Examination of Witnesses (Questions 69-79)
Mr Alex Blowers, Mr Jim Niblett and Dr Yih-Choung
Teh
19 FEBRUARY 2007
Q69Chairman:
Gentlemen, thank you very much indeed for coming. In theory, we
have until six o'clock but we may have divisions, in which case
we will suspend the Committee for 10 minutes, so if that is not
going to inconvenience you perhaps you would bear with us; it
will give you time to draw breath, I am sure. For the benefit
of the shorthand-writer, could you introduce yourselves, just
briefly?
Mr Blowers: Thank you very much, My Lord Chairman.
My name is Alex Blowers. I am the International Director at Ofcom
and my responsibilities include the overall co-ordination of our
EU and international activities.
Dr Teh: My name is Yih-Choung Teh. I am Project
Director for Ofcom's work on international roaming.
Mr Niblett: I am Jim Niblett. I am International
Policy Director at Ofcom.
Q70 Chairman: Thank you. Could you
comment on whether you think charges to the consumer, those who
are roaming with their mobile 'phones, have moved significantly
over the last few years?
Mr Blowers: I think we would say that the general
pattern has been one of consistently above-cost prices, and that
problem of above-cost prices has persisted for a number of years,
so this has not been a temporary phenomenon, it has not been a
short-term phenomenon, there has been a long-term problem of consistently
above-cost prices.
Q71 Lord Mitchell: I am sorry. I
do not understand what that means, "above-cost prices."
It looks great. I thought all prices were above cost?
Mr Blowers: Prices which are significantly above
cost, I am choosing my words with care, prices which certainly
do not reflect what you would expect to see happen in conditions
of effective competition in the market; that is our general starting-point
on this.
Q72 Lord Geddes: I am sorry; on the
same point. To stay in business, operators have got to make a
profit?
Mr Blowers: Absolutely.
Q73 Lord Geddes: When you say "above
cost," their charges have got to be above cost. Your complaint,
if I can use that word, is that they are excessively above cost;
is that right?
Mr Blowers: Yes. I am trying to avoid using
the words "excessively above cost", but when we take
into account a reasonable return and the costs of the service,
so building in a fair element of profit, what we have seen is
prices that are consistently above cost, above a reasonable return
on profit and which have stayed remarkably the same and remarkably
high over a number of years. For that reason, our starting-point
is that we agree with the need for some form of regulatory intervention.
If you want us to comment specifically on the recent evolution
of tariffs in the market, certainly we can cover that point. I
know that you will have heard from the operators, first-hand,
about their various changes.
Q74 Lord Mitchell: They say, and
they were here just before, that it is a highly competitive business,
that they are out there in the forefront, in the high street,
all the time competing, and you are saying that there isyou
have not used the words, butan excessive amount of profit
that is being made on roaming. Why is not the natural market mechanism
working? That is my first question. Secondly, we heard Vodafone
say that roaming charges have reduced by 40 per cent over a period
of time, and the question I did not ask and should have done perhaps
is actually how many people are taking advantage of those 40 per
cent reductions? I think an awful lot of people do not know about
them or cannot get to them and I wonder if you could comment on
that?
Mr Blowers: Let me make a headline point and
then I will ask Yih-Choung to comment specifically on the evolution
of the prices. The mobile market in general, across the board,
is highly competitive so, when you hear people say that the mobile
market in general is not competitive, as the regulator in the
UK we would disagree with that proposition. What we are talking
about here is a highly specific market failure within the mobile
market which relates to one part of that market, so our commentary
that we believe there is a case for regulation should not be seen
as a general commentary to the effect that we think that the mobile
market is uncompetitive. We are talking about one specific problem,
one market failure, which arises, effectively, as a consequence
of the discontinuity between the operator that is levying the
retail charges and the operator that is setting the actual cost,
the cost base, by setting the wholesale rate for roaming in the
destination country. It is that discontinuity, along with a vast
amount of complexity around this market, which will be, I am sure,
one of the things which the Committee is already seized of, which
leads to the market failure which requires to be addressed. This
is not a question of a generic market failure in the mobile market.
On the specifics, Yih-Choung, I do not know whether you want to
take that point.
Dr Teh: Certainly. I can respond to the question
about evolution of tariffs more recently. I think we would agree
that we have seen some progress more recently in terms of the
tariffs on offer to consumers; for example, Vodafone's Passport
tariff or the bundles offered by Orange and T-Mobile, or O2's
My Europe tariff, are significantly better than what has been
available to consumers, especially some pre-paid consumers. However,
those are some specific tariffs which are moving in the right
direction and we note that those have been made available under
the threat of a European Regulation, and we do not think it has
gone far enough, in terms of some very much higher tariffs still
being available. I think essentially that is where we see the
tariffs at the moment.
