively barred from making such unless they ask the network to lift the bar which usually requires a credit check. Oftel’s response A2.4 In response to the first of these points, it is not clear that consumers are disadvantaged by bundled tariffs. Some post-pay tariffs include very few bundled minutes, and Orange and Virgin offer prominent billed products without inclusive minutes. Such products are also available from Vodafone and BT Cellnet. Beyond this of course, pre-pay products are unbundled options for customers. Tariff optimisation schemes also help to reduce the detrimental effect if consumers do not use bundled minutes. A2.5 Oftel acknowledges the concern about services for elderly and disabled consumers. Many of these concerns will be considered in a workshop that Oftel intends to arrange on these and related issues with mobile operators, consumer groups and other interested parties. A2.6 On the issue of premium rate access, if any party wishes to formally complain to Oftel about barring premium rate numbers, Oftel will consider this complaint. However, Oftel appreciates that some of the reasons why operators’ bar PRS calls (for credit or consumer protection purposes) may be valid. Consumer satisfaction A2.7 Most responses to the consultation comment on Oftel’s view by stressing the particular data that supports their arguments. Few respondents question the main conclusions or submit new data. One respondent suggests that strong conclusions should not be drawn from indicators of consumer satisfaction since satisfaction may be based on ignorance (including ignorance of the effectively competitive level of prices). A2.8 Consumer groups express concerns about coverage variations, particularly rural coverage problems and lack of adequate information on coverage. One respondent suggests that Oftel should assess whether and when competition will provide rural coverage, and should seek to address the issue by working with mobile networks, other government departments, development agencies and public sources of infrastructure finance. Another suggests encouraging operators to share 3G infrastructure and to enable national roaming as a way to increase coverage. A2.9 One respondent is concerned about a divergence between different providers’ handling of customer complaints. Oftel’s response A2.10 Oftel understands that coverage is improving, with expansion work ongoing in rural areas in England, Wales and Scotland, and One2One launching in Northern Ireland in April 2001. BT Cellnet and One2One have also announced that they intend to share 3G infrastructure. Oftel appreciates that coverage is often related to population density for valid commercial reasons. Oftel considers that any co-ordinated activity on rural coverage would be most appropriately driven by bodies such as development agencies rather than by Oftel. A2.11 Oftel’s last two quarterly surveys of small and medium sized business users of mobiles shows an improved level of business users’ satisfaction with network quality. Other positive news comes from Oftel complaint data, which show a falling trend for mobile complaints in absolute terms, relative to subscriber numbers and relative to complaints about other telecommunications services. Mobile complaints in May 2001 fell to their lowest point since June 1999. More recent data on complaints to Trading Standards also show complaints about mobile services are falling as a proportion of mobile subscribers. A2.12 Oftel’s February 2001 survey of residential consumers shows that the trend of high satisfaction overall with mobile services continues. A recent, less positive, finding from Oftel surveys is the continued pattern of dissatisfaction with particular features of mobile services. Residential consumers show consistently low levels of satisfaction with the prices for both off-net mobile to mobile and international roaming calls, with only just over half of both residential and business consumers satisfied with these services. A2.13 One respondent to the consultation stresses the need for caution about the measured satisfaction data; ie limited consumer awareness may be artificially inflating the satisfaction measures. In effect, the suggestion is that if more consumers were more aware, they might be less satisfied. A2.14 To test the link between awareness and satisfaction, Oftel has used data from its quarterly surveys. In February 2001, Oftel looked at residential consumers’ views on the price of off-net mobile to mobile calls:
A2.15 For business customers, Oftel compared satisfaction with value for money whilst abroad with awareness of being charged for incoming roaming calls, for those business customers surveyed in November 2000 who actually used international roaming (note that the difference is statistically significant despite a small base size):
A2.16 These statistics do support the view that the satisfaction figures may reflect consumers limited awareness of certain aspects of their overall mobile service, and support the need for measures to improve customer awareness. A2.17 In response to the comments about complaint handling; customer service continues to register high satisfaction. There is no requirement upon operators to respond to complaints in the same way. Oftel does, however, hope that mobile providers will join the Telecoms Ombudsman Scheme which, once established, may improve systems for complaint-handling. Are business users benefiting less than residential users? A2.18 The mobile operators suggest that competition in the business segment had little potential to improve further because this segment became competitive before the residential segment. Some operators also comment that the business segment is currently at least as competitive as the residential segment, with businesses having access to additional benefits, more suppliers (with some mentioning the value placed by businesses on ISPs’ services), buying expertise and stronger purchasing power. Switching was observed to be comparable in relation to residential consumers, and satisfaction among businesses to be no lower for mobile services than for other services. A2.19 One respondent commented that the cost of off-net mobile to mobile calls promotes a duopoly for high value corporate customers. No other respondents commented on the level of business market shares between the operators. Oftel’s response A2.20 Recent surveys of SMEs shows overall satisfaction remaining high and comparable with residential, at around 90-95%. Satisfaction with measures of network quality also increased in the fourth quarter survey. Satisfaction, as for residential consumers, was much lower for certain aspects of the service, including off-net mobile to mobile call costs (57%) and international roaming (around 50%). A2.21 A further positive feature of the February 2001 survey of SMEs is that most SMEs do not see price as deterring ownership or usage; most SMEs not using mobiles said that they do not need them, and only half of those with mobiles said that cheaper call costs would encourage higher usage. Switching levels remain comparable with those for residential users, and the third quarter survey of SMEs showed that half of SMEs ported at least some numbers when changing network or provider. A2.22 On the impact of greater volumes of off-net mobile to mobile calls, figures provided by one operator suggest that the proportion of calls made off-net to other mobiles by contract customers exceeds by only 4% the respective figure for pre-pay customers. It is difficult to assess the full implications of this figure, as business subscriptions still constitute a minority of all contract customers and on-net mobile to mobile calls among large corporates would probably