March 2000

Background

The Oftel strategy statement Achieving the best deal for telecoms consumers set out Oftel’s plans to review competition in the mobile market.

An essential part of this review is an analysis of price trends. Last year Oftel appointed National Economic Research Associates (NERA) to construct a suitable model to allow Oftel to track price changes over time and reflect the actual experience of different types of customer.

The model classifies mobile customers into particular categories or ‘profiles’ according to usage patterns and then applies operator tariffs to these profiles. User profiles of typical customers were identified from responses to a consumer survey carried out early in 1999.

For each user profile the model estimates the proportion of calls made at peak, off-peak and weekend rates. The model also estimates the proportion of different call types made by each profile. Estimates are made of the proportion of calls made to fixed networks – local, national or international; calls made to mobile networks – own or other; and other calls such as voicemail, fax or SMS.

While customer profiles may have changed during the course of the year the model provides an indicative guide to general price trends during 1999.

The model does not consider the actual cost of handsets but does take into account connection fees and handset subsidies as well as call charges.

Full details of the model were outlined in the NERA report A Price Index for Mobile Telephony. To reduce monthly fluctuations in the latest figures, however, NERA has used a one-year moving average to estimate subscriber growth and the rate of new connections. This change means that results presented in the original NERA report for January to June have been revised slightly.

Results

The model shows that, overall, prices of mobile telephony services fell by 17 per cent from January to December.

Figure 1: Prices of mobile telephony by payment type (January 1999=100)

Customers on pre-pay schemes have benefited most from price reductions. Overall, pre-pay prices fell by 23 per cent during the year. Prices fell by 15 and 14 per cent for monthly and advance contract customers respectively.

The NERA model also allows prices to be tracked for different levels of usage. To do this customers are split into one of 6 groups. The first group includes customers with a mobile for emergency use or to receive incoming calls only – so-called ‘zero-usage’ customers. The remaining customers are then split into five equal groups or ‘quintiles’ reflecting the total length of all calls made in a month.

Prices for customers in each of the five usage groups fell by around 15 per cent during the year. For customers with phones for emergency use or to receive incoming calls only, the drop in prices was 25 per cent.

Figure 2: Percentage price reductions for mobile telephony by usage pattern Jan-Dec 1999

For each usage pattern price reductions were greater for users on pre-pay packages. Low usage customers on pre-pay schemes saw the biggest price falls. For zero usage customers on pre-pay schemes prices at year-end were almost half January levels. For pre-pay customers in the bottom two fifths of the usage range prices fell by over a third.

For monthly contract customers prices falls were around 10-15 per cent for all usage patterns. Prices rose slightly for some customers on advance contract schemes although fell overall.

For high users, differences in price falls between all payment schemes were less noticeable.

Figure 3: Prices of mobile telephony by payment type and usage pattern January and December 1999 (January = 100)

A further 3 quarterly updates of the index are planned. Oftel will review the model methodology to ensure that the results remain relevant to the overall market review.

More detailed results are available on request. Data are presented in index form only and are not available for individual operators. Oftel will, however, be looking at relative price levels and operator specific trends in the context of the overall review.

For further information please contact:

Kenny Osborne
Statistician
Oftel
50 Ludgate Hill
London EC4M 7JJ
Tel: 020 7634 8973
or by e-mail