mec1500

ARCEP

Conference on Mobile Economics

Paris, 26 March 2007

‘Should mobile termination rates differ?’

Martin Cave

Warwick Business School, UKMartin.Cave@wbs.ac.uk

mec1500 2

Issues

When should an NRA set differential rates for mobile operators?Should they converge?If so, over what period?How are the Commission and NRAs addressing this issue?

mec1500 3

Context

Commission comments to NRAs on symmetry-eg

-period of asymmetry must be justified, ‘based on a cost model which takes into account costs of an efficient operator and the complete process of adequate accounting information to be provided by all MNOs’

-NRA is invited to monitor the cost structures and assess whether its current assumptions on ‘fair and reasonable prices’ will remain relevant.

mec1500 4

Approach taken here:

Four possible regulatory objectives(some ambiguous)

- achieve cost orientation/recovery - mimic a competitive market/achieve

competitive parity- promote statically efficient prices- promote dynamic efficiency

mec1500 5

Some differentiating factors I

A. Differential X-inefficiencynot a good basis for differential rates!

B. Quality of service differences- cost-reflective- consistent with competitive outcome and

with efficiency-enhancing prices- incentive problems under CPP

mec1500 6

Some differentiating factors II

C. Different frequencies/spectrum chargesi) with competitive spectrum markets, or

‘opportunity cost’ prices: no problem as prices take the strainii) with arbitrary fees or historic valuations: allow cost recovery or promote efficiency/competition

mec1500 7

Some differentiating factors III

D Location of traffic -Should geographically-based termination

cost differences be incorporated, as detemined by cost function?

-Impact depends on pass-through to retail prices

-Call-by-call differentiation not feasible, but operator-by-operator differentiation promotes cost orientation and competitive parity

mec1500 8

Some differentiating factors IV

E. Peak and off-peak demand : where termination charges are reflected in retail charges, peak-load charges promote efficiency

F. Different termination technologies: incentive needed to use termination mode which is cheaper in aggregate; if 3G justified overall, then a blended rate is justified for cost recovery

mec1500 9

Some differentiating factors V

G-H Different start dates/market shares

Dynamic efficiency argument: competitive advantage required for late-comers for sake of long-run end-user benefits

Precedents include OPTA’s ‘delayed reciprocity’ in fixed termination rates and Ofcom’s WBA margin squeeze restrictions

Justification should relate to effective start date in the first instance, not market share

mec1500 10

The cost-benefit analysis of intervention for dynamic purposes

Factors which influence the decision include: -entry date gap and time elapsed -maturity of market -expected technological and regulatory

developments -switching costs -impact of traffic asymmetries etc.

mec1500 11

Treatment of switching costs

Evidence that ‘slow’ mobile number portability (MNP) has a weakened/ insignificant effect on churn (Lyons 2006), whereas

‘fast’ MNP lowers prices and increases churnCombined with contract length, this permits

calculation of period of effective switching needed to neutralise earlier entry

mec1500 12

Unbalanced traffic

Relative size does not skew inter-operator termination cash flows where traffic is balanced

Where it is unbalanced, excessive termination rates disadvantage operator with a trade ‘deficit’

Combined with low on-net prices charged by ‘surplus’ operators, this can tip deficit operators out of the market (and may even breach competition law)

Is this a basis for differentiation?

mec1500 13

Conclusions I

Some grounds for differentiation are unexceptionable

-higher quality -higher costs from geographical factors -time-of day traffic differencesOthers are more debatable -coexistence of different networks

mec1500 14

Conclusions II

Problems arise with inclusion of dynamic factors - regime 1:differentiation can sustain

inefficient operators dependent on regulatory favours, which do not benefit end-users, OR

-regime 2:differentiation for a short period may prevent numbers in the long-term going down from 3 to 2 or 4 to 3.

Possible solution lies in estimating realistic period of ‘hope’ for regime 2 to operate, and committing and sticking to differentiated rates acordingly.