constitute a large proportion of all businesses’ on-net calls. It is likely that SMEs would have a higher proportion of off-net mobile to mobile calls than other contract customers, but the size of the difference is difficult to predict. A2.23 Overall satisfaction and switching measures are comparable to those in the residential segment, suggesting that there is not a large disparity between the overall deal for most business and residential consumers. Issues such as off-net mobile to mobile tariffs and international roaming have more impact on SMEs than on residential consumers, but both these issues, as well as problems of consumer awareness, affect both segments. Looking forward, an apparent renewed focus on promoting use of contracts rather than pre-pay is likely to benefit business consumers. A2.24 Taking into account all the evidence, and the comments of respondents, Oftel does not consider that businesses have a worse deal than residential consumers in absolute terms. Generally, respondents make valid points about the extra potential benefits available to businesses, although the lack of awareness which has been identified suggests that many SMEs may not be getting all these benefits. Consumers able to access and use information to help make effective choices and take advantage of market opportunities A2.25 In response to the consultation, operators generally do not think that lack of information is a problem. One mobile operator emphasised that that consumers learn from each other and, over time, through their experience in purchasing phones and services. Since most purchases now are repeat purchases, consumers will be more confident and knowledgeable than more recent adopters. Another operators stated that many consumers are not bothered enough to spend much time comparing deals, partly as many do not choose on price alone. Operators maintain that confusion about optimal packages is due to ‘market dynamism’ and search costs, not competition problems. One operator suggests that consumer detriment in the mobile sector caused by poor choices may be low relative to other sectors, partly due to the use of tariff optimisation schemes. A2.26 Several operators referred to a (draft) DTI commissioned report on mobile phone tariff transparency, which expresses the view that formal regulation is not as good at informing customers as word of mouth and marketing. On transparency of roaming rates, operators point to new, flat-rate, tariff structures and the newly-established voluntary code among GSM operators to provide for clear information on international roaming prices. However, one operator considered that the competitive process could be partly judged (and may be accelerated) by how well it enabled consumers to make better decisions, and that co-regulation (but not continued formal regulation) might be useful. A2.27 Contrasting with the views of mobile operators is the view of consumer groups. These respondents are very concerned about consumer confusion, stating that even if much information is available it is very difficult for consumers to obtain comparable information on price, service quality and other details. A clear need for action by Oftel, providers and consumer groups is considered necessary. One respondent states that comparative websites would be insufficient. Some considered that "confusion marketing" and complex tariffs hamper competition, and that the absence of clear and comparable consumer information precluded a fully competitive market. A2.28 Since the consultation document, Oftel has further data to consider the issue of customer awareness. A2.29 In Oftel’s February 2001 survey of SMEs (SME Q4):
A2.30 An Oftel survey in November 2000 found only two-thirds of SMEs to be aware that they were charged for incoming calls when roaming abroad, with 23% positively believing that they were not charged for incoming calls. In Oftel’s May 2001 survey of SMEs, nearly a third did not know whether they were satisfied with the information available on roaming charges. However, most of those SMEs had never used their mobiles abroad, and excluding the ‘don’t knows’, 82% were satisfied with roaming charges information. There is an issue, of course, of the interpretation of satisfaction being dependent upon awareness, and figures for awareness of incoming call charging among SMEs does give cause to question customers’ own perceptions of the information they receive. A2.31 In Oftel’s February 2001 survey (Q4 residential) only 37% of all existing residential users identified off-net call charges as being "a lot more" than on-net charges, despite the fact that the gap for most tariffs is at least 100% and is often higher. In Oftel’s May 2001 survey, (Q5 residential), of those using international roaming services frequently, a third did not know that they paid for incoming calls. A2.32 Oftel also commissioned mystery shopping on mobile number portability and SIM locking, which found that advice is generally very poor; further details are given elsewhere in this statement. Oftel’s response A2.33 Oftel accepts that there is much information available to consumers, but that there are problems with locating, comprehending and comparing it. Insufficient consumer awareness is apparent for some basic aspects of mobile services. A2.34 Tariff optimisation schemes are useful, but only some of them work on the basis of comparing the products of different providers, and they apply to contract products rather than pre-pay (used by most current customers). These schemes therefore complement rather than substitute steps to improve awareness. A2.35 Data available since the consultation document and comments from respondents do not indicate substantially different conclusions from those reached in the consultation document. There is still considerable scope for improvement in consumers’ awareness and understanding of information and in the provision of advice. While a considerable amount of information is available to consumers, making comparisons is not easy. A2.36 Further evidence concerning consumer detriment could be obtained from a major analysis that Oftel expects to complete before the end of 2001. Ideally, this analysis should identify more clearly the distribution of detriment between different groups of consumers, and how far consumers are trading-off higher expenditure for other benefits of mobile ownership. However, Oftel has sufficient evidence of low consumer understanding, from a number of sources and across a broad range of issues, to conclude that many consumers may currently be disadvantaged. A2.37 In the consultation document Oftel suggested that consumers may become more aware over time, having owned a mobile phone for a while and thus become more aware of their usage pattern and tariff structures. Having reviewed further data and the comments of respondents, Oftel has modified its view. Whilst overall awareness probably does rise over time, the levels observed in Oftel’s consumer surveys are below what might be expected given current market penetration and levels of usage. For example, among residential users only about a third identify off-net call costs as being "a lot more" than on-net charges, and a third of frequent international roamers are not aware (despite the high cost) that they pay for incoming calls whilst roaming. A slow pace of improvements in awareness matters more when the range of tariffs and services changes regularly, impacting upon the choices facing the customer and their usage patterns. For example, a proportion of customers will adjust to new data services and new charging models using GPRS, and those retaining 2G technology will still be offered new services via SMS or WAP. One mobile operator did actually