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Mobile Termination Review Statement

Statement published 15|03|11

Executive summary

1.1 Wholesale mobile voice call termination (MCT) is the service necessary for a network operator to connect a caller with the intended recipient of a call on a different mobile network.

1.2 When fixed and mobile operators offer their customers the ability to call UK mobile numbers, they pay mobile communications providers a wholesale charge to complete those calls. The rates that operators pay are called MCT charges or more commonly 'mobile termination rates' (MTRs).

1.3 On 31 March 2011, the rules which currently apply to MCT, and which limit MTRs, will expire. We have conducted a market review to consider what rules, if any, should apply after that time.

1.4 This statement sets out the conclusions of this review, including our conclusions on market definition, the existence of significant market power (SMP), the detriments likely to arise from the exercise of that SMP and the remedies which should be imposed. In particular we set new rules which limit the MTRs of the four national mobile communication providers (MCPs), and limit all other designated MCPs to "fair and reasonable" rates 1. In most cases, the outcome will be a single wholesale charge for MCPs on different networks, falling sharply each year 2. This simpler regime will benefit consumers by promoting competition, and make it easier for operators to comply. The new rules will apply from 1 April 2011 and end on 31 March 2015.

1.5 In our first consultation (published on 20 May 2009), we sought views on different approaches to regulating MTRs, including potentially radical reforms such as removing all rules on call termination or requiring that MCT be priced at zero (termed 'bill and keep'). We set out six options, and asked for comments on these options, or any other option that stakeholders thought we ought to consider.

1.6 At the same time the European Commission (EC) issued a Recommendation that fixed and mobile termination rates be limited to the incremental costs of providing call termination to other communications providers (the 2009 EC Recommendation).

1.7 We received 30 responses to our May 2009 consultation, from a range of organisations and individuals. Most industry stakeholders, including all of the national MCPs, major MVNOs, BT and other fixed operators, agreed that regulation of MCT was still required and that some form of charge control was likely to be the most appropriate way to regulate charges over the next four years.

1.8 Although we had canvassed six options, in fact, almost all respondents supported one of only two choices for the period covered in this market review (that is, to 2015). The first, "LRIC+", involves setting charges using a similar method to that used in 2007 and previous charge controls (which includes a mark-up for joint and common costs, such as the cost of the spectrum used by the network) 3. The second, "pure LRIC" involves setting charges using the method set out in the EC Recommendation 4. Some respondents, including Vodafone, O2, T-Mobile and Orange supported LRIC+, mostly on the grounds that (in their submission) it allocates costs efficiently, allows full cost recovery and is a well understood and proven approach. Others, including BT and H3G, supported pure LRIC citing its role in providing more incentives for innovation and efficiency, and an overall gain in welfare. 'Terminate the Rate' (a group of operators and representative bodies, including BT and H3G, campaigning for lower rates) also preferred this approach.

1.9 In our second consultation (published on 1 April 2010) we explained why, having considered the options, and in light of the responses received we thought that capping MTRs, based on some measure of cost, would lead to better outcomes for consumers than alternative approaches. We proposed that we cap MTRs based on the incremental cost of terminating a call (i.e. pure LRIC) and set maximum charges reaching a level set to pure LRIC over four years.

1.10 This proposal was a change from previous MCT charge controls, under which MTRs have been set using LRIC+. The change in the way we assess cost makes a significant difference to the expected flows of funds between interconnecting providers: on the basis of charges set using pure LRIC, MTRs would, by 2015, be less than half of the charges calculated on a LRIC+ basis. We considered that adopting pure LRIC would be more likely to promote efficiency, sustainable competition and would confer the greatest possible benefit on consumers.

1.11 We received a significant amount of material in response to our April 2010 consultation. We received responses from the four national MCPs, as well as BT, COLT, Cable & Wireless, Asda, Tesco, Virgin Mobile and Lycamobile. We also received responses from 13 smaller CPs, seven trade and consumer groups, and from 'Terminate The Rate' (over 44,000 emails). We also received letters from 43 MPs, who have lodged an early day motion in support of Terminate The Rate's position 5. We also received feedback from the European Commission.

1.12 As well as taking into account the submissions made in response to our consultation, we have obtained information and documents (using our statutory powers) from a wide range of affected fixed and mobile communications providers. We have carefully considered this material, which includes commercially confidential data concerning customer spending patterns and behaviour, and forward-looking business plans and information about network volumes and traffic from all four national MCPs.

1.13 In this statement, we set out our decision to adopt a charge control for the four national MCPs based on pure LRIC. In deciding to adopt pure LRIC, we have taken the approach we consider will best:

1.13.1 promote efficiency;
1.13.2 promote sustainable competition in the retail mobile market in the UK; and
1.13.3 confer the greatest possible benefits on end-users of public electronic communication services.

In doing so, we also consider whether this approach is objectively justifiable and proportionate 6. Finally our decision to adopt pure LRIC is consistent with the 2009 EC Recommendation.

