Mobile call termination market review 2015-18 Draft decision Draft Statement Date of notification to EC: 6 February 2015 MCT Review 2015-18 About this document This document sets out in draft the conclusion of our review of the wholesale ‘mobile call termination’ (MCT) markets for the period 1 April 2015 – 31 March 2018. MCT is a wholesale service provided by a mobile communications provider (MCP) to connect a call to a recipient on its network. When fixed or mobile communications providers enable their customers to call a UK mobile number, they pay the terminating MCP a wholesale charge, called a ‘mobile termination rate’ (MTR). MTRs are set on a per-minute basis and are currently subject to regulation. We published a consultation document on 4 June 2014 outlining our regulatory proposals for MCT markets. We have taken account of points raised by stakeholders and new information received since the consultation. In this document we set out our decisions, including the regulation that we conclude is appropriate for this market. The regulation we have decided to impose includes a charge control on the MTRs of all MCPs offering MCT and is designed to promote competition and further the interests of consumers. This draft statement is today being notified to the European Commission. Once this notification process is complete, we will publish a final statement to bring our decisions into effect. MCT Review 2015-18 Contents Section Page 1 Summary 1 2 Introduction and background 4 3 Product and geographic market definition 21 4 SMP assessment 52 5 Remedies 64 6 Cost standard for the MTR charge control 92 7 Calculating the efficient costs of MCT 141 8 Implementation of the charge control 150 MCT Review 2015-18 Section 1 1 Summary 1.1 This draft statement sets out the conclusions of our review of the wholesale ‘mobile call termination’ (MCT) markets for the period 1 April 2015 – 31 March 2018. 1.2 MCT is a wholesale service provided by a mobile communications provider (MCP) to connect a call to a recipient on its network. When fixed or mobile communications providers enable their customers to call a UK mobile number, they pay the terminating MCP a wholesale charge, called a ‘mobile termination rate’ (MTR). MTRs are set on a per-minute basis and are currently subject to regulation. Based on current volumes, we estimate the total revenues in 2014/15 from MCT in the UK to be around £504m which compares to total retail revenues in the UK mobile sector of £15.6bn in 2013.1 If we consider “net” termination, i.e. we exclude mobile to mobile (M2M) off-net calls, the estimated revenue is around £141m.2 1.3 The purpose of this review is to analyse the state of competition in the provision of MCT and consider the appropriate form of ex ante regulation, if any, that should be imposed. To this aim we identify and define relevant markets that are susceptible to ex ante regulation and assess whether any MCP has significant market power (SMP). 1.4 The last MCT market review concluded on 15 March 2011 (‘2011 MCT review’), found 32 MCPs had SMP in their relevant markets and introduced a significant change from previous MCT charge controls in the way we assessed the cost of MCT. In particular, in choosing the cost standard to calculate the charge control for the four largest MCPs, we moved from LRIC+ to LRIC, which resulted in a sharp reduction of MTRs – falling around 80% between March 2011 and April 2013.3 1.5 In June 2014 we published a consultation (‘June 2014 Consultation’) to seek stakeholders’ views on our regulatory proposals for MCT for the period 1 April 2015 – 31 March 2018. We received 14 responses to the June 2014 Consultation.4 Responses from stakeholders focused mostly on the following: the choice of cost standard and our reasoning to continue to use LRIC; our proposal to introduce a charge control for smaller MCPs for the first time; our proposal to impose a one-off adjustment to the new LRIC-based MTR and our proposal that over the top (OTT) 1 For retail revenues see Ofcom, Telecommunications market data tables Q4 2013, 24 April 2014, http://stakeholders.ofcom.org.uk/binaries/research/cmr/telecoms/Q4-2013.pdf. 2 Termination revenues are obtained by considering total and net termination volumes of 59.62 and 16.72 billion, respectively and the current MTR of 0.845ppm. Volumes refer to the four largest MCPs and include traffic carried on behalf of, or for, MVNOs or other third parties. 