express the view that such changes in the market were the cause of customer confusion. This implies that confusion will persist, albeit that the issues and consumers affected may change. A2.38 Oftel’s conclusion is that consumer awareness seems to be increasing more slowly than expected. For consumers with very stable usage patterns this should be less of a problem. Also, early adopters of new services may be less affected, as they tend to search for more information before making their choices. The chief concern may be the bulk of consumers in the middle, whose improvements in awareness may lag behind changes in their usage patterns. A2.39 In terms of what to do about lack of consumer awareness, ideally the market would be providing sufficient information to meet consumers’ needs for information. Several operators quoted a draft DTI report which suggests that marketing and word of mouth are the best way to resolve problems. The same report also stated that in the short-term at least, consumers will struggle to assess networks’ competing claims. Oftel shares this view and given the further data available, questions just how short-term the problem is likely to be. A2.40 Oftel considers that the problems with consumer awareness necessitates some regulatory action. Oftel intends to adopt an approach of co-regulatory action now, with Oftel co-operating with providers, consumer groups, retailers and other groups (eg. ICSTIS, the premium rate services regulator) to improve consumer confidence and ability in decision-making. There seems to be a need to address awareness at point of sale, and one option for discussion is to provide a standard leaflet for consumers highlighting the relevant considerations and information sources that consumers should consider before making their purchase and should bear in mind when using their mobiles. A2.41 Oftel would welcome self-regulatory measures where appropriate, such as GSM Europe’s recent voluntary code of conduct on roaming. The code requires participants to provide comprehensive roaming information and be independently audited for compliance in order to appear on a published list of compliant providers. If successful, this code should complement the more flat-rate tariff structures in improving roaming tariff transparency. A2.42 Of course, incorrect choices by consumers are of less concern where they are realised, and easy and cheap to correct. Therefore, detriment will also be addressed by focussing on improving consumers’ ability to switch tariffs, packages and networks, in particular through improved awareness of, and conditions for, MNP and SIM locking. This is particularly important given the recent increase in pre-pay phones which will tend to increase the cost incurred by consumers in moving to a better deal. Number Portability A2.43 In response to consultation several operators referred to MNP as a significant contribution to consumer switching, and referred to industry work to improve processes. Orange, however, states that the technical solution to UK MNP requires improvement and that further industry work is required to implement a cost-effective direct routing solution for calls to ported numbers. Other respondents commented on the low proportion of customers that had ported and cited practical difficulties with the porting process as the cause. Hutchison3G said that, in the absence of process improvements, it doubted whether MNP would provide equal opportunities to compete in the short- to medium-term. MISP suggested that Oftel ensure a speedy implementation of a national MNP website but considered that most customers did not see MNP as valuable, that providing MNP was a significant cost for mobile providers, and that ISPs specifically tend to be net losers of customers because of MNP. MISP also commented that many customers wrongly assumed that once ported from, say, Vodafone to BT Cellnet, anyone calling them from a BT Cellnet handset will be charged a cheaper rate by their service provider. A2.44 The mystery shopping exercise mentioned in Chapter 2, and findings in a May 2001 Oftel survey indicating confusion about portability and mobile call charges, also suggest a need to improve the awareness of MNP among residential customers. Oftel’s response A2.45 Oftel believes that the development of MNP is essential to promote full competition and to ensure that consumers get a good deal in the mobile sector. Moreover, MNP may have increasing significance as mobile penetration peaks. The European Commission shares this view, which is reflected in the inclusion of mandatory MNP in the proposed Universal Service Directive under the new EU framework. Oftel also considers that whilst the benefits of MNP, in terms of lowering barriers to switching, outweigh the current disadvantages, the full benefits remain to be realised given the level of porting to date. A2.46 Oftel recognises that the current fax based porting process, which takes 25 days, is too slow and cumbersome. Oftel welcomes the fact that this system will be replaced in October 2001 by a new MNP system that will be faster – around 5 days - and more reliable. Oftel also supports all industry efforts to address any remaining process problems with MNP, and will continue to participate in co-regulatory work to address these issues and promote customer awareness of MNP. A2.47 On the issue of the applicable tariffs following porting, Oftel considers that these should be those of the network/service provider to which the customer ports. Although this is generally the case, Oftel has is aware of some discrepancies involving at least one operator, and will be discussing with that operator the timescale for resolving the technical issues involved. Switching behaviour A2.48 In consultation responses, mobile operators emphasised the opportunities for switching between tariffs and networks. For example, customers can switch operators if lower off-net rates are a concern, or they can buy dual SIM equipment to optimise prices for different times of day. Also, the extent of business customer switching (greater than residential switching) shows business customers exercising choice and operators competing vigorously for their custom. Three operators referred to DTI research published in November 2000, which found that switching mobile providers was relatively easy compared with other sectors. Orange said that it did not need to create or rely on barriers to switching as most customers are happy to stay with them. A2.49 One operator said that pre-pay has made network switching easier, although service providers said that subsidised handset upgrades may be a major part of consumers’ current motivation to switch. Another respondent suggested that current levels of switching, in the context of early handsets being replaced by more fashionable models with greater functionality, may reflect a very competitive handset market rather than competition between networks. A2.50 Since the consultation document, Oftel has collected more data on switching. This shows that comparing April 2000 and May 2001 figures the proportion of residential customers who have switched network was broadly equal (23%). The level of switching of mobile packages has, however, increased from 16% in August 2000 to 24% in May 2001. In Oftel’s February 2001 survey, the proportion of SMEs that have switched network or service provider was just over a third, unchanged from November 2000. The number of small businesses switching packages with the same provider has increased from 27% to 38% and from 45% to 62% for switching tariffs. Oftel’s response A2.51 Oftel surveys show that the majority of customers who have switched found it easy. This is unsurprising because for most residential