MOBILE PHONES INQUIRY

Statement of Issues

The Competition Commission (the Commission) has sent an issues letter to the four mobile network operators, Vodafone, BT Cellnet, Orange and One2One, and to Oftel (the main parties), as part of its inquiry into the cost of calls to mobile phones.

The Commission has identified a number of issues that it wishes to consider, arising from the evidence received to date from the main parties, and other interested parties. These issues will form the basis for the Commission’s findings on the question whether the mobile network operators’ termination charges are too high and, if so, whether it is in the public interest for such charges to be regulated.

An issues letter is always sent to the main parties in an inquiry and is designed to highlight those matters which have been identified by the investigating Group for further consideration, and to ensure that no relevant matter has been missed. The Commission will shortly hold a number of hearings with the main parties to discuss these issues. The purpose of making the statement of issues public is to give all interested parties an opportunity to put any further points to the Commission that they may wish to raise within the next ten days. No findings on any of these issues, nor any conclusions as to whether any matter operates or might be expected to operate against the public interest have yet been reached by the Commission.

The issues that the Commission intends to consider are as follows:

The market
Competition
Pricing and cost issues
The public interest

A. THE MARKET

Whether there is a separate market for the termination of voice calls on the network of each of the four mobile network operators (MNOs). In this connection, whether a call to a mobile network, originated either on a fixed or mobile network, may be terminated other than on the network of the MNO to which the called party subscribes.
Whether, alternatively, voice call termination on mobile networks is part of a wider market for telecommunication services and if so, what services this wider market encompasses.
Whether the relevant market for the termination of calls to mobiles includes not only voice calls using current (2G and 2.5G technology) but also calls using 3G technology and, if the latter is included, whether the relevant market includes only voice and not other messages sent using 3G.
Whether the definition of the market in which termination of calls on mobile networks belongs is likely to change in the foreseeable future as the result of technological developments (so that, for example, a call to a mobile network could be terminated other than on the network of the mobile operator to which the called party subscribes) and if so, which party or parties would have the incentive to promote or make commercial use of such technological developments.

B. COMPETITION

5. Whether the charges for call termination on the networks of the four MNOs are, or are likely within the foreseeable future to become, subject to any competitive constraint. In this connection, we shall want to pursue the following matters in particular:

whether, in the context of what Oftel terms the "calling party pays principle", there are any, or any sufficient, incentives for MNOs to reduce termination charges, or (in the absence of regulation) whether there would be any disincentives to increase them and if so, what these might be in each case;
whether the market or markets for services provided by the MNOs to retail customers (for example, call origination, text messaging, access to the network) is or are competitive and might be expected to be so in the future, having regard to any limit to the number of networks that can operate;
whether the retail market is segmented (for example, by type of customer or usage patterns) and if so, whether that segmentation limits the degree to which price-conscious consumers can drive prices down towards the level of costs for the retail market as a whole;
whether the number, variety and complexity of pricing packages available to consumers of mobile services make comparisons between the prices of one MNO and another more difficult for such consumers than they need to be;
whether, if insufficient competitive constraints are currently exerted on the MNOs’ call termination charges, the revenue from those charges is being used by the MNOs to reduce the level of prices charged by the MNOs to their customers for calls, or to subsidise handset prices or monthly subscriptions. Whether, as a result, the structure of prices offered by the MNOs to their customers has become distorted;
whether the current level of the call termination charges of the MNOs results in customers of the fixed network operators (FNOs) effectively subsidising customers of the MNOs;
whether the current level of call termination charges of the MNOs allows them, through their on-net charges or otherwise, to compete unfairly against the FNOs;
whether excessive profits are being earned by any of the MNOs either overall or in respect of any part of their business and if so, whether this is indicative of insufficient competitive pressure being exerted on one or more of the services offered by the MNOs.

C. PRICING AND COST ISSUES

6. Whether or not the MNOs’ call termination charges are closely related to the true costs of call termination (including the cost of capital).

7. Whether competitive constraints would be sufficient to ensure that the MNOs’ call termination charges were set at or near the level of the true costs of call termination over the next four years or whether, alternatively, these charges would rise above cost in the absence of regulation.

8. Whether, in assessing the MNO’s respective termination costs, the basis of cost allocation should be some form of long-run incremental cost, fully allocated cost or some other method. Whether the costs of an efficient operator should be used as a benchmark.

9. Whether the call termination charges of the MNOs should be cost-reflective (with equal proportionate mark-up), should reflect the principles of Ramsey pricing or should be set in some other way.

10. Whether the fact that fixed line termination charges are regulated means that, in the interests of fairness and efficiency, the charges for call termination on mobile phones must also be regulated.

11. Whether the differences between on-net and off-net charges for call termination reflect the cost differences between them and, if not, whether they should do so.

D. THE PUBLIC INTEREST

12. Whether the absence of a control mechanism on call termination charges operates or might be expected to operate against the public interest. In this connection, we shall want to pursue the following matters in particular:

whether, in the absence of competition in call termination, the four MNOs are able to keep termination charges at higher levels than would otherwise be the case and whether this produces effects adverse to the public interest in the form of higher charges for consumers, an inappropriate price structure across mobile phone services offered by the MNOs, or in some other way;
whether, in assessing the public interest in relation to call termination services offered by the MNOs, we should take account of distributional considerations. For example, whether, and if so to what extent, the class of users receiving incoming calls to mobiles coincides with the class of callers to mobiles, so that those bearing the cost of any cross-subsidisation are the same as those benefiting from such subsidisation; or, again, whether and if so to what extent the users of fixed lines (including payphones) who do not own a mobile phone subsidise users of mobile phones;
whether, if termination charges were further reduced as a result of regulatory action, the MNOs would be likely to increase their prices for other services and whether this would operate against the public interest;
whether externalities should be taken into account in assessing the public interest and if so, in what way and with what effect;
whether there would be any justification for imposing different charge control mechanisms on different MNOs.

Notes to Editors

The reference was made by the Director General of Telecommunications under the Telecommunications Act 1984, on 7 January 2002 (see Oftel Press Release 01/02). The Commission has six months to complete the inquiry, although an extension of up to six months can be granted if necessary.
The inquiry is being carried out by a group of five Commission members led by Professor Paul Geroski, a Commission deputy chairman. The other four members are Nicholas Garthwaite, Diana Guy, Professor Jonathan Haskel and Roger Munson.
Further information can be found on the Commission website: www.competition-commission.org.uk/inquiries/mobile.htm
Enquiries should be directed to: Francis Royle, Press Officer, tel.: 020-7271 0242.