Mobile call termination market review 2015-18 Consultation Publication date: 4 June 2014 Closing Date for Responses: 13 Aug 2014 MCT review 2015-18 About this document This consultation document seeks stakeholders’ view on our proposals for regulation of the wholesale ‘mobile call termination’ (MCT) market 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. The market review process requires us to identify any problems that might stem from market power and impose appropriate remedies. In order to do so, we identify and define relevant markets which are susceptible to regulation and assess whether any MCP has significant market power (SMP). We then consider the appropriate form of regulation, if any, that should be imposed in the event that we find one or more MCPs has SMP in the relevant markets. This document outlines regulatory proposals for the MCT market, including a proposed charge control on mobile termination rates which would apply from 1 April 2015. The proposals are designed to promote competition and further the interests of consumers. This consultation closes on 13 August 2014. We plan to publish a statement by March 2015. MCT review 2015-18 Contents Section Page 1 Summary 2 2 Introduction and background 5 3 Product and geographic market definition 20 4 SMP assessment 54 5 Remedies 65 6 Cost standard for the proposed MTR charge controls 89 7 Calculating the efficient costs of MCT 113 8 Implementation of the proposed charge control 121 Annex Page 1 Responding to this consultation 136 2 Ofcom’s consultation principles 138 3 Consultation response cover sheet 139 4 Consultation questions 141 Further annexes are published separately. 1 MCT review 2015-18 Section 1 1 Summary 1.1 This consultation document seeks stakeholders’ views on our proposals for regulation of the wholesale ‘mobile call termination’ (MCT) market for the period 1 April 2015 – 31 March 2018. The purpose of this review is to analyse the state of competition in the provision of MCT and to consider the appropriate form of ex-ante regulation, if any, that should be imposed in the relevant market. The market review process requires us to identify any problems that might stem from market power and impose appropriate remedies. In order to do so we have to identify and define relevant markets that are susceptible to ex-ante regulation and assess whether any mobile communications provider (MCP) has significant market power (SMP). 1.2 MCT is a wholesale service provided by an 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 MCP which terminates the call to the call recipient (‘the terminating MCP’) a wholesale charge, namely a ‘mobile termination rate’ (MTR). MTRs are set on a per-minute basis and are currently subject to regulation.1 1.3 The last MCT market review concluded on 15 March 2011 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.2 3 Therefore, the current regulated MTR cap, set at 0.845ppm from 1 April 2014, is calculated on the basis of LRIC. 1.4 This cap on the basis of LRIC has resulted in a sharp reduction in MTRs - which have fallen by around 80% over a three year glide-path – and a consequent decrease in MCT revenues. Based on current volume trends, we estimate the total revenues in 2013-2014 from MCT in the UK to be around £450m. If we consider “net” termination, i.e. we exclude mobile to mobile off-net calls, the estimated revenue figure reduces further to around £90m. This accounts for a very small proportion of MCPs’ total revenues (for example, it amounts to less than 1% of UK mobile retail telephony revenues in 2013).4 1.5 In addition to the regulatory changes determining the reduction of MTRs and MCT revenues, in the past three years the UK mobile sector has changed in ways that are 1 Our latest statement “Wholesale mobile voice call termination” (‘the March 2011 Statement’) was published on 15 March 2011 and is available on the following link together with the current regulated MTRs - MTRs reflect the changes made following appeals of the March 2011 Statement: http://stakeholders.ofcom.org.uk/consultations/mtr/statement 2 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. 3 In the March 2011 Statement, we referred to Long Run Incremental Cost as “pure LRIC” to emphasise the difference between LRIC+ and LRIC. In this consultation, we will refer to it just as LRIC. 4 UK mobile retail telephony revenues were £15.6 billion in 2013. See Ofcom, Telecommunications market data tables Q4 2013, 24 April 2014, http://stakeholders.ofcom.org.uk/binaries/research/cmr/telecoms/Q4-2013.pdf 2 MCT review 2015-18 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’). 1.6 Consumers increasingly use mobile networks for data connectivity: the data use per subscriber increased by more than 100% in 2012 and 43% in 2013.6 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 continuing trend concerns the design and deployment of more efficient mobile networks with lower costs. This has been achieved, for example, by new network sharing arrangements. 1.7 We have considered all these developments and based on the analysis undertaken for this consultation, we set out our proposals to: 1.7.1 Define around 80 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. 1.7.2 Designate each undertaking holding UK mobile numbers as having significant market power (SMP) with respect to the (wholesale) market for terminating calls to such numbers. 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 more than 80 MCPs are designated with SMP. The list of affected MCPs is set out in Table 4 of Section 3. 1.7.3 Regulate the MTRs of all MCPs with SMP by imposing a single maximum cap on MTRs. This represents a change from the previous market review where the charge control only applied to the four largest MCPs and smaller SMPs were subject to an obligation to set MTRs at fair and reasonable terms (“F&R”). We consider that imposing a charge control on all MCPs with SMP would be more effective than the F&R approach in remedying the harm caused by MTRs set above the efficient cost benchmark. In particular, we consider that the benefits of increased regulatory certainty and the increased deterrent effect against excessive MTRs would outweigh any potential disadvantage, e.g. our loss of flexibility in determining MTRs below the regulated cap in the event of a dispute and any additional regulatory burden this imposes on smaller MCPs. 1.7.4 Impose on all MCPs an obligation to provide network access on fair and reasonable terms and an obligation of price transparency requiring all MCPs to publish their MTRs – and any proposed change to their MTRs at least 28 days in advance of those changes coming into effect. 5 EE, H3G, Telefónica and Vodafone. 6 Ofcom, Infrastructure Report, 2013 Update, 24 October 2013 (updated on 6 December 2013), http://stakeholders.ofcom.org.uk/binaries/research/telecoms-research/infrastructure- report/IRU_2013.pdf. 3 MCT review 2015-18 1.7.5 Impose an additional obligation of no undue discrimination only on the four largest MCPs in relation to the provision of network access for MCT. 1.7.6 Continue to use LRIC to set the charge control. We propose a three-year charge control, starting from 1 April 2015. MTRs are proposed to be set with reference to the forecast LRIC (as determined by our MCT cost model) in each year of the charge control. This would lead to MTRs falling from today’s cap of 0.815ppm (in 2012/13 prices7) to 0.476ppm by 1 April 2017 (also in 2012/13 prices).