customers switching involves buying a new, subsidised handset and a new subscription. As handset prices rise due to falling subsidies, and more consumers try to keep their handsets and numbers when switching, there may be a change to the perceived ease of switching. A2.52 Oftel has considered the potential impact on network switching of a reduction in handset subsidies. About four-fifths of consumers who switched network change their handset at the same time but less than 10% of switchers cite the need for a new handset as their reason to switch. About half give price-related reasons and a quarter cite quality of service. If half of network switchers are influenced primarily by price, then the rise in handset prices should be expected to deter a proportion from switching in the future. A quarter of consumers are put off switching network by having to buy a new phone at all. These statistics suggest that it is possible that the recent reductions in handset subsidies may reduce switching levels. A2.53 Whilst customers can change to operators with lower off-net rates, this assumes that customers appreciate the difference in charges. Oftel’s February 2001 survey of residential customers (Q4 residential) gives reason to doubt this is the case. Oftel also acknowledges that dual SIM equipment is available, but the benefits of this are limited given that most handsets are SIM locked. A2.54 Oftel surveys support the argument that most non-switchers are satisfied with their service. However, the explanation for not switching would be more meaningful if there were evidence that customers can easily compare suppliers. |
|||||||||||||||||||||
|
Lock-in period
|
Fee |
What’s locked ? |
|
|
Vodafone |
Unlock at any time |
£35 |
pre-pay only |
|
BT Cellnet |
12 months |
£15 |
pre-pay & some WAP contract phones |
|
One2One |
Pre-pay 3 months; contract 1 month (as long as contract obligations are met) |
£35.25 |
Pre-pay & contract |
|
Orange |
Unlock at any time* |
£35.25* |
Pre-pay & contract |
* Orange: contract customers in their first year must also pay any subscriptions remaining for the first 12 months before being unlocked
Compliance with guidelines
Guidance: fees should be related to the cost associated with the unlocking process
A3.9 Oftel did not receive sufficient detail from the mobile operators to be able to fully assess whether unlocking fees relate properly to the costs associated with unlocking but Oftel suspects that fees should be lower than they are. For example, one operator’s fee is unchanged from 1998, when an Oftel competition case showed that a significant proportion of the unlocking charge covered post and packing for sending phones from and to customers for unlocking – a process now very rarely used by any operator. Given greatly increased penetration, the volume-sensitive elements of unlocking costs also ought to have fallen. Another operator related its fee to a ‘broad interpretation’ of the costs of unlocking, meaning that the unlocking fee is being used partly to recover the handset subsidy. In Oftel’s opinion, this is an incorrect way to interpret the guidance.
A3.10 It is arguable that fees are not objectively justified if they are based on inefficient processes. It may be that unlocking processes are not as efficient as they might be, and that there is a case for developing more efficient unlocking processes. This is an argument for reviewing processes as has happened with mobile number portability.
Guidance: handsets should not be locked after the handset subsidy has been recovered.
A3.11 During the consultation period, Oftel collected information about typical subsidies and time needed to recoup. Having done some basic analysis, Oftel’s view is that lock-in periods are generally not clearly excessive in relation to the rate of subsidy recovery. Vodafone and Orange indeed have no lock-in period.
Guidance: end-users should be told at the time of purchase the existence and level of subsidy; and that network operators/service providers should tell end-users that unlocking is possible, or provide upon request the information necessary to unlock.
A3.12 Oftel has gathered a lot of data on customer awareness and understanding of SIM-locking and advice provided by mobile providers and retailers. All the evidence points to a very poor overall picture of awareness and deficient point of sale advice. Whilst those consumers who know about SIM locking and request that their phones be unlocked may ultimately be successful, it seems that most consumers have little chance of getting to this position. The poor quality of advice and the lack of understanding of SIM locking means that the low level of unlocking does not represent good evidence of a lack of consumer demand for it.
A3.13 Processes to inform customers about SIM locking seem inadequate. Only some providers attempt to make customers aware of the existence of locking through literature. However, some providers do not specify the unlocking charge, instead stating that customers will be able to unlock subject to the policy and/or fee applicable at the time that they unlock. Customers would therefore have no idea that a fee, currently as high as £35.25 will apply. Customers are not made aware of the level of subsidy. It seems appropriate to Oftel that customers have some information on subsidies so that they can form a view on the reasonableness of different operators’ unlocking fees. Customers should, for example, know that they might pay £35 to unlock a phone that is barely subsidised.
A3.14 Oftel commissioned mystery shopping on SIM locking in March 2001. The report (published on Oftel’s website) shows that under half of all mystery shoppers were given the correct advice about whether SIM unlocking was possible, and only eight percent were given the correct advice about all aspects of unlocking (including charges, time taken to unlock and ability to use during the unlocking process). Such demonstrably poor advice does not meet the published guidelines.
A3.15 Oftel’s February 2001 residential consumer survey found that just over a third were aware that their handsets could be locked to their current supplier, and only a quarter were aware that they might be charged for unlocking. Only 17% of residential subscribers were aware before they bought their phone of the procedures and potential costs involved in switching supplier later (which include SIM locking).
A3.16 As for business customers, Oftel’s May 2001 (Q5 SME) survey found that 42% of SMEs were aware that their phones might be SIM locked, and 36% that they might be charged a fee for unlocking. About a tenth of SMEs aware of SIM locking have actually tried to unlock but a third fail to do, mainly due to the costs involved.
Conclusion
A3.17 There are problems in terms of compliance with SIM locking guidelines. The fees charged warrant further investigation, and the level of advice and awareness is poor.
Consumer research
A3.18 Oftel commissioned research on consumer behaviour and prices in three countries where handsets are not SIM locked. In July 2001, Oftel published the results of this consumer research (Use of multiple SIM cards in mobile phones, by consumers in Italy, Finland & Portugal - Summary of Oftel Research, April-May 2001, published July 2001) which was conducted in April 2001.
A3.19 The research showed that in Portugal, Italy and Finland, whilst most consumers did not use more than one SIM card, those that did were much more active in switching their providers, package, tariff and handset. The number using more than one SIM card ranges from 4% in Portugal, to 8% in Finland, to 13% in Italy. The figure for Italy (only a slightly higher number of subscriptions than in the UK) represents 5.8 million customers.
