1
The regulatory context for fixed mobile interconnection
A presentation to the ITU workshop
David RogersonPrincipal Consultant
20 - 22 September 2000
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Agenda
• The need to regulate mobile operators
• The specific problem of mobile termination
• The form of regulation
• The wider context of regulating mobile termination
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The two forms of regulation
• Competition Law
– for occasional use in normally competitive markets
– focuses on actual abuse of dominant market position
• Sector-specific regulation
– for markets which are not effectively competitive
– includes potential abuses of market power where such an outcome is considered likely and the time taken to achieve redress through Competition Law would unduly distort market development.
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Two temptations for mobile regulation
• Mirror fixed network regulation
– intensive sector-specific rules for operators with significant market power (e.g. cost based interconnection, carrier selection, number portability)
– premise: the mobile market operates as an oligopoly.
• Leave well alone
– let Competition Law be the only constraint on market development
– premise: the mobile market is (and always has been) competitive.
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The middle ground
• Mobile communications is not a single market
• At least four separate sub-markets exist:
– retail subscriptions; retail calls; wholesale origination and wholesale termination.
• The extent of competition in these sub-markets varies dramatically.
• Regulation should be restricted to those markets where competition is not yet effective, and should be the minimum required to achieve effective competition.
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Proposed regulatory process
Define distinct mobile markets
Test for market failure
Test if market failure results from dominance
Regulate all market players
Regulate dominant market players
Do not regulate the marketNo
Yes
No
Yes
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Agenda
• The need to regulate mobile operators
• The specific problem of mobile termination
• The form of regulation
• The wider context of regulating mobile termination
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Average termination rates in Europe
14
.55
14
.50
17
.00
27
.90 3
3.5
7
17
.12 20
.70 2
6.2
9
15
.32
29
.10
20
.47 2
4.8
4
20
.26
1.2
8
1.8
2
1.8
3
1.4
6
0.9
1
1.2
0
1.8
3
1.6
8
1.4
8
1.4
9
1.1
6
1.3
4
0.8
0
01
02
03
04
0
Au
stria
De
nm
ark
Fin
lan
d
Fra
nce
Ge
rma
ny
Ire
lan
d
Ita
ly
Th
e N
eth
erla
nd
s
No
rwa
y
Sp
ain
Sw
ed
en
Sw
itze
rlan
d
UK
Eu
ro c
en
ts p
er
min
ute
(a
s a
t 1
.1.2
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0)
MobileFixed
51
52
53
5
9
The ratio of mobile to fixed termination charges
Austria
Denmark
Finland
France
Germany
Ireland
Italy
The Netherlands
Norway
Spain
Sweden
Switzerland
Ratio (as at 1.1.2000)
UK
0 5 10 15 20 25 30 35 40
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Mobile termination is excessively priced
Higher cost technology
Less economy of scale
Higher costs of financing
6:1 - 9:1
Actual charges
16:1
Ratio of mobile to fixed costs
Ratio of mobile to fixed charges
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Mobile termination is a bottleneck service
• The caller (who pays for the call) has no control over the choice of terminating network
• The called party (which chooses the terminating network through its subscription service) does not normally account for the price of inbound calls.
• The terminating mobile operator is able (and may even have incentives) to charge excessive prices for call termination.
• This market failure is irrespective of market power.
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Agenda
• The need to regulate mobile operators
• The specific problem of mobile termination
• How to regulate mobile termination
• The wider context of regulating mobile termination
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The traditional approach: LRIC cost assessment
• Identify and cost all network elements involved in mobile call termination.
• Three possible approaches:
– top-down, using the operators accounts
– bottom-up, using generic network cost models
– benchmarking against other operators.
• Widely used in the fixed network, but faces several problems in the mobile market.
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Problems with mobile LRIC cost assessment -1
Top-down approach
• Suitable cost accounts are seldom available, and the expense of producing them may be out of proportion to the size of the market failure being addressed.
• Possible solution is to restrict top-down models (based on separated LRIC accounts) to operators with market power.
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Problems with mobile LRIC cost assessment -2
Bottom-up approach
• Danger of under-estimating real costs is substantial in an industry that needs high investment in 3G systems.
• How to handle economies of scale fairly when different operators have different market shares.
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An alternative approach: link with origination rates
• Competition is reducing prices for retail mobile call origination.
• Pegging termination rates to origination tariffs will harness these competitive pressures to address the termination bottleneck.
• Consistent with light-handed regulation.
• The success of this strategy depends on strong competition in the retail calls market.
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Cost comparison of termination and origination - 1
Retail mobile call service
Mobile networkservice
Retailserviceprovision
Interconnectservice
Elements in common with call termination
Elements not part of call termination
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Cost comparison of termination and origination - 2
Mobile network service
1. Call origination
BSC MSC
POI
2. Call termination
GMSC VMSC
POI
BSC
Locationdatabase
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Regulatory approach
• Establish a representative price for mobile-to-fixed calls (the lowest price in any retail tariff plan?)
• Deduct 15-20% for retail and marketing costs
• Deduct an average fixed network interconnect fee
• Add a margin of 10-15% to cover additional network costs of the termination service
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Market impact - 1
• Phase 1: before regulation
– origination rates fall faster than termination rates as retail competition takes effect
• Phase 2: the regulatory link between origination and termination rates is established
– rates become aligned
• Phase 3: after regulation
– origination and termination rates fall in parallel as retail competition gathers pace.
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Market impact - 2
Origination rates
Termination rates
Phase 1 Phase 3Phase 2
$Key
Cost-based level fortermination rates
Cost-based level fororigination rates
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Agenda
• The need to regulate mobile operators
• The specific problem of mobile termination
• How to regulate mobile termination
• The wider context of regulating mobile termination
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Approach to regulating mobile termination
• Direct cost assessment is cumbersome and may be challenged by mobile operators as being out of proportion to the extent of market failure
• Indirect regulation is more light-handed but relies on significant and growing competition in the market for mobile originated calls.
• Regulators must strengthen the market for retail mobile competition as well as regulating mobile termination.
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Components of the mobile market
Retail Wholesale
Subscriptions Call origination
Calls Call termination
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Competition in the mobile market
Mobile market
Subscriptions
Retail calls
Call origination
Call termination
Significant competition; increasing rapidly
Weak competition; increasing slowly
Market currently does not exist..
Virtually no competition; no immediate prospect of competition.
Competitive characteristics
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The competitive cascade
Subscriptions
Retail calls
Origination
Termination
National roaming;Mobile number portability
Indirect access
Wholesale prices linked to retailtariffs for mobile-originated calls
The flow of competition
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Conclusions
• Direct regulatory intervention on mobile termination rates is justified, but difficult in practice and open to legal challenge.
• Indirect regulation, linking termination and origination prices whilst promoting competition in retail markets, is proportionate and will create the right incentives for market development.
• Indirect regulation will maximise economic benefit with the minimum of regulatory effort.
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E-mail – [email protected]
Web – http://www.ovum.com
Tel: +44 (0) 20 7551 9000
Fax: +44 (0) 20 7551 9090
David RogersonPrincipal Consultant