Summary
The purpose of this review
1.1 In this document (the “Preliminary Consultation”), Ofcom is initiating its preliminary consideration of the issues which will need to be addressed when Ofcom next reviews the markets for wholesale mobile voice call termination. Ofcom concluded a review of these markets in June 2004 (see Statement Wholesale mobile voice call termination published by Ofcom on 1 June 2004; the “June 2004 statement”).
1.2 Ofcom is consulting separately on a proposal to extend the application of charge controls which apply to wholesale mobile voice call termination on the 2G networks of Vodafone, O2, Orange and T-Mobile (the “2G MNOs”) for an additional year. (See consultation document “Wholesale mobile voice call termination markets – a proposal to modify the charge control conditions” published by Ofcom on 7 June 2005; the “Charge Control Consultation”.)
1.3 The Charge Control consultation is proposing that new charge controls should apply during the period from 1 April 2006, when the present charge controls expire, until 31 March 2007. Ofcom is proposing to impose those new charge controls without conducting a further market review, relying instead on an assessment that there has been no material change in these markets since the June 2004 statement was published.
1.4. Ofcom intends to conclude a further review of the markets for wholesale mobile voice call termination before the new charge controls, which are being proposed in the Charge Control Consultation, expire in March 2007. This Preliminary Consultation is intended to initiate consideration of the issues which will need to be addressed during that further review. Some of the key concerns are summarised in the paragraphs which follow.
Scope for fundamental change removing the causes of SMP
1.5 Phase 2 of Ofcom’s Telecoms Strategic Review, published on 18 November 2004, (“TSR”) noted that policies designed to promote infrastructure competition had been much more successful in mobile than in fixed networks. The TSR also noted, however, that the main area where there remains a need for enduring economic regulation in mobile is in call termination. As the TSR explained (see section 8.83), because of the Calling Party Pays (“CPP”) arrangement which exists in the UK, terminating operators effectively have a monopoly over the provision of call termination to their subscribers. In the absence of price controls, terminating rates would be set inefficiently high.
1.6 The TSR argued that if these problems were to persist into next generation mobile networks, it would be appropriate to look for arrangements which could alleviate the market power which network operators have over call termination, and so limit the need for regulatory intervention. With this in mind, the TSR was keen to explore other structures for call termination such as Bill and Keep and Receiving Party Pays (“RPP”). The TSR also noted, however, that interconnection between IP based mobile networks could offer an opportunity for market based solutions to the call termination problem.
1.7 All of the responses to the TSR which commented on the possibility of a move to RPP considered that, on balance, the benefit, of greater competition, would be insufficient to justify contemplating the considerable disruption (both to the MNOs themselves and also in terms of consumer behaviour). Views on the prospects for IP based networks to alleviate the effects of SMP were more varied, with operators of fixed networks tending to express a degree of scepticism about the extent to which IP based solutions would have an impact on the market. However, most respondents welcomed Ofcom’s stated intention to work with the industry to find a long term solution.
1.8 Ofcom is keen to stimulate further serious consideration of changes which the industry might implement, or which future technological developments might enable, which would remove the underlying causes of Significant Market Power (“SMP”) in these markets. The prospect of SMP, and regulation, enduring into the indefinite future is not one which Ofcom finds attractive. Ofcom therefore encourages the mobile industry to renew its efforts to identify a change to market structures which would lead to a competitive market from which all regulation may be removed, and which would be beneficial to consumers.
Features of current regulation
1.9 To the extent that the market may not be capable of being changed fundamentally during the foreseeable future, Ofcom may need to consider appropriate remedies for SMP going forward. Several features of regulation currently in force may come under pressure over the next few years, and Ofcom wishes to address these before the charge controls being proposed in the Charge Control Consultation expire and before the limitations of present regulation start to have an impact on the market.
Distinctions between voice call termination on 2G and 3G networks
1.10 Regulation currently applies only to voice call termination on 2G networks. However, purchasers of wholesale services terminating voice calls on mobile networks are unable to choose whether a call will be terminated on a 2G or 3G network, as the choice is determined by technical features within the mobile network and the mobile phone which is being called. Furthermore, Ofcom understands that the wholesale billing systems of the MNOs are currently unable to distinguish between calls which are terminated on 2G or 3G networks and, for this reason, MNOs charge the same price irrespective of whether the call is terminated on a 2G or a 3G network.
1.11 However, this does not mean that the charge determined by Ofcom for 2G termination is the charge actually paid by networks for termination. The MNOs are not prevented from setting a 3G termination charge above the regulated 2G rate and charging a blended rate for termination. This blended rate would be calculated as a weighted average of 2G and 3G rates, the weights representing the relative volumes of traffic terminating on 2G and 3G networks. In the absence of any controls on 3G termination rates, there is a risk that the uniform blended rate would rise inexorably as more and more traffic fell outside the scope of the price control.
Regulatory distortion
1.12 Asymmetric regulation of mobile voice call termination charges which applies only to termination on 2G networks may also create artificial incentives for MNOs to terminate traffic on their unregulated 3G networks where, absent regulation, MNOs might consider such use of 3G networks to be inefficient. Thus, regulation of this kind may cause inefficient use of resources.
1.13 Separate charge controls applied to mobile voice call termination on 2G networks and on 3G networks, while avoiding the distinction between an unregulated form of termination and a regulated form of termination, also presents some risk that resources may be used inefficiently as MNOs may seek to use the network which they believe to be subject to lighter regulation; it is likely that MNOs will always enjoy some information advantages over third parties such as Ofcom, which may be exploited to commercial advantage.
1.14 Possible solutions to the risk of regulatory distortion range from abandonment of all charge controls to the imposition of a single control on the overall blended charge.
Costs of wholesale mobile voice call termination
1.15 Ofcom has conducted an analysis of the costs of terminating voice calls on 2G networks, to inform the proposals in its Charge Control Consultation. This analysis has included an updating of the LRIC model used to determine the level of the charge control imposed in June 2004. The model has been updated to reflect changes to a number of factors including demand, equipment costs and cost of capital. Ofcom has also modelled a range of different assumptions about the impact of traffic migrations from 2G to 3G voice call termination, as 3G phones start to become more widely used. Further analysis will be carried out before the further market review is concluded in 2007.
1.16 Ofcom is commissioning a detailed analysis of 3G costs with a view to informing the wider debate, and expects to receive output from that study during 2006.
1.17 Given the risks that separate price control formulae for 2G and 3G voice call termination may undermine regulation of 2G voice call termination and may also give rise to inefficient incentives to use one or other network, it may be desirable, if charge controls are considered necessary, to take a wider view of voice call termination encompassing both 2G and 3G costs, particularly in view of the absence of choice for originating operators and the application of blended charges by MNOs. This will not be possible until 3G costs, and migration patterns and other interactions between the 2G and 3G networks, are better understood. The decision on when to take a wider view of mobile voice call termination costs will be particularly important. It will be important to take a number of considerations into account, including the potential for significant increases in voice call termination charges and whether or not there might be an effect on the resources available to develop 3G services. Ofcom will welcome views on the question of timing.
Next steps
1.18 Comments on the issues addressed in this Preliminary Consultation should be delivered to Ofcom by 30 August 2005. After considering the views expressed, Ofcom will issue a further consultation which will include an initial view on Ofcom’s preferred approach to potential regulation of these markets after March 2007. Ofcom does not expect to make a formal proposal for consultation with a wide range of stakeholders including the European Commission and other NRAs before the summer of 2006. Ofcom expects to issue a final Statement at the end of 2006 or early in 2007.
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