A3.20 Most multiple SIM card users have two SIM cards, although in Italy about a quarter of customers have three or four. Most of those using only one SIM card cited the reason as satisfaction with current costs, or insufficient usage to justify having multiple SIM cards. Certainly there is no problem with awareness in other countries – the lowest figure for awareness being 70%, in Portugal.
A3.21 About two-thirds of multiple SIM card customers said they used one card mostly and others only occasionally. This may be partly because most changed their SIM cards manually; Italy’s 27% was the highest proportion using phones holding more than one SIM card at a time. The most popular circumstances influencing choice of SIM card were whether customers were calling fixed or mobile phones, which mobile network they were calling, and whether they had inclusive minutes or credit available. For each of these call types, consumers said they actively considered which SIM card to use for about half to three-quarters of calls.
A3.22 Of course it is not possible to know how many consumers in the UK would use multiple SIM cards if there were no SIM locking. However, if the use of multiple SIM cards is within the range of the three countries studied, then about two to six million UK customers would use more than one SIM card in the absence of SIM locked phones. There is little basis to speculate about where the UK would lie in this range, but given the lower UK sector concentration, there may be more incentive for customers to acquire second SIM cards, given that a higher proportion of other mobile consumers would be on different networks (calling off-net mobiles is a factor which influences the use of multiple SIMs).
Benefits of reducing SIM locking
A3.23 Unlocked handsets would allow consumers to switch suppliers, completely and/or for particular calls and services. Easier switching should increase competitive pressure on prices. A reduction in SIM locking would lower entry barriers for new suppliers offering SIM only products (where consumers purchase only a SIM card to use in their existing handset) such as MINT and Virgin and also, in the future, Hutchison 3G. The ability of consumers to change between operators on a call-by-call basis should also put pressure on the margins for individual call types, for example the cost of calling between different mobile networks and/or international roaming.
A3.24 About four-fifths of sales are now to existing users. Given the improved quality of phones and the increasing cost of pre-pay handsets, there is likely to be an increased benefit from and increased demand to keep existing phones when switching provider.
A3.25 As well as creating more competition, Oftel considers that developments in the sector support an end to SIM locking. Firstly, given that handset subsidies have now fallen, the length of time taken to recoup handset subsidies has also fallen. For pre-pay, Oftel’s May 2001 survey indicates that the average monthly consumer spending for pre-pay residential customers is £14. The corresponding figure for business pre-pay spending is £38. Given that handset subsidies are now low – for pre-pay they are typically £20-£30, but can be as low as £5 – the amount of time taken to recoup the handset subsidy seems to be within two to three months and for some customers much less. Indeed it is likely that many subsidies are recouped at point of sale by the purchase of a medium to high value pre-pay voucher (voucher values range from £5 to £75).
A3.26 Oftel has estimated the proportion of the whole customer base whose handset subsidies had been recovered by 1 June 2001, based on different assumptions about the subsidy recovery period. These calculations indicate that most consumers with SIM locked handsets have already repaid their subsidy.
SIM locking and mobile phone security
A3.27 In response to the consultation, MNOs mention that SIM-locking reduces the number of stolen mobile phones. This is clearly a serious issue, SIM locking is one of a range of measures considered by the Home Office to reduce the level of mobile phone theft but its effectiveness as a deterrent has not been fully assessed. Oftel will, of course, liase with the Home Office during any follow up action on SIM locking.
Next Steps
A3.28 Oftel is convinced that changes in the sector have moved the balance of argument in favour of reducing SIM locking in the UK. SIM locked handsets are a barrier to switching. Operators have already started down a path that may end SIM locking, with their reductions by May 2001 in handset subsidies; one operator at least has explicitly acknowledged the link.
A3.29 At this stage Oftel will encourage the removal of SIM-locking by a co-regulatory approach. Oftel will therefore be asking the operators to respond to its analysis and state their future intentions on SIM locking policy. Oftel also appreciates that individual operators may not wish to be disadvantaged by acting alone, and so is willing to assist to secure a common approach.
A3.30 Even if operators are able to make a case to justify the continuation of SIM-locking, there are clear weaknesses in current practices, concerning fees, unlocking duration, customer awareness and retail advice. Some of these issues might be solvable by a co-regulatory approach. However, Oftel is sufficiently concerned about such issues that, if they persist, it will investigate with a view to taking appropriate legal action.
Concentration
A4.1 In their responses, most mobile operators present comparisons to suggest that the UK mobile sector is less concentrated than other European mobile sectors and/or less concentrated than other markets in general. One mobile operator argued that the German regulator has not designated any operator in Germany with SMP despite the fact that two operators in Germany have market shares of around 40% each.
A4.2 One mobile operator commissioned a study which compared the mobile sector with a small number of other markets to support the contention that other, more concentrated markets, are unregulated and therefore the mobile sector should be free from regulation. This study quoted three markets, which are more concentrated than the mobile sector: large passenger aircraft manufacture, fixed line communications, and popular newspapers.
Oftel’s response
A4.3 The UK mobile sector is less concentrated than other mobile sectors in Europe but does not accept that this means the UK mobile sector is effectively competitive. As explained in Chapter 2, Oftel continues to believe that the structure of the mobile sector is not deterministic of the state of competition, but Oftel recognises that the oligopolistic structure of the mobile sector and the high level of interdependence between network operators, combined with high entry barriers, may result in prices that are above the competitive level. This will not necessarily be the case as the state of competition in an oligopolistic market can be the result of many factors influencing the behaviour of the players in that market.
