Memorandum by Ofcom
SUMMARY
Ofcom is the regulator for the communications
sector, with responsibility for regulating telecoms, broadcasting
and the radio spectrum. As well as promoting competition and innovation
as an economic regulator, Ofcom is a competition authority with
powers to prevent and deter anti-competitive behaviour.
The mobile market has a great deal to be complemented
on. It has delivered competition, choice, investment and innovation
to EU citizens. The UK has a particularly strongly competitive
mobile sector. Nevertheless, Ofcom believes that market failure
has been a persistent and long-term problem in one specific part
of the mobile market—international roaming prices. Given
the cross-border dimension of the problem no single national regulator
is well-placed to address the problem and we therefore welcome
the Commission's initiative to tackle the high prices being levied
on consumers. We agree that legislation, in the form of a directly-effective
EU Regulation, is an appropriate way to address the problem.
To ensure the Regulation's success however,
we are working to amend elements covering the precise mechanisms
proposed. We believe that certain measures in the initial proposal
may lead to unintended, negative consequences for consumers. For
example, in suggesting a single maximum cap on retail prices to
be applied across the EU, the Commission risks an overly prescriptive
approach, leading to inflexibility and areas of weakness which
will cause problems with implementation.
Working with other national telecoms regulators
and with the Government, we have sought to engage with the Commission,
the Council and the European Parliament to find a practical and
effective solution, which will benefit all consumers and enable
operators to satisfy a diverse range of consumer needs.
Ofcom's position on the Commission proposal
can be summed up in three key points:
1. The core of the "roaming" problem
is high wholesale charges and there is therefore a need for regulation
at wholesale level, to limit charges set between operators buying
and selling international roaming. Addressing competition problems
at the wholesale level should more effectively deal with concerns
about high retail prices ultimately paid by end-users.
2. We support an obligation to offer a consumer
protection tariff, which will provide adequate consumer protection
particularly for infrequent roamers. This would require operators
to offer all consumers a standard tariff. Maximum permissible
charges for making and receiving calls will be specified with
no hidden extra charges or strings attached. This could be applied
in combination with a cap on average retail prices, which would
ensure prices for all consumers are reduced appropriately.
3. Enhance transparency to address previous
concerns over the general lack of consumer awareness of retail
roaming prices, and ensure consumers are well informed as to retail
prices and availability of tariffs.
UK RETAIL ROAMING
PRICES
Typical rates for making calls whilst abroad
have always been significantly above typical rates for domestic
calls. While there are some additional costs involved in the provision
of roaming calls, these are insufficient to justify the wide price
differentials.
There appear to be a number of factors that
have contributed to higher retail prices for international roaming.
In the case of calls made whilst abroad, very high wholesale charges
(set by operators in the visited country) are passed on to the
consumer making the call in the form of a high retail price.
A lack of effective competition in the wholesale
international roaming market, perhaps in part because of the significant
traffic imbalances between countries providing different commercial
incentives to operators in those countries, has led to high retail
prices being maintained.
Even where wholesale prices have reduced over-time
(notably more recently with the threat of regulation), there appears
to be a time-lag in consequent reductions in retail prices. In
part this might be explained by a lack of awareness of roaming
prices amongst consumers.
Research commissioned by Ofcom at the end of
2005 suggested that 37 per cent of mobile users in the UK used
their mobile whilst abroad. Of these almost half (44 per cent)
were unaware of the cost of using their mobile whilst abroad.
PROPOSED REGULATION
The case for Regulation
As stated above, Ofcom consider that the primary
cause for high retail roaming prices are high wholesale prices,
maintained because of a general lack of competition at the wholesale
level. The precise reason for the lack of wholesale competition
is unclear, although the complexity of the wholesale market in
combination with differing incentives of operators across the
EU is likely to contribute to the maintenance of high retail prices.
Ofcom consider therefore that regulation, in
the form of a cap on wholesale charges between mobile operators
is appropriate and necessary. In formulating the regulatory cap
care must be taken to ensure that competition is still able to
develop: the cap must be set at a level that ensures wholesale
charges will fall substantially, but also to allow operators sufficient
flexibility to compete and innovate. Ofcom favours, application
of an average, rather than the maximum cap.
Ofcom believes that the case for immediate retail
regulation is less clear. There have been a number of examples
where operators have shown the willingness and ability to reduce
retail prices where no wholesale obstacle to doing so exists,
where an operator has a network in a foreign country for example.
However, whilst industry has made progress in this area, we believe
more could be done.
If retail controls are to be applied, care must
be taken to ensure that the right balance between protecting consumers
against excessive prices, whilst protecting the development of
competition is maintained. Setting overly restrictive retail controls
will not achieve the best outcome for consumers over the longer
term, as tariff innovation and differentiation could be severely
constrained.
A consumer protection tariff (also called Euro-Tariff)
designed to protect more vulnerable consumers, with a simple pence
per minute charge structure and no hidden extra charges might
strike the right balance between the need to protect consumers
whilst allowing providers scope to offer other innovate tariff
structures appealing to a range of users with differing requirements.
