Suspected margin squeeze by Vodafone, 02, Orange & T-Mobile

25 February 2005

Complainant: Ofcom own-initiative investigation
Investigation against: Vodafone, 02, Orange & T-Mobile
Case opened: 16 May 2003
Case closed: 21 May 2004
Issue: Investigation into whether the prices charged by the mobile operators for the delivery of non-PSTN calls to mobiles for retail business customers are at a level which represents a margin squeeze vis-à-vis the wholesale rate for mobile call termination.
Relevant instrument: Chapter II of the Competition Act 1998 (abuse of a dominant position) and Article 82 of the EC Treaty.

Update Note - 27 May 2004

Ofcom closed this case on 21 May 2004 by issuing a 'no grounds for action' decision. A non-confidential version of the decision has been prepared and is available at the link below.

www.ofcom.org.uk/bulletins/comp_bull_index/
comp_bull_ccases/closed_all/cw_615/decision.pdf

End of Update Note

Ofcom has closed this case by issuing a 'no grounds for action' decision. A non-confidential version of the decision is currently being prepared and will be published shortly. A summary of the decision follows.

SUMMARY

Ofcom has concluded that Vodafone, O2, Orange and T-Mobile (the 'mobile operators') have not infringed Section 18 ('the Chapter II prohibition') of the Competition Act 1998 ('the Act') or Article 82 of the EC Treaty in relation to their pricing of certain fixed-to-mobile calls to business customers.

Ofcom's decision follows an own-initiative investigation, which was opened in response to representations made by three fixed operators that the mobile operators were pricing the delivery of certain fixed-to-mobile calls to business customers at levels that constituted a margin squeeze vis-à-vis the wholesale charges that fixed operators pay for mobile call termination.

Ofcom's investigation covered two types of fixed-to-mobile call: Closed User Group ('CUG') calls and Business On-Net calls.

In respect of CUG calls, Ofcom has concluded that the relevant upstream market is the market for the provision of call termination for CUG calls across all the mobile operators' networks covering the whole of the United Kingdom. Ofcom has concluded that none of the mobile operators is dominant in this market. Accordingly, Ofcom has concluded that none of the mobile operators has infringed the Chapter II prohibition or Article 82 of the EC Treaty in respect of CUG calls.

In respect of Business On-Net calls, Ofcom's view is that the relevant upstream market is the market for the provision of call termination for Business On-Net calls on each respective mobile operator's network covering the whole of the United Kingdom. Ofcom considers that each of the mobile operators is dominant in the relevant market(s). Ofcom recognises that there is a possible alternative upstream market for the provision of call termination for Business On-Net calls across all the mobile operators' networks covering the whole of the United Kingdom, in which none of the mobile operators would be dominant.

Ofcom does not need to reach a conclusion on which of the two market definitions for Business On-Net calls is appropriate. This is because Ofcom does not consider that the mobile operators' conduct amounts to an abuse, irrespective of the market definition that is adopted. Accordingly, Ofcom has concluded that the mobile operators have not infringed the Chapter II prohibition or Article 82 of the EC Treaty in respect of Business On-Net calls.

Case leader: Robert MacDougall (e-mail: Robert.Macdougall@ofcom.org.uk)
Case reference: CW/00615/05/03

Text published when the case was opened

Complainant: Oftel own initiative
Investigation against: Vodafone, 02, Orange & T-Mobile
Case opened: 16 May 2003
Issue: Investigation into whether the prices charged by mobile operators for the delivery of non-PSTN calls to mobiles for retail business customers are at a level which represents a margin squeeze vis-à-vis the wholesale rate for mobile call termination.
Relevant instrument: Chapter II of the Competition Act 1998 (abuse of a dominant position)

Update note - 4 May 2004

The Competition Act 1998 has been amended as of 1 May 2004 in order to implement EC Regulation 1/2003 (the "Modernisation Regulation") into UK law. Ofcom now has the power under the Act to apply Article 81 and Article 82 of the EC Treaty in full, in addition to the Chapter I and Chapter II prohibitions.

As of 1 May 2004, Ofcom is conducting this investigation under Article 82 of the EC Treaty, in addition to under the Chapter II prohibition.

End of update note

Update: Oftel clarified the scope of this own initiative investigation on 18 July
2003, as follows:

Oftel has received informal representations from various fixed operators about the potential for mobile operators to distort competition in the delivery of fixed to mobile calls for retail business customers by pricing the delivery of non-PSTN calls to mobile at a lower price than the wholesale price that fixed operators are charged for mobile call termination.