A4.4 In a study commissioned by one of the mobile network operators, concentration in a range of industries was considered. Three were cited as being more concentrated as than mobiles. However, there appear to be a number of problems with drawing any firm conclusions from this study. The market for large passenger aircraft has many unique characteristics and the degree of countervailing buyer power and the extent of state involvement on both the supply and demand side suggest that this is hardly a paradigm ‘unregulated’ market. Fixed line communications are of course regulated. In the case of popular newspapers, it is not clear that these represent a distinct economic market. In 1998, the OFT defined a single national daily newspaper market in an investigation of an allegation of predatory pricing by The Times newspaper. Using this wider market definition, the concentration decreases quite dramatically, and is ranked second from last in the sample presented by the study – significantly less concentrated than the mobile sector. In addition, it is not clear that these markets possess the same type of characteristics that have been addressed by regulation in the mobile sector (vertical integration and the potential for leverage of market power from the wholesale to retail markets).
A4.5 Oftel considers that it is not appropriate to compare concentration between different industry sectors, due to the inherent differences in the nature of products and market structures. Concentration is just one indicator of competitiveness; considered in isolation, it is not necessarily a good measure of market power. Firms in highly concentrated markets could quite plausibly be facing strong competition depending on the behaviour of incumbents, and whether the market is contestable or not. It is also necessary to consider entry conditions (barriers may well be lower in other markets than in mobile telecoms) and the constraints imposed by the threat of new entry.
25% indicator for a finding of market power
A4.6 BT Cellnet point to market share information to argue that the sector is effectively competitive and to show that Orange and One2One can no longer be described as new entrants to the mobile sector. In particular, BT Cellnet cites evidence that its share of the market is likely to fall below the 25% MI threshold and market share trends suggest that One2One and Orange’s shares are likely to equal/exceed BT Cellnet’s market shares in the near future.
Oftel’s response
A4.7 Oftel states in the MI guidelines that Oftel considers that a market share of 25% can be used as a rule of thumb approximation below which operators are unlikely to possess MI. The market shares of some of the operators in the mobile sector are very close. It would be inappropriate to draw a distinction between operators only on the basis of very small differences in market shares. Oftel considers the full range of indicators when deciding which operators possess market power.
A4.8 In the ICD there is a presumption that an operator with more than 25% market share has SMP. Nevertheless, operators with less than 25% market share may still be designated as having SMP. Given the complexity of the mobile sector and the fact that the market shares of all operators are similar, Oftel considers that market shares should not be considered in isolation and it is necessary to consider market shares in conjunction with the other indicators. Of particular importance are the indicators pointing to the possession of market power.
A4.9 As set out in Article 4(3) of the current ICD, the test for SMP is:
An organisation shall be presumed to have significant market power when it has a share of more than 25% of a particular telecommunications market in the geographical area in a Member State which it is authorised to operate.
National regulatory authorities may nevertheless determine that an organisation with a market share of less than 25% in the relevant market has significant market power. They may also determine that an organisation with a market share of more than 25% in the relevant market does not have significant market power. In either case, the determination shall take into account the organisation’s ability to influence market conditions, its turnover relative to the size of the market, its control of the means of access to end-users, its access to financial resources and its experience in providing products and services in the market.
Market for net new connections
A4.10 BT Cellnet suggests that the consideration of the market shares of new net connections is relevant in determining market power, since it reflects the current market place for new connections. It emphasises the fact that Oftel has failed to consider that BT Cellnet’s share of net connections has been below 25% since Q3 1999/00.
Oftel’s response
A4.11 Oftel takes
the view that it is inappropriate to concentrate on shares of ‘a market
for net new customers’, for a number of reasons. First, it is not clear
that net new connections can be defined as an economic market. Although
there will be some switching costs, it seems likely that new and existing
subscribers are in the same market as each other. In principle, it seems
likely that the same factors which encourage retention of existing subscribers
also attract new ones, possibly aided by switching costs which tend
to favour operators with large existing subscriber bases. Second, it
is worth noting that an analysis based on shares of net new subscribers
appears to lead to illogical outcomes. For example, a company starting
with a complete monopoly in a slow-growing market would very likely
suffer a net loss of subscribers, ie a negative share of net new subscriptions
if an element of competition (however limited) were introduced. This
would not, however, mean that the incumbent firm had no market power.
More generally, the ‘market’ for new net connections gives no real indication
of the competitive conditions faced by players in the market.
Introduction
A5.1 Oftel’s goal is to achieve the best deal for consumers in terms of quality, choice and value for money. The key principles which Oftel applies in pursuing this goal are that it should regulate only where this is likely to bring benefits to consumers and that it should keep regulation to the minimum necessary to obtain appropriate outcomes.
A5.2 The consultation document explained that the purpose of Oftel’s market reviews is to assess the state of competition in a particular sector and that, in the light of each assessment, Oftel will determine the level of regulation appropriate to the level of competition. The consultation document also explained more specifically that if as a result of the consultation exercise Oftel concluded that effective competition exists, Oftel would consider whether the requirement to supply IA operators should be lifted and remove any triggered mobile specific regulation designed to promote competition, including the obligation to supply service providers and not to unduly discriminate. The consultation document also explained that if, on the other hand, Oftel concluded that effective competition does not exist, and the present Market Influence framework is appropriate, Oftel would decide which operators should be designated as having market power and thus be subject to regulation designed to promote competition and prevent the abuse of market power.
A5.3 It was argued in the consultation document that, whilst Oftel makes no presumption that the existence of market power will lead to an abuse of that power, the prohibition of undue discrimination is an appropriate regulatory tool to guard against any future anti-competitive behaviour by operators with market power and high incentives to foreclose new retail markets such as those developing for mobile Internet services. The consultation document also presented the view that the MI triggered obligation to supply would ensure that service providers continue to be supplied until the mobile sector becomes effectively competitive. While these principles remain valid, and these triggered conditions remain capable of guarding against anti-competitive behaviour and ensuring that service providers continue to be supplied, it is essential to ensure that these conditions do not also have unintended adverse affects on the markets in which they are designed to promote competition.
A5.4 Stakeholders were asked, therefore, during the consultation exerciseQuestion 14 in the consultation document{Question 14 in the consultation document} to comment on whether they agreed with Oftel’s assessment and proposal that the MI designations are necessary and that existing triggered obligations are appropriate. Oftel has assessed the responses to the consultation exercise and has concluded that although the sector is not effectively competitive, the present Market Influence framework is not appropriate. This Annex sets out Oftel’s reasoning for this conclusion.