Q75 Lord Dykes: Do you think the
market, in its recent development, in the companies in Britain,
particularly, and elsewhere as well, has relied really too much
on pretty good deals, sometimes individualised deals, with particularly
large corporations but perhaps less than large as well? Also on
making sure that the corporate customer is satisfied and the tariffs
are not too high, and they have not bothered really about the
individual customer because of the inevitable high price and elasticity
of demand for the service, the lack of knowledge of that customer
of how it works, the complexities of it, trying to work out the
charges, and anyway being in a hurry when you are going abroad,
which may be less often than the corporate customer? Has not there
been a lot of that, those disutilities and rigidities, which are
part of the market failure you were referring to?
Mr Blowers: I think undoubtedly it is the case
that some groups of consumers are much more sensitive to the issue
of roaming charges, as part of the array of choices and decisions
that they make at the point of purchase. We know that the market
which has evolved for mobile services in the UK is driven very
largely by choices around handsets, and probably there are some
eye-catching elements in the tariff which, for the average residential
consumersomebody like meare much more important
to them at the point of purchase than the roaming charge. It is
a rational business decision under those circumstances, given
those price elasticities, to set the charges so that perhaps you
recover more of the costs from the roaming element than from the
other elements of the package. Some groups of consumers undoubtedly
will benefit more from existing competition and existing offers
because they are more sensitised to these kinds of considerations.
Where rational decision-making ends and market failure begins
is quite an interesting question and it is a question that Ofcom
wrestled with over a number of years around these issues. Is it
the case that it would be rational to set charges in this way,
necessarily a reason not to intervene, and I think the conclusion
that we have reached is that the size of the consumer detriment
was growing because actually the market was becoming more sensitised
to these issues, and that discontinuity which I described between
retail and wholesale makes it difficult for the market to react
in a timely fashion to those changes. That is why I think proportionate
regulation, but I emphasise the word `proportionate' regulation,
could be justified in this case, and then the debate turns on
what would be proportionate regulation in these circumstances.
Q76 Lord Dykes: Some of the national
regulators, like yourself, and in other countries as well, were
arguing that the Commission should take collective action on behalf
of everybody, because it is very difficult to do it for a national
regulator, for obvious reasons, with roaming charges, although
there could be some interface. Nonetheless, should not the Commission
have waited maybe just a bit longer for those initial, developmental
market rigidities to go out because of the competition, in wholesale
prices but mainly in retail, and then maybe take more regulatory
action later on; or was it right that the Commission decided to
take action in the summer of last year?
Mr Blowers: I think, on balance, we would say
that probably it was right. Certainly we were amongst the doves,
if I may put it in those terms, who were arguing for the industry
to be given time to respond to the political lead that Commissioner
Reding had made, but I do think that, looking at the system in
aggregate and looking at the behaviour of the operators in aggregate,
probably last summer was the right time to act. Of course, the
debate has been then whether the form of the proposal, the form
of intervention, was actually the right form of intervention,
and that is a separate issue, which no doubt we will come on to.
Q77 Baroness Eccles of Moulton: Mr
Blowers, it is very nice to be taking evidence from you again.
You were very helpful to us on a previous subject. I think we
are aware that Ofcom is not keen on regulation for the sake of
it. You were homing in on a particular market failure. Would you
consider that to be really the major one, to be the heart of the
matter?
Mr Blowers: That is an interesting question,
an interesting philosophical question. I think when we look at
our overall responsibilities in telecoms, it is clear that the
market failures which we confront in the fixed telecom market
are significantly greater than those which we encounter in the
mobile market. As I said at the outset, when we look at the mobile
market in aggregate we think actually it performs pretty well
and we are reluctant to get dragged into large-scale regulation
in the mobile market. I think the problem here is that there is
a significant detriment for a significant and growing group of
consumers around the roaming issue, and I think it is incumbent
on us therefore to act to fix that particular problem. How we
would weight that in the mix with other interventions I think
is a difficult question to answer, but certainly it seems to us
that a proportionate regulatory response could be justified in
this case.
Q78 Baroness Eccles of Moulton: Would
you say then that the industry itself could not deal with the
discontinuity between the wholesale and retail, really that is
beyond anything you could expect an industry to do for itself
therefore it needs intervention; or could they do it?
Mr Blowers: Given the current market structure.
I will explain what I mean by that it seems to me that if you
had a market where it was more frequently the case that the purchaser
of wholesale was also the seller of the retail services, so that
they were at both ends of the transaction, if you like, actually
that market structure might mean that the problem was self-correcting,
but we are a long way away from that market structure today, there
are companies who are in that position, but overall the market
structure is highly fragmented. There are many different actors,
there are 27 Member States, each with a minimum of two mobile
companies, so that is a lot of transactions, a lot of individual
negotiations to get through. It seems to me that even if you took
the view that the market would be self-correcting it would take
a long time to get there. Whereas an early and decisive regulatory
intervention (whilst you are absolutely right that we try to be
the non-interventionist regulator, we have this famous expression
of our bias against intervention), it does seem to me that if
you believe that the consumer detriment exists and you want to
fix that consumer detriment, in short time rather than geological
time, then actually this is probably the best way to do it.
Q79 Baroness Eccles of Moulton: Every
operator is both wholesaler and retailer but there are just too
many of them for it to sort itself out?
Mr Blowers: Exactly.
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