mec1500 ARCEP Conference on Mobile Economics Paris, 26 March 2007 ‘Should mobile termination rates differ?’ Martin Cave Warwick Business School, UK

mec Issues When should an NRA set differential rates for mobile operators? Should they converge? If so, over what period? How are the Commission and NRAs addressing this issue?

mec Context Commission comments to NRAs on symmetry-eg -period of asymmetry must be justified, ‘based on a cost model which takes into account costs of an efficient operator and the complete process of adequate accounting information to be provided by all MNOs’ -NRA is invited to monitor the cost structures and assess whether its current assumptions on ‘fair and reasonable prices’ will remain relevant.

mec Approach taken here: Four possible regulatory objectives(some ambiguous) -achieve cost orientation/recovery -mimic a competitive market/achieve competitive parity -promote statically efficient prices -promote dynamic efficiency

mec Some differentiating factors I A.Differential X-inefficiency not a good basis for differential rates! B.Quality of service differences - cost-reflective - consistent with competitive outcome and with efficiency-enhancing prices - incentive problems under CPP

mec Some differentiating factors II C.Different frequencies/spectrum charges i) with competitive spectrum markets, or ‘opportunity cost’ prices: no problem as prices take the strain ii) with arbitrary fees or historic valuations: allow cost recovery or promote efficiency/competition

mec Some differentiating factors III D Location of traffic -Should geographically-based termination cost differences be incorporated, as detemined by cost function? -Impact depends on pass-through to retail prices -Call-by-call differentiation not feasible, but operator-by-operator differentiation promotes cost orientation and competitive parity

mec Some differentiating factors IV E.Peak and off-peak demand : where termination charges are reflected in retail charges, peak- load charges promote efficiency F.Different termination technologies: incentive needed to use termination mode which is cheaper in aggregate; if 3G justified overall, then a blended rate is justified for cost recovery

mec Some differentiating factors V G-HDifferent start dates/market shares Dynamic efficiency argument: competitive advantage required for late-comers for sake of long-run end-user benefits Precedents include OPTA’s ‘delayed reciprocity’ in fixed termination rates and Ofcom’s WBA margin squeeze restrictions Justification should relate to effective start date in the first instance, not market share

mec The cost-benefit analysis of intervention for dynamic purposes Factors which influence the decision include: -entry date gap and time elapsed -maturity of market -expected technological and regulatory developments -switching costs -impact of traffic asymmetries etc.

mec Treatment of switching costs Evidence that ‘slow’ mobile number portability (MNP) has a weakened/ insignificant effect on churn (Lyons 2006), whereas ‘fast’ MNP lowers prices and increases churn Combined with contract length, this permits calculation of period of effective switching needed to neutralise earlier entry

mec Unbalanced traffic Relative size does not skew inter-operator termination cash flows where traffic is balanced Where it is unbalanced, excessive termination rates disadvantage operator with a trade ‘deficit’ Combined with low on-net prices charged by ‘surplus’ operators, this can tip deficit operators out of the market (and may even breach competition law) Is this a basis for differentiation?

mec Conclusions I Some grounds for differentiation are unexceptionable -higher quality -higher costs from geographical factors -time-of day traffic differences Others are more debatable -coexistence of different networks

mec Conclusions II Problems arise with inclusion of dynamic factors - regime 1:differentiation can sustain inefficient operators dependent on regulatory favours, which do not benefit end-users, OR -regime 2:differentiation for a short period may prevent numbers in the long-term going down from 3 to 2 or 4 to 3. Possible solution lies in estimating realistic period of ‘hope’ for regime 2 to operate, and committing and sticking to differentiated rates acordingly.