3 Long Run Incremental Cost (LRIC) measures the incremental cost to an operator of providing a service in the long-run. It includes the variable and fixed costs associated with the service increment in question, in this case MCT. LRIC+ includes a mark-up for joint and common costs, such as the cost of the spectrum used by the network. By definition, the LRIC standard, as currently used to set the charge control, does not include such a mark-up. 4 We also received one letter as part of the separate MTR enforcement programme which we regard as relevant to our policy decisions. Ofcom, Own initiative enforcement programme into wholesale mobile call termination rates, 11 November 2013, http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open- cases/cw_01115/ 1 MCT Review 2015-18 voice services didn’t sufficiently constrain market power in MCT markets. Stakeholders also made a number of observations relating to the cost model used to calculate the regulated MTRs. 1.6 To inform our policy decisions, we have also considered the significant developments that have occurred in the mobile market in the last three years, recognising that the UK mobile sector has changed in ways that are relevant to this market review. Between 2011 and 2013, the availability of spectrum to provide mobile services has increased significantly following Ofcom’s work on spectrum liberalisation and the 4G auction. The four largest MCPs5 have started deployment of their fourth generation (4G) networks based on Long Term Evolution (LTE) technology and have launched 4G services. 4G networks are currently employed for data only but are expected to be used for voice in the future when some of the UK MCPs are expected to launch Voice over LTE (VoLTE). 1.7 Consumers increasingly use mobile networks for data connectivity: mobile data use mobile data use has seen strong growth in recent years. This has been partly driven by the continued growth in both the numbers and use of smartphones. Smartphone ownership has risen from 27% in 2011 to above 60% in 2014. 6 As 4G take-up grows, we expect MCPs to deliver less traffic over 2G and 3G overall. In addition, the mix of voice and data delivered over existing technologies is also likely to change. Another trend concerns the design and deployment of more cost efficient mobile networks. This has been achieved, for example, by new network sharing arrangements. 1.8 Having considered these developments, the latest market data and stakeholders’ responses to the June 2014 Consultation, we set out in the rest of this document our decisions to: 1.8.1 Define 72 separate markets, each corresponding to an MCP able to set an MTR for calls to the UK mobile numbers allocated by Ofcom to that MCP (see Section 3). 1.8.2 Designate each undertaking holding UK mobile numbers as having SMP with respect to the (wholesale) market for terminating calls to such numbers (see Section 4). This recognises the commercial reality that control of the number range provides the mechanism by which pricing power is exercised in relation to calls to mobile numbers. Applying this approach will mean that 72 MCPs are designated with SMP. The list of affected MCPs is set out in Table 5 of Section 3. 1.8.3 Regulate the MTRs of all MCPs with SMP by imposing a single maximum cap on MTRs (see Section 5). This represents a change from the previous market review where the charge control only applied to the four largest MCPs and smaller MCPs were subject to an obligation to provide network access on fair and reasonable (F&R) terms and conditions, including charges. We consider that imposing a charge control on all MCPs with SMP will be more effective than the F&R approach in remedying the harm caused by MTRs set above the efficient cost benchmark. 1.8.4 Impose on all MCPs an obligation to provide network access on fair and reasonable terms and conditions and an obligation of price transparency 5 EE, H3G, Telefonica and Vodafone. 6 Ofcom, Infrastructure Report 2014, 8 December 2014. http://stakeholders.ofcom.org.uk/binaries/research/infrastructure/2014/infrastructure-14.pdf 2 MCT Review 2015-18 requiring all MCPs to publish their MTRs (with any proposed change to their MTRs to be made at least 28 days in advance of those changes coming into effect) - see Section 5. 1.8.5 Impose only on the four largest MCPs an additional obligation of no undue discrimination in relation to the provision of network access for MCT (see Section 5). 1.8.6 Continue to use LRIC to set the charge control (see Section 6). 1.8.7 Implement an adjustment towards the new LRIC rate in the first year of the control (i.e. 2015/16) with MTRs in the first year mid-way between the current nominal MTR (0.845ppm) and the new forecast nominal LRIC rate, and the MTR capped at the new LRIC rate from the start of the second year of the three year control (i.e.