Non-PSTN calls refers to the delivery of calls via the integration of a company's fixed line and mobile infrastructures, by directly connecting the company's PBX to the mobile network (see footnote1).

Under section 25 of the Act, the Director General of Telecommunications (the Director) may conduct an investigation if there are reasonable grounds for suspecting that the Chapter II prohibition has been infringed.

In the light of the recent report from the Competition Commission (see footnote 2) and Oftel's market review consultation on calls to mobile (see footnote 3), the Director has reasonable grounds to believe that each of the mobile operators may be dominant in the supply of wholesale call termination on its own mobile network.

Fixed operators have claimed that they are unable to profitably compete with mobile operators in the provision of fixed-to-mobile calls to business customers, given the wholesale price that they must pay for mobile call termination. That is, the concern expressed is that the four MNOs may be using their dominance in the wholesale voice call termination markets to distort competition in the relevant downstream market (the retail market(s) for calls to mobiles made by retail business customers). The Director considers that the form of the alleged abuse is a margin squeeze ie there is an insufficient retail margin available to fixed operators seeking to provide retail fixed-to-mobile calls to business customers to allow them to compete.

Furthermore, and for the avoidance of doubt, Oftel is not investigating whether the prices that mobile operators charge for the provision of non-PSTN calls to retail business customers are set a level which might constitute predatory pricing sufficient to breach Chapter II of the Act.

  1. It should be noted that although an Integrated Extension Call (IEC) product may not technically fall within the description of a non-PSTN call as outlined above, the Director considers that it is appropriate for such a product to fall within the scope of the investigation.
  2. Vodafone, O2, Orange and T-Mobile: Reports on references under section 13 of the Telecommunications Act 1984 on the charges made by Vodafone, O2, Orange and T-Mobile for terminating calls from fixed and mobile networks, Competition Commission 2003.
  3. http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/ctm/ctm0503.pdf

Case leader: Robert MacDougall (e-mail: robert.macdougall@ofcom.org.uk)
Case reference: CW/00615/05/03

Text published when the case was opened

Complainant: Oftel own initiative investigation
Investigation against: Vodafone, 02, Orange & T-Mobile
Case opened: 16 May 2003
Issue: Investigation into whether the prices charged by mobile operators for the delivery of non-PSTN calls to mobiles for retail business customers are at a level which represents price discrimination between the termination rates charged to other operators and the implicit rates charged by mobile operators to their own downstream business and/or margin squeeze vis-à-vis the wholesale rate for mobile call termination
Relevant instrument: Chapter II of the Competition Act 1998 (abuse of a dominant position)

Oftel has received informal representations from various fixed operators about the potential for mobile operators to distort competition in the delivery of non-PSTN calls to mobile for retail business customers and/or fixed to mobile calls for retail business customers by pricing the delivery of such non-PSTN calls to mobile at a lower price than the wholesale price that fixed operators are charged for mobile call termination.

Non-PSTN calls refers to the delivery of calls via the integration of a company's fixed line and mobile infrastructures, by directly connecting the company's PBX to the mobile network.

Under section 25 of the Act, the Director General of Telecommunications (the Director) may conduct an investigation if there are reasonable grounds for suspecting that the Chapter II prohibition has been infringed. In the light of the recent report from the Competition Commission (see footnote 1) and Oftel's market review consultation on calls to mobile (see footnote 2) , the Director has reasonable grounds to believe that each of the mobile operators may be dominant in the supply of wholesale call termination on its own mobile network.

The Director has reasonable grounds to suspect that the Chapter II prohibition may be infringed. In particular, the prices charged by the mobile operators may represent price discrimination between the wholesale termination rate charged to other operators and the implicit termination rate charged to their own downstream operations and/or a margin squeeze with the effect of excluding competitors from the retail market(s) for calls to retail business customers.

Stakeholders with relevant information and evidence in respect of this investigation should submit this to Oftel by 6 June 2003.

Case leader: Robert MacDougall (e-mail: robert.macdougall@ofcom.org.uk)
Case reference: CW/00615/05/03

  1. Vodafone, O2, Orange and T-Mobile: Reports on references under section 13 of the Telecommunications Act 1984 on the charges made by Vodafone, O2, Orange and T-Mobile for terminating calls from fixed and mobile networks, Competition Commission 2003.
  2. http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/ctm/ctm0503.pdf