Statement issued by the Director General of Telecommunications

September 2000

Contents

Chapter 1        Introduction

Chapter 2        Oftel's mobile market review
                               Objectives
                               Scope
                               Timetable

Chapter 3        Measuring consumer benefits and effective competition
                               Consumer benefits
                               Market analysis
                               Indicators of effective competition
                               Conclusions of the mobile market review

Chapter 4        Regulation of the UK mobile market
                               Market Influence
                               Significant Market Power

Chapter 5        Stakeholder input
                               Data requirements
                               Project team and contacts
                               Comments on the mobile market review

Annex A          Indicators of effective competition

Chapter 1

Introduction

1.1 In January 2000 Oftel published a statement of its strategy – Achieving the best deal for consumers. Central to Oftel’s strategy is a move to lighter-touch regulation as competition develops, while continuing to protect and inform consumers where the market 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 segments including mobile. The market reviews are designed to assess the level of competition in these market segments. The results of the reviews will be used to decide what is the appropriate regulation for these areas. Oftel has recently published guidelines (Implementing Oftel’s strategy: Effective Competition Review Guidelines, August 2000) that set out how Oftel will conduct effective competition reviews.

1.2 In the 1998-99 review of the mobile market (Oftel’s review of the mobile market: Statement July 1999) Oftel concluded that the mobile market was not fully competitive but that competition was developing, and despite the entry barrier of obtaining spectrum the mobile market had the potential to become effectively competitive. The 2000-01 review will consider how competition has developed since the 98-99 review and take a two year forward look at the future prospect for effective competition in the mobile market. Depending on the result of this review, Oftel will set out its proposals for withdrawing, continuing with, amending or introducing new regulation for the UK mobile market.

1.3 This statement is the formal start of Oftel’s 2000-01 mobile market review. It sets out the objectives; timetable and scope of the review; outlines the way that Oftel will measure the extent of competition in the mobile market; and invites stakeholders to comment and input into the review.

Chapter 2

Oftel’s mobile market review project

Objectives

2.1 The objectives of the 2000/1 mobile market review are:

1. To review the state of competition in the mobile market and to assess if Oftel’s objective of "effective competition – benefiting consumers" is being met.
2. In the light of the results from the effective competition review determine if regulation of the mobile market continues to be necessary and, if so, what form this regulation should take.

Scope

2.2 The broad market segment under review consists of the wholesale and retail markets for mobile services covered by the mobile PTO licence (ie mobile services provided by Vodafone, Cellnet, One 2 One, Orange and Dolphin). However, the review will define relevant economic markets that may include services that are not covered by the mobile PTO licence.

2.3 The 2000-01 mobile market review will:

• measure consumer benefits of competition in the mobile market;
• carry out analysis of relevant economic markets;
• assess current regulation against the results of the competition review;
• consult on proposals for removing, continuing with, amending, or introducing new regulation; and
• support any proposals for regulation of the mobile market with a cost benefit analysis.

Timetable

2.4 Oftel’s 2000-01 review of the mobile market begins now and is due to finish in June 2001.

Table one: Mobile market review timetable

2.5 Oftel’s Calls to Mobile project is reviewing the controls on incoming calls to mobile networks. Following representations from industry, Oftel has decided to align the timetable of Calls to Mobile with the review of the mobile market in order to allow the findings of the mobile market review to be taken into account in the competition review of incoming calls to mobile networks. Therefore, Oftel aims to publish the consultation document and final statement of the competition review carried out by Calls to Mobile in December 2000 and June 2001 respectively.

Chapter 3

Measuring effective competition and consumer benefits

Consumer benefits

3.1 Oftel’s effective competition reviews are focused on consumer outcomes. A competitive market will deliver high quality of service, competitive prices, innovative services and choice. Therefore, measures of the benefit of competition to consumers are key factors in Oftel’s assessment of effective competition.

3.2 International benchmarking of prices and benchmarking of the availability of standard and innovative products will be key measures of consumer benefits. Oftel will also consider the results of benchmarking UK prices over time (the mobile price index work, A price index for mobile telephony, June 2000), an analysis of trends in subscriber spend on mobile services by level of spend, quality of service and service availability measures, and availability of information to consumers.

Market analysis

3.3 For the purpose of the market analysis, the review will define relevant economic markets. These market definitions will be explored as part of the December 2000 consultation document. Oftel's approach to market definitions follows that used by the UK competition authorities and focuses on the existence of constraints on firms' ability to set prices. These constraints may be provided by the possibility of demand-side substitution, that is the ability of customers to respond to a price increase by switching to products which are good alternatives from their point of view, or supply-side substitution which occurs when firms supplying other products switch resources into a product whose price has increased. Conclusions that might emerge from the application of this methodology are:

• there are distinct markets for fixed and mobile services;
• it is possible to define distinct retail and wholesale markets;
• incoming mobile calls are a separate market from outgoing mobile calls (incoming calls are being dealt with separately by Oftel’s incoming calls to mobiles project);
• pre and post pay mobile services are part of the same market; and
• it is possible to define different markets for different types of calls such as voice and data calls and conveyance to enhanced services such as mobile internet.

3.4 It is anticipated that the market analysis will be carried out on the wholesale and retail markets for mobile services and, if judged relevant to do so, basic voice telephony and enhanced services (such as data applications, messaging and access to mobile internet services).

