Alternative approaches to mobile termination charges: an empirical assessment

1. Alternative approaches to mobile termination charges: an empirical assessment Stephen Littlechild Encore Workshop The Hague, 22 April 2008

2. Outline • Problems of regulation & the role of competition • Mobile termination charges: the paradox • Problems of CPP and price controls • Comparisons of CPP and RPP • Problems of RPP • Bill and Keep – a solution? • Source: S Littlechild, Mobile termination charges: CPP v RPP, Telecommunications Policy 30, 2006

3. Problems of regulation 1960s • Utility economics: regulation to deliver optimal pricing & investment (p=mc) • But in reality • Costs not given – disputed • Costs changing over time, technology, innovation • Economists’ ideas evolving too • Limited incentive to apply optimal prices • Regulation was a battleground • Time-consuming, costly, political, inflexible • Gradual realisation of a need for change

4. A new approach 1980s • Liberalisation, deregulation, privatisation • Competition to deal with market power • Private ownership to increase efficiency • Both mean innovation and responsiveness to customer demands, prices reflect costs • Severely reduce scope and need for regulation • Where competition undeveloped or unlikely, limited transitional RPI-X incentive regulation

5. Regulation today 2000s • Expected that regulation would reduce • But in fact more extensive & intensive • Light-handed? Increasingly as before: • Costs not given – disputed • Costs changing over time, technology, innovation • Economists’ ideas evolving too • Regulation is still a battleground • Time-consuming, costly, political, inflexible • More problematic in competitive market • Gradual realisation of need for change

6. Mobile Termination Charges • Paradox: most competitive and innovative utility sector is still heavily regulated. Why? • Receiving subscriber’s network controls access to subscriber: bottleneck monopoly • Hence can levy termination charges to subscribers from other networks • Customers cannot avoid these charges by changing supplier, so competition ineffective • In most countries these charges are perceived as too high • This has led to widespread price controls

7. Calling Party Pays CPP • Bottleneck monopoly associated with CPP • CPP is widespread • UK, Europe, Australia, New Zealand etc • Termination charges in excess of cost • Regulators estimate 22 to >100 %, median 70% • Also leads to distortion via waterbed effect • Competition to attract customers leads to subsidies on handsets and monthly charges • Implies higher penetration but fewer calls

8. CPP solutions • Price controls on termination charges • From 1998 in UK, 2002 EU, 2004 Australia, NZ • These have been quite severe • Typically cut price by 35-50% over 2 – 4 years • UK cuts total 65% over 7 years • Customers get lower call prices • Regulators estimated worth US$4 - $57 per capita per year (UK, Australia, NZ)

9. Problems with CPP price controls • Are price controls fully effective? • Prices set at top end of cost estimates • Welfare improvements static and small • $1.50 - $11 per capita per year • Offset by reductions in waterbed effects? • Costs of price control process • UK >2000 pages, estimated cost nearly $50 m • Regulatory influence on competitive market • Eg when to regulate new entrants, allowed margin affects types of offers & customers, on-net v off-net, size of networks • Is the cure worse than the disease?

10. Receiving Party Pays RPP • RPP is used in fewer countries • Incl. US, Canada, Singapore, Hong Kong, China • Operators recover termination costs by charging own subscribers for incoming calls • So incoming and outgoing call charges both subject to competition • Does this make a difference in practice? • Predict higher prices, more usage, less penetration • Increasing evidence now available

11. Cross section comparisons • FCC used Merrill Lynch data 2005 • 9 CPP and 4 RPP high income countries • CPP RPP • Aver revenue cents/min 23 9 • Ave mins use/month 178 415 • Mobile penetration 89% 76% • These data consistent with predictions of bottleneck monopoly with CPP v RPP

12. Regression analysis • But other factors may be relevant • Same Merrill Lynch data 44 countries • Regression shows most significant factors • Ave rev/min + GDP - RPP • Ave mins use – fixed penetration - % prepaid • + portability + RPP • Mobile penetration + High income + technical concentration + % prepaid • Confirms RPP influences price and usage • RPP does not reduce mobile penetration

13. Comparison UK and US • UK US • Ave rev cents/min 22 8 • Ave mins/month 151 630 • Mobile penetration 98% 61% • Fear RPP would reduce UK penetration • But after allowing for other factors • RPP wholly explains lower average revenue in US • RPP explains over half higher usage in US • Greater prepaid & single technical system largely explain higher UK penetration: RPP has no effect

