Memorandum submitted by the Service Providers
Mobile Independent Service Providers submitted
their views to the Trade and Industry committee on the complaints
handling process by OFTEL within the SPIG submission in November
1999, prior to your oral session with the Director General on
7 December 1999.
We would like to bring you up to date with specific
issues for our sector. We met the OFTEL Director of Compliance
in January 2000 and were reassured that complaints were properly
prioritised according to importance for the industry rather for
procedural reasons (although OFTEL, like any competition authority,
needs to take account of due process).
Despite these reassurances, little has changed
on the ground. A glaring example is OFTEL's announcement of a
further inquiry into unfair cross subsidy by the mobile network
operators BT Cellnet and Vodafone in July 1999. This is a good
example of an investigation, which is of major importance to the
mobile sector and yet has moved at glacial pace, despite the concerns
of our members.
The background is instructive but disheartening.
For many years it has been widely believed by many of our members
that network operators have unfairly cross-subsidised their Tied
Service Providers at the expense of Independent Service Providers.
In 1994 OFTEL introduced a formula (the "Talkland Formula")
which was intended to be the yardstick against which cross-subsidy
could be measured. Since then, the Formula has been honoured in
the breach only. Meanwhile many of the original Independent Service
Providers have been assimilated by the networks as they find it
impossible compete on fair terms with the Tied Service Providers
(including, ironically, Talkland who launched original complaint
over eight years ago).
OFTEL in its consultative document "Competition
in the mobile market" dated February 1999 confirmed that
the Talkland formula had been continually breached (unfair cross-subsidy
had taken place). Yet after a further 14 months and three case
officers OFTEL is still asking for further information before
it can take any action. The most recent progress report to Service
Providers at the OFTEL Service Provider Forum on 30 March 2000
suggested that OFTEL wishes to update the formula, which appears
to be another element of delay and obfuscation. It seems to our
members that OFTEL is simply not prepared to come to grips with
a major issuemeanwhile the networks apply a tighter margin
squeeze, driving Independent Service Providers out of business.
We accept that radio spectrum is a scarce resource
and will always be available only to a small number of networks.
Hence we must stress that competition will not stem from four
of five vertically integrated businesses acting as an oligarchy,
but derives from competition in the provision of services. Competition
can only thrive if there is a level playing field for all players
providing those services. Independent SPs find it extremely difficult
to compete with cross-subsidised operator owned SPs.
We are concerned that OFTEL is disregarding
the limited nature of competition at the network level in its
haste to de-regulate. The regulatory controls on Vodafone and
BT Cellnet as the two largest operators are now barely adequateand
must not be relaxed further.
We are also concerned at the continuing staff
turnover in the OFTEL competition casework department. We have
recently heard that Jane Whittles, the head of casework, is leaving
and the turnover among more junior staff continues; for instance
we know of complex complaints that have passed through several
hands. (And in some cases, the case handlers have been recruited
by the network operators they were investigatingwhich does
not inspire confidence among our members.) Telecommunications
competition and regulatory casework is highly complex and requires
committed and settled case handlers. Rapid turnover of personnel
is not compatible with effective investigation. OFTEL must put
in place plans for retaining those staff who are key to its effectiveness
as a competition authority.
Mobile communications services will be the backbone
of the m-commerce market, but the benefits to customers and the
economy will not accrue unless Independent Service Providers and
new entrants have confidence that they can compete fairly. We
had hoped that OFTEL would have acknowledged the importance of
the mobile sector and the crucial impact on competition of the
result of their inquiry.
The Federation of Communication Services, which
was formed in 1981, is the representative body for the mobile
communications industry. It has represented the interests of the
mobile phone service provider community since 1988, initially
through the Cellular Service Provider Group and more recently
through the autonomous Independent Mobile Service Providers Group,
IMSP Group. FCS members are listed in the members directory on
the website, www.fcs.org.uk.
Both Groups have taken an active role in representing
the interests of Service Providers to OFTEL at the OFTEL SP Forum,
meetings with OFTEL officials and by means of submissions in response
to OFTEL consultations. Independent mobile service providers contributed
to the evidence submitted by SPIG to the TAIC in November 1999
regarding complaint handling by OFTEL. They also contributed to
the subsequent letter to Martin O'Neill MP dated 16 May 2000,
which highlighted concerns about the continuing staff turnover
in the OFTEL competition casework department.