Indicators of effective competition

3.5 Oftel’s effective competition review guidelines sets out four broad groups of the indicators of effective competition:

• market structure;
• supplier behaviour;
• consumer behaviour; and
• consumer outcomes.

3.6 The criteria in each group is set out annex A. However, since the mobile market is characterised by entry barriers that are not present in other markets and regulation of the wholesale mobile market exists, the review will give greater weight than might otherwise be the case to:

• active competition in price, quality and innovation in the retail market; and
• the impact of regulation that supports a wholesale market.

Conclusions of the review

3.7 As set out in Oftel’s strategy statement, the outcome of an effective competition review will be one of three possible conclusions:

• effective competition exists;
• effective competition is in prospect; or
• effective competition is not yet in prospect.

3.8 The implication of the presence of effective competition is the absence of operators with market power. Therefore, Oftel’s conclusions about the extent of competition in a market will refer to statements about the presence or absence of market power.

Chapter 4

Regulation of the UK mobile market

4.1 There are obligations in the UK mobile PTO licence and in the Interconnection Directive ("The ICD": The Interconnection Directive: European Parliament and Council Directive 97/33/EC, implemented in the UK by the Telecommunications (Interconnection) Regulations (SI 1997/2931) ("the Interconnection Regulations") that are triggered by a designation that a mobile operator has market power, described as Market Influence ("MI") and Significant Market Power ("SMP"). The factors that must be considered when making a determination that an operator has market power are described in Condition 56 of the mobile PTO licence for MI and in Condition 44 of the mobile PTO licence (which reflects Article 4(3) of the ICD) for SMP. The effective competition indicators listed in Annex A are similar to the factors that must be taken into account when making an SMP and/or MI determination.

4.2 The mobile market review will examine whether the mobile market is effectively competitive as a whole, taking into account consumer outcomes. It will also conclude which, if any, mobile operators have MI or SMP for the purpose of the UK mobile PTO licence and EC law.

Market Influence and the UK mobile PTO licence

4.3 Following the 1998/99 mobile market review, Oftel determined in March 2000 that Vodafone and BT Cellnet had MI in the mobile market. Currently, such a determination by Oftel triggers conditions in its licence that requires it, amongst other things:

• to provide mobile airtime to Service Providers on request;
• to provide separate accounts for various activities;
• not to show undue preference to or undue discrimination in the provision of various services; and
• to publish charges, terms and conditions for services.

Significant Market Power and the ICD

4.4 A determination that an operator has SMP for the purposes of the ICD is a statement about that operator’s position in the markets set out in that Directive. These markets are:

• fixed networks and services;
• mobile networks and services; and
• leased lines services.

4.5 In December 1997, the Director General determined that Vodafone and BT Cellnet had SMP in the mobile market for the purposes of the ICD. Operators that have SMP in mobile networks and services are subject to particular obligations as set out in Articles 4(2) and 6 of the ICD. These obligations are that:

• Article 4(2): all reasonable requests for access to the network including points other than the network termination points offered to the majority of end-users are met;

• Article 6: the principle of non-discrimination with regard to interconnection offered to others is adhered to.

4.6 Article 7 of the ICD (principles for interconnection charges and costs accounting systems) only applies to mobile operators when they have SMP on the national market for interconnection. At present, no UK mobile operator has been designated as having SMP in the national market for interconnection.

4.7 In December 1999, to resolve a dispute brought to the Director General under the ICD, the Director General determined that indirect access for subscribers to mobile networks is an interconnection service to which Article 4(1) of the ICD applies, and therefore, should be made available. Oftel considered it appropriate to apply this conclusion to the two mobile networks that were the subject of the disputes (Vodafone and BTCellnet) because they have market power in the mobile market.

Chapter 5

Stakeholder input

Data requirements

5.1 Reliable data is critical to Oftel’s market reviews. Oftel routinely collects and publishes data on the UK mobile market including:

5.2 During the market review Oftel will set out its information requirements in more detail and ask mobile operators, service providers and consumer groups to provide further information. If any of Oftel’s stakeholders have data (ie market research) relevant to the mobile market review, Oftel would be very pleased to receive such information.

5.3 If appropriate, Oftel will hold stakeholder meetings and issue papers on issues that arise throughout the mobile market review (for example on the definition of relevant economic markets needed for the market analysis). To register an interest in receiving such papers or invitations to stakeholder meetings on the mobile market review please contact Lisa Etwell at Oftel on 020 7634 8853.

Project team and contacts

5.4 Oftel is committed to transparent consultation processes. During July 2000, Oftel held meetings with the UK mobile operators and consumer groups to gather initial views on the scope of the mobile market review and presentations were made to Oftel’s service provider forum and operator policy forum. Any party interested in discussing the mobile market review in more detail is invited to contact Oftel’s team:

• Elaine Axby: Mobile policy project director
• Heather Clayton: Mobile market review manager
• Michael Richardson: Service providers and mobile enhanced services
• Siobhan Walsh: Economic adviser
• Russell Richardson / Vanessa Oakley: Legal advisers
• Chris Handley: International developments

Comments on the mobile market review

5.5 Oftel welcomes inputs from industry and consumer groups, in particular, comments on the planned scope of the review and the availability of data are sought. Any written comments on this document should be sent to:

Heather Clayton
Oftel
Policy Directorate
50 Ludgate Hill
London EC4M 7JJ

Tel: 020 76348979

e-mail: heather.clayton@oftel.gov.uk

Annex A

Indicators of effective competition