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Alternative approaches to mobile termination charges: an empirical assessment. Stephen Littlechild Encore Workshop The Hague, 22 April 2008. Outline. Problems of regulation & the role of competition Mobile termination charges: the paradox Problems of CPP and price controls

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alternative approaches to mobile termination charges an empirical assessment

Alternative approaches to mobile termination charges: an empirical assessment

Stephen Littlechild

Encore Workshop

The Hague, 22 April 2008

  • 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
problems of regulation 1960s
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
a new approach 1980s
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
regulation today 2000s
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
mobile termination charges
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
calling party pays cpp
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
cpp solutions
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)
problems with cpp price controls
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?
receiving party pays rpp
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
cross section comparisons
Cross section comparisons
  • FCC used Merrill Lynch data 2005
  • 9 CPP and 4 RPP high income countries
  • 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
regression analysis
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
comparison uk and us
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
impact of mobile technologies
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
comparison of operators
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
regulatory concerns about rpp
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
are rpp concerns justified
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)
summary of evidence
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
exploring further
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
bill and keep systems
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
appraising the alternatives
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
disadvantages of b k
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
  • 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