14. Impact of mobile technologies • About 27 countries changed RPP to CPP • Said to have increased growth in mobiles • But handicapped by multiple technologies? • CPP average 1.4 technologies • RPP average 2.2 technologies • RPP to CPP average 2.9 technologies • Note also these are developing countries • Low penetration not so problematic in EU

15. Comparison of operators • T-Mobile operates in both US and UK • Call prices: higher in UK than US • Average 1/3 to 2/3 higher, incremental 2 – 4 times • Other operators less difference but still UK > US • Monthly fee: T-Mobile no real difference • Similar for other operators • But in UK more inducements to new subscribers • Mobile handsets: more & cheaper in UK • US 14 offered, 8 free to $200, 4 rebates to $150 • UK 26 offered, 6 free to $191, 20 free to $554 • Nokia 3220 only common: US $50, UK free

16. Regulatory concerns about RPP • Most CPP regulators have ignored RPP • Europe, Australia, NZ • UK has dismissed RPP rather cursorily • Oftel, Competition Commission, Ofcom • Four main concerns • Costly and disruptive for operators • Resistance from customers • Turning off mobile phones • Reduce economic efficiency

17. Are RPP concerns justified? • Costly and disruptive to operators? • CC & billing experts disagree (US operators use it) • Resistance from customers? • Customer groups against in UK but in favour in US • Call prices would be lower and usage higher • Turning off mobile phones? • No quantitative evidence; FCC ‘no substance to it’ • Implausible in high income countries these days • Reduce economic efficiency? • Theory ambiguous but outweighed by high charges • RPP pricing more efficient (bucket plans)

18. Summary of evidence • CPP has severe deficiencies • High termination charges & call prices, low usage • Intrusive and costly price control processes • Questionable efficiency – prices still above costs • Limited welfare benefits, handsets still subsidised • Regulation influences the competitive market • RPP avoids all these problems • Zero termination charges, low call prices, high usage • No need for intrusive and costly price controls • Prices are at competitive levels • No adverse effect on mobile penetration

19. Exploring further • BUT a real downside to RPP is concern about resistance to paying to receive calls • So how does RPP come about? • What prevents RPP operators from charging other operators for (wholesale) termination? • Some form of regulation (zero or low or reciprocal charges): Bill and Keep rules

20. Bill and Keep systems • B&K operators have discretion how to charge their own customers • What prevents B&K operators from charging them for (retail) termination? Answer: Nothing • Most choose RPP but they could choose CPP • Some B&K operators now offer free incoming calls as an alternative option • Nextel/Sprint nationally • US Cellular in midwest, Cellular South in southeast • Fido/Rogers and Telus Mobility in Canada • Also all 3 mobile operators in Singapore

21. Appraising the alternatives • CPP creates problems that it can’t deal with • Market power and market distortions • It necessitates an unsustainable extent of regulation • RPP solves all of these problems • Most of the objections to RPP are not substantial, BUT • Charging customers to receive calls could be unpopular • Not appropriate to require operators to do this • B&K offers all the advantages of RPP • All prices at competitive levels, lower than now • Higher usage, less subsidised handsets • No reduction in mobile penetration • B&K has advantages of RPP without the downside • No requirement to charge to receive calls

22. Disadvantages of B&K? • A more onerous form of price control? No • It precludes charging others for termination but does not seek to control the level or structure of charges to own subscribers • Would disadvantage networks with subscribers that receive rather than make calls? Not permanently • Operators will adjust charges to reflect the calling patterns and costs involved • Charges will be different from now, but present charges not optimal • Could lead to unpopular charges to receive calls? No • Not unless subscribers prefer that, and presumably optional • Fewer handset subsidies? Yes – but is this a problem? • Could lead to cost, disruption and controversy? Unlikely • Operators would have incentive to minimise these aspects • Marcus suggests phasing in B&K by phasing out termination charges

23. Conclusion • Liberalisation & regulation have proved successful internationally, BUT • Some utility regulation becoming untenable • E.g. regulation of mobile termination charges • B&K: no need for intrusive & costly price controls • B&K: customers & operators decide how to pay for mobile call termination, subject to competition • Competition and customer choice, not regulation, would determine market outcomes • Must be worth considering now