Is the MI framework an appropriate response to the finding of market power?
A5.5 The MI-triggered obligations to supply service providers and the associated prohibition of undue discrimination has the potential to increase consumer choice of supplier and retail products. The MI framework can have little influence, however, on prevailing retail prices as the current regulatory control of wholesale charges merely prohibits undue discrimination between products or purchasers. As Energis observed in its response to the consultation document, regulatory action to apply downward pressure on retail prices would need to take a cost-based form such as cost-based MVNO access or Indirect Access. The consultation document explained, however, that Oftel does not believe the imposition of cost based access or retail price caps is warranted, given the potential for competition to reduce prices, and the risk that the imposition of price controls would seriously undermine the incentives to invest.
A5.6 The Association of Communication Services Providers observed in its response to the consultation exercise, that the ability of independent service providers to set their own retail prices has the potential to create a degree of turbulence in retail pricing which, in turn may have the effect of disrupting "non collusive oligopolistic co-ordination of prices". Oftel recognises that this is a possibility, particularly if ISPs had access to wholesale products at cost oriented prices. However, as explained above, Oftel considers that highly interventionist action to control wholesale prices for outgoing services is not justified when competition between the network operators is developing. The regulatory obligation to supply wholesale services to service providers on non-discriminatory terms (but without price controls) has had little impact on the overall level of prices paid by consumers.
A5.7 As was indicated by the data published in the consultation document, customer satisfaction with mobile services is generally high, with about 90-95% of residential and business customers generally satisfied with all aspects of the mobile service. This data does not suggest that regulatory intervention to facilitate the supply of alternative services by independent service providers is warranted. The rapid growth of Virgin Mobile, and the more gradual accumulation of very large customers bases by companies such as Singlepoint, Project Telecom, RSL COM, and Cellular Operations, does suggest, however, that there is demand from consumers for the variety of services and facilities offered by independent companies. One might, therefore, expect mobile networks to recognise, in the absence of anti-competitive intent, that efficient third parties can deliver a competitive edge in the delivery of the network’s services to end users.
A5.8 In the consultation document, Oftel expressed the view that if market power exists at the network level, the potential and incentives to leverage that market power into new emerging retail services (such as the mobile Internet) may be greater than they are today. Those concerns about the potential for anti competitive abuse remain. However, Oftel continues to hold the view, expressed in the consultation document, 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 it is important that early regulatory action, or the issuing of regulatory guidance in this area, should not distort the development of the mobile Internet market. Whilst the MI framework, in particular the prohibition of undue discrimination, could be used to take action in the event of anti-competitive leverage of market power at the network level, mobile Internet services are still at a very early stage of development. Further, there is no evidence to disprove the assertions of mobile operators that consumers and third party providers of services will enjoy a high degree of countervailing power. It is notable that the strategy for developing mobile Internet services which has been adopted by BT Cellnet and Vodafone (which are both subject to regulatory controls) is not discernibly different to the strategy adopted by Orange and One2One (which are not subject to regulation). In the event that consumers are denied access to Internet services of their choice, Oftel may apply the principles contained in its Statement Open access: Delivering effective competition in communications markets, April 2001. Clearly, the options for renewing or extending existing open access regulation would include a triggering of the prohibition of non-discrimination, but other, less formal approaches, may be possible.
Is a regulatory obligation to supply service providers still required?
A5.9 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 One2One 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 One2One in the absence of any regulatory obligation to supply. Orange too has reported that it has in place service provision relationships with third parties such as Energis.
A5.10. Conventional service provision, where the third party service provider has a direct contractual relationship with the end user, is not, however, 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 customers {In reply to questions at the 2001 FT Telecoms conference, Charles Dunstone reported that his company was now managing 250k UK customers in this way, and a further 650k in France} 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.
A5.11 The segment of the supply chain below the service provider tier has never been subject to regulation; Oftel has generally taken the view that regulation, or the operation of effective competition, at the service provision tier is sufficient to guarantee competition downstream. 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.
A5.12 The independent service provision sector has been subjected to widespread restructuring and rationalisation over recent years, and this trend appears to be continuing. Whilst, in many instances, independent service providers have been acquired by network operators, some independent service providers too have been acquiring the customer bases of their competitors and, by doing so, have built a significant base of their own. The resulting pattern across the four mobile networks is, however, very variable, and the variations do not follow the pattern of regulation. As was reported in the consultation document, nearly 40% of contract customers connected to Vodafone’s network (14% if pre-paid customers are included in the assessment) are now connected through service providers not owned by Vodafone, while the proportion of contract customers connected through independent service providers to BT Cellnet’s network has fallen to less than 10% (less than 3% if pre-paid customers are included).
A5.13 As is well known, both Vodafone and BT Cellnet are subject to the same regulatory constraints and obligations, and the differences in the extent of involvement with third party service providers seems likely to reflect a different commercial approach rather than a different approach to compliance with regulatory obligations. Whilst it has not been possible to demonstrate a link between Vodafone’s high rates of return, relative to those of BT Cellnet, and Vodafone’s extensive network of alliances with independent service providers, it is clear that Vodafone has been able to sustain a very high level of profitability at a time when a very high proportion of its contract customers are acquired and managed by independent third parties. Whilst it is conceivable that Vodafone may believe that its returns could be further enhanced by a withdrawal from these alliances, Oftel has no evidence which points to the logic of such a strategy, particularly if the detail of those alliances was no longer subject to regulatory controls.