Conclusions

1.14 Our decision is set out in this statement (which comprises sections 1 to 10 of the main document and all of the material set out in the annexes). This statement constitutes our impact assessment. In this statement we:

1.14.1 Define a market for call termination on each of 32 'individual mobile networks'. Each market is identified for a relevant MCP as the provision of services to other communications providers for the termination of voice call to UK mobile numbers which that MCP has been allocated by Ofcom, in the area served by that MCP, and for which the MCP is able to set the MTR.
1.14.2 Designate each of those 32 MCPs as having significant market power (SMP) with respect to the termination of calls to that network (i.e. within their allocated number ranges).
1.14.3 Require all 32 MCPs to provide MCT on fair and reasonable terms, to publish their MTRs, and to give 28 days notice of changes to their MTRs.
1.14.4 Require the four national MCPs not to unduly discriminate in relation to the provision of MCT.
1.14.5 Limit MTRs for all four national MCPs so that the maximum permitted charge for MCT reaches pure LRIC by 1 April 2014. The MTR cap will be set on a four-year glide path and aims to limit disruptive price-setting flexibility ('flip-flopping') by setting a simple cap with a single maximum charge in each year after a two-month transition period. Other designated MCPs will be required to offer MCT at fair and reasonable charges.
1.14.6 This approach will lead to MTRs falling from around 4.18ppm in 2010/11 to 0.69ppm by 1 April 2014 (in 2008/9 prices). The major factors behind this decline are:

  • expected falls in the cost of network equipment, as 3G technology becomes more established; and
  • the removal, as a result of moving to pure LRIC, of the contribution by MCT charges to the joint and common costs of the network. (The equivalent calculation for LRIC+ would see a maximum average charge of 1.61ppm by 1 April 2014 in 2008/09 prices).

Table 1.1 - Proposed MTRs (pence per minute - 2008/09 prices)

 

2010/1120011/12 2012/13 20013/14 2014/15
Vodafone / O2 / Everything Everywhere 74.1802.664 1.698 1.083 0.690
H3G 84.4802.664 1.698 1.083 0.690
Other designated mobile communications providers Set on the basis of being fair and reasonable

 

Footnotes

1 The four national MCPs are H3G, Everything Everywhere, O2 and Vodafone.

2 See section 6 for detail on the SMP conditions to be applied to different MCPs.

3 LRIC+ includes an allocation for the fixed and common costs so that the service in question e.g. MCT contributes to common cost recovery.

4 Long-run incremental cost (LRIC) is a method of understanding the incremental cost to an operator for providing a service, compared with not providing that service. Pure LRIC is not exactly the same as marginal cost, but for regulatory price-setting purposes, pure LRIC is a better approximation of the economic concept of marginal cost. In network industries (such as telecoms) the marginal cost of a service may be very low or very high depending on whether usage is a long way from, or effectively at, installed capacity. This leads to very low (or zero) marginal cost most of the time, but with short increments over which marginal cost is very high. In regulatory practice, long-run incremental cost has therefore been applied as a proxy, avoiding the volatility implied in setting prices on the basis of marginal cost. Pure LRIC measures service specific fixed and variable costs that arise in the long-run from the increment of output in question (in this case, all terminated minutes provided to other CPs).

5 Terminate the Rate campaign submitted that a pure LRIC approach to setting MTRs will deliver greater competition and benefits to consumers, but that this should be done over a shorter period than we have proposed.

6 Section 2 has more information on the regulatory regime and our general and specific duties.

7 2G/3G MCPs

8 3G-only MCP

The full document is available below.

Annex 1 was updated at 8.40am on 15|03|11 to correct a typographical error in Schedule 2, Part 1.1

 


 

Publication of the charge ceiling for wholesale mobile call termination from 1st April 2014 to 31st March 2015

Mobile Call Termination Market Review 2015-2018 - workshop with industry : Presentation published 28|10|13

Publication of the charge ceiling for wholesale mobile call termination from 1st April 2013 to 31st March 2014

Publication of the charge ceiling for wholesale mobile call termination from 1st April 2012 to 31st March 2013

MCT impact on consumer segments model

Clarifications and updates relating to the MCT statement

Modification to SMP Conditions

Explanatory Note accompanying Modification to SMP Conditions

Revised MCT Cost Model accompanying Modification to SMP Conditions

 

In this section

Wholesale mobile voice call termination statement - Annex 1  PDF Document  (95 kB)

Notification under section 48(1) and 79(4) of the Communications Act 2003

Wholesale mobile voice call termination statement - Annex 3  PDF Document  (637 kB)

Economic arguments on pure LRIC versus LRIC+

Wholesale mobile voice call termination statement - Annex 4  PDF Document  (33 kB)

Analysis of data about consumers and their spending patterns (redacted)

Wholesale mobile voice call termination statement - Annex 5  PDF Document  (89 kB)

Comments on stakeholder research

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