Mallinson: Working through mobile competition pipedreams

Politicians and government agencies in the 1980s and 1990s led us to believe that harmonisation of standards, liberalisation for new entrants and privatisations would result in well-functioning competitive markets. Significant regulatory intervention would only be required as an interim measure to protect competition and consumers during this transition. Regulation was supposed to diminish or go away.  Instead, management of competition through regulation has persisted and seems to be on the rise. 

Policy objectives

Competition policy and regulation provide the possible means to variety of different ends. Market forces alone will not produce the desired outcomes. For example, in the long run, unfettered competition typically results in fewer - not more - competitors. It all depends what the powers that be want to maximise: customer choice with the number of competitors, spread of market share, subscriber numbers, minutes of use, economic efficiency; or minimise:  price per minute or cost per month.

The UK used to be a trail-blazer for telecoms development, starting back in the mid-1980s, with the introduction of new competitors in wireless and fixed communications with a balanced cellular duopoly, alternatives to the national phone company BT and its privatisation. Instead, others now lead the charge including Germany, for example, with 800MHz band digital dividend spectrum licensing in 2010. Complaints and legal challenges from operators on matters such as spectrum licensing have slowed down the UK regulator Ofcom.

Terminal price controls?

All the UK mobile operators bar one resisted Ofcom's recent price controls to reduce call termination charges by around 80 per cent  over the next four years. Hutchison's 3 UK supported the move. Why?  High call termination charges favour operators with the highest subscriber market shares because these operators tend to receive most calls. Consequently, these operators also tend to be net recipients for call termination charges. Operators with relatively small market shares, such as 3 UK, tend to be net payers.

Operators compete on the basis of handset subsidies, subscription charges and prices for the calls users make, not on the basis of costs others incur to reach them. Consequently, call termination charges have not reduced anything like as much as have the prices to make mobile calls. Ofcom felt compelled to reduce termination charges to align them more closely with call initiation prices, applicable costs and level the playing field for 3 UK, the smallest operator.

High mobile termination charges have subsidized mobile phone owners at the expense of fixed network operators and those who initiate most calls. For example, this cross-subsidy has supported prepaid customers who tend to make fewer calls than their postpaid counterparts. It is possible to keep a European prepaid phone active for many months or even years without actually paying anything. Consequently, mobile phone penetration averages 130 per cent in Europe with its highest level of 155 per cent in Italy where prepaid predominates. In comparison, there is less than 100 per cent penetration in the US, where call termination charges are very low and instead one pays to receive calls at the same transparent rates one pays to make calls. Postpaid predominates and carriers insist upon minimum monthly payments regardless of how little they are used.

Low termination charges result in low call prices per minute and that stimulates usage. The US has the world's highest usage levels of around 800 minutes per user per month on average.  West European MOUs languish at 170, as they also do in other predominantly prepaid markets.

Spectrum caps

After consultations and vigorous pleading, the UK regulator Ofcom has appeased various carrier interests by invoking spectrum caps  for the next round of spectrum licensing, including the particularly attractive 800MHz "digital dividend" spectrum.  Immediate responses by the UK operators reflect self-interest. These measures will help preserve the number of UK mobile competitors. It will also reduce the auction proceeds and, for example, help 3 UK stay in the game.  Nevertheless, it is remains unclear whether 3 UK's position is sustainable with its market share a third that of its closest competitor.  3 UK will make a windfall gain from this licensing restriction if it succeeds in acquiring new spectrum. And if 3 UK still cannot survive independently the value of this windfall will be recovered neither by consumers nor the exchequer.

Unrestricted spectrum auctioning concentrates spectrum in the hands of those who are already major players with large spectrum holdings. These players tend to be deep-pocketed and can deploy new spectrum resources most efficiently.  The old "beauty contest" methods for spectrum allocation would most likely spread the spectrum around more widely, but these were discredited as a give-away to operators prior to Europe's millennial 3G spectrum auctions.  Auctions raise a lot of money that can be used to help pay down the national debts or be spent on other causes. That is politically attractive even though it hobbles the mobile sector with an enormous financial burden. The money could more effectively be invested by operators in projects such bridging the digital divide with universal mobile broadband.

Sharing is for wimps

Network sharing limits the ability of mobile operators to differentiate themselves. Operator expectations to lead in the provision of enhanced services are being quashed through disintermediation by Apple with its iPhone, Google with Android, Facebook and other over-the-top service providers.  With operators' ability to distinguish themselves at the network level eliminated through sharing, that only leaves areas such as branding, distribution and pricing to make their competitive impact.

Why would anybody want to share their most strategic assets with a direct competitor?  Only when needs dictate it.  Head and shoulders above the rest, market leaders AT&T Mobility and Verizon Wireless in the US have no interest in is sharing their networks with other carriers. When Verizon Communications CTO Tony Melone, was asked in a panel session at the CTIA Wireless conference in Orlando, Fla., earlier this month whether he would be willing to consider sharing spectrum with other carriers he replied "over my dead body." It is market followers or those in nations where market share is much more evenly spread that this extreme step is taken. Regulators in Europe have blessed sharing deals as preferable to full-blown mergers because they preserve customer choice among different operators. There are several network sharing arrangements among the UK's operators. For example, T-Mobile and 3 UK agreed to 3G network sharing in 2007.  

Competition or Competitors?

All industries are subject to competition law in the event of market abuses such as cartel price fixing, monopoly price gouging or predatory pricing at low levels to exclude competitors. Many industries are regulated to ensure health and safety and banks have to hold sufficient capital to protect depositors. Unlike most industries, however, telecommunications also remains subject to special controls on pricing. In mobile, access to its lifeblood in spectrum is also regulated.

Until 30 years ago, telecoms companies were regarded as natural monopolies. With competitors introduced through deregulation and licensing, competitive forces are subsequently separating winners from losers and consolidation would be a natural consequence. Regulation has become more complex and is being used to arrest market developments towards consolidation and its resulting cost savings. Whereas some authorities have allowed significant consolidation, many are concerned to maintain a minimum number of significant competitors to preserve customer choice and price competition, rather than let competition run its full course with resulting cost-efficiencies.

The combination of Orange and T-Mobile in the UK under the name Everything Everywhere goes further than network sharing. It is a joint venture with plans to retain the two parent company brands. The Swiss Competition Commission blocked the merger of Orange Switzerland and Sunrise. AT&T's proposed acquisition of T-Mobile which would result in nearly 75 per cent of US subscribers in the hands of just two carriers will reveal just how far the Federal Communications Commission and the US Department of Justice antitrust authority are willing to let competitive forces go.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor has recently published its Extended Mobile Broadband Device Forecast to 2020. Further details are available at: http://www.wiseharbor.com/forecast.html

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