Mobile call termination: the relationship between mobile termination rates, market share and competition

This consultation supplements our consultation published on 1 April 2010 (the 'April 2010 consultation') as part of our review of the markets in which mobile call termination (MCT) on individual mobile networks is supplied in the UK.

In the April 2010 consultation, we defined markets for MCT on individual mobile networks and proposed rules addressing the significant market power of mobile communications providers (MCPs) supplying MCT. Those proposed rules included:

• On the four national MCPs, a charge control on MCT. We proposed that the charge control should require mobile termination rates (MTRs) to fall to the long-run incremental cost of providing MCT to third parties (i.e. pure LRIC); and
• On other MCPs, a requirement to provide MCT on fair and reasonable terms.

In proposing to adopt pure LRIC, we considered what outcomes were likely to be best overall for consumers. In making any final decision, we will also take utmost account of the European Commission Recommendation on the Regulatory Treatment of Fixed and Mobile Termination Rates in the EU (the EC Recommendation).

In assessing whether to adopt pure LRIC, we considered four factors:

• economic efficiency;
• effect on competition;
• distributional effects on consumers;
• and commercial and regulatory consequences.

We conducted a consultation on our proposals, and our assessment of these four factors. We also obtained relevant data from communications providers. This supplemental consultation asks an additional question to assist us in our consideration of the competitive impact of our proposals.

Within that context, we considered the effects of different approaches to setting MTRs on competition between fixed communications providers (FCPs) and MCPs, and competition among MCPs.

Within the analysis of competition effects among MCPs, the April 2010 consultation focussed primarily on the effects of differences in price between on-net and off-net calls. In light of responses to that consultation, we consider that there are other aspects of the interaction between the regulation of MTRs and competition between MCPs that merit further examination.

In particular, we are interested in understanding what weight, if any, we should place on the potential for MTRs to affect competition between MCPs with an asymmetric market share of subscribers (that is, between large and small MCPs).

The relationship between MTRs and asymmetric market shares was identified by the Commission, among other factors, in support of its recommendation for pure LRIC. In the recital to its Recommendation, it stated that "Termination markets represent a situation of two-way access where both interconnecting operators are presumed to benefit from the arrangement but, as these operators are also in competition with each other for subscribers, termination rates can have important strategic and competitive implications. [] In addition, in markets where operators have asymmetric market shares, this can result in significant payments from smaller to larger competitors." The Explanatory Note to the Recommendation, also explained that "[a]bove-cost termination rates can give rise to competitive distortions between operators with asymmetric market shares and traffic flows. Termination rates that are set above an efficient level of cost result in higher off-net wholesale and retail prices. As smaller networks typically have a large proportion of off-net calls, this leads to significant payments to their larger competitors and hampers their ability to compete with on-net/off-net retail offers of larger incumbents. This can reinforce the network effects of larger networks and increase barriers to smaller operators entering and expanding within markets."