Commission Draft Report On Mobile Termination

Media Release
Issued 18 October 2004-05 / 051

Telecommunications Act: Commission releases its
draft report on mobile termination

The Commerce Commission's draft report on mobile termination released today provisionally recommends that the termination of voice calls on a cellular mobile telephone network should be regulated. However the report does not recommend regulation of third generation (3G) mobile services. A copy of the Commission's draft report is available on www.comcom.govt.nz (select Telecommunications investigations).

Network Access Group Manager Osmond Borthwick said that the Commission had formed the preliminary view that limited competition in the market for mobile termination had resulted in mobile network operators setting mobile termination rates significantly above cost

"Based on the information currently before it, the Commission considers that a regulated reduction in mobile termination rates is likely to lead to increased competition in the market for tolls and fixed-to-mobile calls," said Mr Borthwick.

Mr Borthwick said the Commission has undertaken a cost benefit analysis showing that substantial benefits to both consumers and businesses are likely to arise from regulating mobile termination.

"The Commission is reluctant however to regulate the returns from new technology and at this stage does not propose to regulate 3G mobile services," added Mr Borthwick.

Mr Borthwick emphasised that today's draft report reflects the Commission's preliminary view on whether or not to recommend regulation of mobile termination rates.

"The Commission has issued a draft report to add transparency to its decision making process. The process allows the Commission's preliminary views to be examined and contested by all interested parties and allows for further submissions and input. The Commission encourages interested parties to make submissions on today's draft report," said Mr Borthwick.

Under Schedule 3 of the Telecommunications Act 2001, the Commission may, on its own initiative, commence an investigation into whether or not a new telecommunications service should be regulated. The Commission may do this only if it is satisfied there are reasonable grounds for such an investigation.

The Commission commenced its investigation into mobile termination in May this year after considering complaints that a potential lack of competition in the wholesale market for terminating mobile calls may be resulting in unreasonably high charges for fixed-to-mobile calls. The Commission released an issues paper entitled "Telecommunications Act 2001: Schedule 3 investigation into regulation of mobile termination" on 22 June 2004 to begin the public consultation process.

Written submissions on the Commission's draft determination close on 16 November 2004. The Commission expects to hold a conference in late November. The Commission intends to send its final recommendation to the Minister of Communications in early 2005.

Submissions should be sent to: telecommunications@comcom.govt.nz

Executive Summary (three pages) attached

Executive Summary (extract from draft determination)

Introduction

1. Mobile termination rates are the fees mobile network operators charge other telecommunications companies to terminate calls on the mobile networks. Mobile termination is a significant input into the provision of retail fixed-to-mobile and mobile-to-mobile services.

2. The Draft Report sets out the Commission's preliminary findings on whether mobile termination should be regulated.

3. The Commission seeks submissions on its Draft Report from interested parties by 16 November 2004.

Overview

4. The Commission must consider whether regulating the service promotes competition in telecommunications markets for the long term benefit of end-users of telecommunications services within New Zealand.

Relevant markets

5. The Commission considers that there is a separate wholesale market for mobile termination services on each of the mobile networks operated by Vodafone NZ Ltd and Telecom NZ Ltd. The Commission considers the evidence does not support the adoption of a broader market including mobile termination, mobile calling and subscription.

6. The Commission considers that there are two relevant downstream retail markets, namely the retail market for toll and fixed-to-mobile calls, and the retail market for mobile services.

7. The relationship between these markets is depicted below:

Competition Assessment

8. The Commission considers that the mobile network operators are subject to limited competition in the wholesale market for termination services on their respective networks. No other party can terminate calls to subscribers of that mobile network, and the calling-party pays principle gives limited incentives to call-recipients to switch providers in the face of an increase in termination charges.

9. The Commission considers that the retail market for the tolls and fixed-to-mobile calls is subject to limited competition. Although retail prices in the market for tolls and fixed-to-mobile have been declining, they remain significantly above the Commission's estimates of cost. Entry and expansion into this market is subject to a significant barrier arising from a vertically integrated operator's ability to raise rivals' costs by charging retail competitors a higher rate for termination services than it charges itself for the same service.

10. The Commission has also examined the level of competition in the retail market for mobile services. Retail mobile prices in New Zealand appear to have been fairly stable in recent years, and also appear to be relatively high when compared to prices in other countries. There are a number of significant barriers to entry or expansion that may deter entry into this market.

11. The Commission has not formed a definitive view on whether the retail mobile services market is subject to limited competition. However, the Commission is not persuaded that competition in this market is sufficient to ensure that excess profits being earned in supplying wholesale mobile termination services are being dispersed through competition for retail mobile calling and subscription services.

12. Consequently, the Commission is not persuaded by what is described as the 'waterbed' argument that a regulated reduction in mobile termination rates is likely to lead to a rise in the price of retail mobile services. It seems likely that mobile handset, subscription and calling charges would be unaffected.

13. A reduction in mobile termination rates is likely to increase competition in the fixed-to-mobile market and result in a sustainable lowering of the retail price for fixed-to-mobile calls. Such a reduction in retail prices will benefit consumers in two ways: first by increasing the viability of entry for competitors into the market for tolls and fixed-to-mobile calling and thereby increasing competition for the provision of those services; and second, by encouraging increased fixed-to-mobile calling.

Cost benefit analysis

14. The Commission has undertaken a cost-benefit analysis to estimate the quantum of these benefits.

15. The Commission considered whether reductions in mobile termination rates would lead to corresponding reductions in fixed-to-mobile prices. The Commission considers the behaviour of operators retailing fixed-to-mobile calls indicates that the price of those calls has declined during periods when the mobile termination rate has decreased.

16. The Commission's cost-benefit analysis indicates that substantial net benefits to end-users of fixed-to-mobile services are likely to arise from regulating mobile termination.

Dynamic efficiency

17. The Commission considered the impact of regulation of mobile termination on the incentive of mobile operators to innovate and invest, primarily in new technologies such as those required to support 3G services and further service enhancements.

18. The Commission does not accept that a dynamic efficiency detriment arises from the regulation of termination on existing non-3G networks merely because a mobile operator has less revenue available to support its investment in a 3G network.

19. However, the Commission believes that regulation of future 3G networks is likely to increase the risk of delay, or restrict investment in 3G networks and cause a significant dynamic efficiency detriment.

20. The Commission concludes, therefore, that there are likely to be significant net benefits to consumers from the regulation of mobile termination rates on existing non-3G networks but not future 3G networks.

Draft Recommendation

21. The Draft Report describes the proposed alteration to the Act and the proposed initial and final pricing principles.

22. The Commission is seeking submissions on these issues.

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