Structure of the proposed regulation
The Commission propose two separate wholesale
caps and two separate retail caps in its current draft. The Commission
also include a detailed set of formulae for calculating the levels
of these various caps.
It is possible to significantly simplify the
Commission's proposals, without losing any associated benefit.
Ofcom believe that a single wholesale cap set as an average (rather
than a maximum) for the reasons set out above, and in our supplementary
note on averaging, would be preferable to two separate wholesale
caps. There is no underlying cost justification for two separate
caps, and the Commission's approach risks over-estimating the
level of wholesale costs, thereby setting the wholesale cap too
high.
Further, for reasons of simplicity, clarity
and legal certainty, specifying charge controls in terms of numbers,
rather than detailed formulae, should be used in the Regulation.
A "deflator" could be applied year on year to mimic
reductions in MTRs if desired.
POTENTIAL IMPACT
ON NATIONAL
MARKETS
There is a genuine risk of the proposed regulation
having a negative impact of national domestic markets, if it is
enforced without amendment.
The Commission's proposed wholesale regulation
would cap the maximum rate any operator could charge another for
the provision of wholesale roaming. This would limit an operator's
flexibility to differentiate charges (for example by time of day)
and dampen incentives for operators to compete, as all operators
would be incentivised to set charges at the regulated maximum
level. The Commission approach also provides an overgenerous mark-up
over cost, thus limiting scope for retail regulation.
Perhaps of greater consequence would be the
effect of the proposed retail caps, which the Commission has set
too low, underestimating the relevant retail costs. The impact
of this could spread to domestic markets as operators may be unable
to recover their efficiently incurred roaming costs.
This could lead to operators seeking to recover
these costs from elsewhere or risk exiting the market altogether.
If operators seek to recover roaming costs from other services
there is the possibility that domestic prices will increase. Alternatively
some operators may choose to stop offering roaming services altogether,
or more likely to certain consumer types or to some (higher cost)
destinations.
Given the omission of genuine retail costs in
the Commission's calculation, Ofcom believe there is a real possibility
that if applied without amendment the Commission proposal could
well lead to distortions in domestic retail markets, potentially
harming incentives to innovate and invest in these markets.
LATEST ANGLO-FRENCH
PROPOSALS
The latest Anglo-French proposal discussed at
Council, which has been built upon by the current German Presidency
recommends the following:
— A single average wholesale cap set
around 30 Euro cents.
— On retail: a standard consumer protection
tariff, available to all consumers regardless of their domestic
retail tariff, offering preset pence-per-minute charges for making
and receiving calls and no additional hidden charges. This would
be operated under an opt-in/opt-out mechanism still under discussion.
Ofcom favours an opt-in approach to 1) ensure compatibility with
existing contractual obligations and 2) that no overly excessive
burdens are placed on operators.
— On retail: an average price control
to ensure that on average retail prices of individual operators
fall below a pre-determined cap; and
— Concept of "sunrise" or
"incentive" clause to incentivise operators to reduce
average prices quickly, whilst maintaining a degree of flexibility
in designing their tariffs.
As highlighted above, Ofcom believe that wholesale
controls are warranted, but the case for immediate retail regulation
is, certainly in the UK market, less clear. Retail price setting
is intrusive and should only be applied where other controls have
failed. Furthermore retail regulation often has unexpected consequences—for
example, operators might choose to increase domestic tariffs or
reduce handset subsidies to compensate. However to ensure that
benefits of reduced wholesale costs trickle down to the consumer,
a flexible and pragmatic approach to retail regulation should
be considered. We believe this has been developed in the Anglo-French
proposal.
RECENT MARKET
DEVELOPMENTS
Industry has taken steps to reduce both wholesale
and retail prices since the announcement for regulatory intervention
in February last year. Vodafone has reduced its wholesale rate
to 45 cents per minute (cpm); T-Mobile/Orange also announced significant
reductions as part of moves by a number of European operators.
All UK operators also have reduced inter-group rates for wholesale
roaming.
Retail prices have also reduced over this period:
O2 recently announced its "My Europe tariff offering calls
for 35ppm; many operators also offer special discounted rates.
The structure of retail roaming tariffs have also changed; T-Mobile
offers roaming "bundles"—reduced rates (of around
45ppm) for an up-front payment and Vodafone offer the Passport
tariff, offering access to domestic rates (inc free minutes) +
a per call charge of 75p charge. Typically access to reduced rates
requires the consumer to roam on the UK operator's partner network
(Vodafone Italy or O2 Ireland for example).
Prior to this announcement wholesale and retail
prices had remained largely static over time. It is also unlikely
that in the absence of the threat of regulation prices would have
fallen as they have.
It is also unlikely that reductions to date
are significant enough to render some form of intervention at
the wholesale level, unnecessary. Prevailing wholesale rates are
still significantly above what we estimate the underlying wholesale
costs to be. We consider that a wholesale rate of around 25cpm
would allow operators throughout Europe to recover their efficiently
incurred costs, whilst still providing sufficient flexibility
for operators to compete and innovate.
23 February 2007
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