A5.14 A comparison of the position with One2One and Orange, neither of whom is obliged to supply independent service providers, also provides a striking contrast. One2One’s strategy of negotiating service provision arrangements with selected organisations has resulted in 11% of all customers (including pre-paid customers) using the One2One network being customers of an independent service provider, whereas the proportion of customers using the Orange network which are connected by independent service providers is still less than 1%, despite the announced MVNO venture between Orange and Energis. In fact, compared with BT Cellnet, there are now three times as many customers connected by independent service providers to One2One’s network. Regulation appears to have had little impact on the extent to which each of the mobile networks uses independent service providers to deliver services to consumers.
A5.15 Concern was expressed in the consultation document that the Market Influence framework was causing some service providers, which resell airtime (MRTS) branded and tariffed by the network operator, to rely unnecessarily on regulation to secure the appropriate wholesale components. Annex 10 to the consultation document considered whether such service providers might benefit from purchasing these services outside the regulatory framework where sustainable long-term relationships can be negotiated without the artificial constraints of regulation. The Annex observed that the existence of the regulatory framework might be viewed by some as an obstacle to commercial negotiation, and it considered how negotiated arrangements might be achieved in parallel with the existing regulatory framework. Vodafone asserted in its response to the consultation document that the MI framework constrains rather than facilitates innovation in the retail market. Whilst Vodafone provided no evidence to support this view, Telia too observed in its response that with one or two exceptions the mobile telephony supply chain has remained basically unchanged in the seventeen years that business has existed. It is Oftel’s view, supported by the evidence presented in this Chapter, that some parts of the distribution chain have evolved significantly in recent years; it may, nevertheless, be true that the service provision element of the chain has been unduly focused on the single business model which has grown up around the obligation to supply, and that evolution of this business model has been deterred by the prohibition of undue discrimination (notwithstanding that, legally, the prohibition relates only to undue discrimination).
A5.16 The existence of a set of regulatory obligations which have been in place, substantially unchanged, for 16 years, is tending 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, while 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 commercial relationship is offered. These factors may have given a disproportionate weight to one business model at the expense of others.
Reasonable demand from service providers
A5.17 The Director General has a statutory duty to ensure that reasonable demand for telecommunications services is met. For the reasons given in this Annex, the Director General has taken the view that competition is sufficient to guarantee supply, even where the mobile sector is not effectively competitive. Oftel reiterated, in the consultation document, that its policy was to ensure that reasonable demand from service providers, as well as end users, is met. In referring to the judgement in Ex Parte Cellcom { R v. The Director General of Telecommunications, Ex Parte Cellcom Limited and others, Queens's Bench Division, The Independent 3 December 1998, The Times, 7 December 1998, CO/2088/98, judgement dated 26 November 1998}, the consultation document confirmed the view that reasonable demand from service providers could be met either through the operation of effective competition or through regulation. The consultation document explained that if the mobile sector was found to be effectively competitive then, by definition, reasonable demand would be met by the operation of effective competition, and regulatory obligations would be withdrawn. The consultation also stated that if the conclusion is that the sector is not effectively competitive and the present MI framework is appropriate, Oftel would then consider which operators should be designated as having MI.
A5.18 Although Oftel has concluded that the sector is not effectively competitive, Oftel has also concluded, after careful consideration of the responses made to the consultation document, that the present MI framework is not appropriate and that it may even be having a negative impact on the development of competition by distorting the development of new relationships between mobile operators and a wider range of downstream players. Oftel believes that reasonable demand from service providers, such as would be met in a competitive market, will now be met by the operation of competitive forces and, therefore, the Director General may rely on market forces to ensure that reasonable demand from service providers is met. This is also consistent with the Cellcom judgement.
A5.19 Oftel recognises that this represents a significant change in regulation of the mobile sector after 16 years of prescriptive regulation. It is conceivable, as some respondents to the consultation exercise observed, that the obligation to supply service providers on non-discriminatory terms is having a significant impact on the willingness of mobile operators to meet reasonable demand from independent service providers and, if the regulatory obligation was withdrawn, the willingness of mobile operators to supply service providers would decrease. If it becomes apparent that the Director General cannot rely on market forces to ensure that reasonable demand is met, then the Director General will take appropriate steps. While the Director General cannot fetter his discretion, he notes that the swiftest way to achieve this may be to re-activate the MI trigger. In view of the possibility that, notwithstanding the evidence currently available to the Director General, the MI framework may need to be triggered at some future date, the Director General does not intend to remove Conditions 56 – 58 from the licences of the mobile operators.
A5.20 The retention of these Conditions is justified. Vodafone and BT Cellnet were first granted licences to run mobile telecommunications systems some 16 years ago. It was recognised at the time that, given the shortage of available spectrum to run such systems, the number of companies able to compete to supply mobile telecommunications capacity would necessarily continue to be limited by law and a system of government spectrum licensing. The absolute barrier to entry created by that system of licensing had the potential to afford those with licences a uniquely powerful position. With a view to limiting anti competitive abuse of such market power, the first licences granted under the Telecommunications Act 1984 to BT Cellnet and Vodafone required those companies to supply wholesale mobile radio telecommunications services to service providers on a non-discriminatory basis, and required the licensees to account for their own provision of mobile radio telecommunications services to end users in legal entities distinct from the company which held the licence to run mobile radio telecommunications systems, and in direct competition with independent service providers. This was the basis on which the first mobile networks were built.
A5.21 When, subsequently, Orange and Mercury Personal Communications (now One2One) were granted licences, these too also reflected the regulatory strategy described above although, given the competitive head start enjoyed by BT Cellnet and Vodafone, Orange and Mercury Personal Communications were eventually exempted from these regulatory controls until they had become ‘well established’ (this measure was later replaced by the current MI framework).
A5.22 Continuing deregulation of the telecommunications industry has focused more attention on the possibility that competitive forces, rather than regulation, might be capable of being relied on to deliver the best deal to consumers, resulting in the principle that regulation should be kept to the minimum necessary to obtain appropriate outcomes. The original presumption remains, nevertheless, that the reasonable demands of service providers should be met and exclusive licences to run mobile telecommunications networks must not be exploited to anti competitive effect