2. ACCESS TO
Radiospectrum is a scarce resource. Timescales
for release for new spectrum for telephony are measured in years
and do not match the pace of market place demand. The scarcity
of this resource means there is, and will continue to be, an absolute
barrier to entry at the network level. The recent round of auctions
for third generation radio spectrum licences has demonstrated
that not only is entry limited but is also exceedingly expensive,
restricting access only to the large operators. In such circumstances
regulatory intervention will continue to be needed to ensure competition
can take place. In addition increasing public concern about the
siting of radio masts will contribute to the difficulties of rolling
out more radio networks. Maximising the use of existing radio
infrastructure, therefore, has to be in the public interest.
The present four-company oligopoly in the mobile
market serves to reduce competition at the point of sale by limiting
the choice of services available to consumers. Independent provision
of services is needed to ensure that competition flourishes and
the consumer has a choice from a basket of services. In order
to provide competing services independent service providers require
access to the mobile networks on fair and reasonable terms.
Indirect Access, IA, to the mobile networks
and establishing Mobile Virtual Network Operators, MVNO, are both
ways in which greater occupancy of the mobile networks and diversity
of supply can be achieved.
Indirect Access for a particular
network provides the consumer with a choice of an outbound carrier.
An MVNO chooses the mobile network
to provide services to its customers and controls the customer
and service information from the SIM.
3. SERVICE PROVIDER
Independent Mobile Service Providers that have
wished to access mobile network infrastructure to purchase simple
conveyance (call minutes) rather than the operator's branded retail
services via IA or MVNO have been unsuccessful. Voluntary negotiations
with the mobile licensees have not been fulfilled principally
The price offered has been based
on "retail minus". Retail minus pricing has been loosely
defined by OFTEL as being the operator's retail price for a particular
bundle of services less the costs saved by the operator in delivering
the services to the service provider rather than to the consumer.
Retail minus pricing as determined by OFTEL for IA does not allow
independent service providers to operate a viable competing business.
The operators' wish to protect their
brand; their vertical market dominance and their high retail prices
References to OFTEL for determination of IA
issues, in particular the request by INMS Ltd in December 1999
for Indirect Access to BT Cellnet and Vodafone, have led to excessive
delays but have not changed the policy of the retail minus charging
regime. We are aware that the UK Government has been subject to
EC competition action as a result of its handling of the determination.
4. UNFAIR PRACTICES
AND OFTEL RESPONSE
Since launch of mobile phone services in 1985,
BT Cellnet and Vodafone have been obliged to offer services to
service providers. OFTEL has continued to determine that both
BT Cellnet and Vodafone have Market Influence and the obligation
to offer services continues.
However, OFTEL has not acted in fact in response
to acknowledged licence breaches. OFTEL has failed the independent
service provider community and by doing so has given a "green
light" to the operators that these practices can continue.
The attached background paper summaries an eight year history
of failure. During this period many independent SP businesses
have ceased trading as a result of unfair competition that OFTEL
has not stopped, shrinking the competitive opportunity in services
delivery (Annex 1).
MISP members have the following concerns about
Dilatoriness in pursuing the margin
squeeze investigation which at the very least contributed to the
growth of BT Cellnet and Vodafone Tied SPs at the expense of Independent
SPs from 1994 to date.
Disregarding clear evidence of a
margin squeeze by BT Cellnet and Vodafone prior to Quarter one
2000 when OFTEL finally concluded an investigation.
Launching a review of the mobile
market which could well lead to the conclusion that neither BT
Cellnet nor Vodafone have continuing Market Influence.
Favouring a policy of network competition
over competition in the provision of services at different levels
of the marketfor example between Independent Service Providers
and network operators.
If m- and e-commerce are to thrive in the UK
and provide a competitive edge for the nation, a healthy service
provider sector and a regime that encourages new entrants will
be essential. Our analysis shows that, as a minimum, the regulatory
framework should include the following conditions:
A regulatory regime that recognises
in the mobile market there can never be effective competition
at the network level because of the absolute barrier to entry.
A Regulator who fairly policies the
mobile licensees; who responds to complaints of licence breaches
in a timely manner; who uses the powers given to him to remedy
any unfair or otherwise anti-competitive behaviour; who can call
upon resources to effectively regulate.
A right of access for independent
service providers to mobile networks to purchase elemental network
services at cost plus prices as inputs for their own competing
services for consumers.
Access for independent service providers
to, and interfaces with, mobile network infrastructure, on the
same terms as the operator provides such access to its internal
providers of services, to provide value added services (eg Pre-pay,
SMS, Voice and other messaging, Internet access and other non-voice
conveyance services, GPRS).
6. THE RESULT
We have real concern that a regime where the
regulator shrinks back to laissez faire, instead of facing up
to the abuses of dominance and Market Influence will have the
The mobile operators will continue
to exercise complete control over distribution channels to consumers
and content through restricted mobile portals.
Prices for basic services will remain
high and prices for new services will limit the take up of those
The opportunity for a richness of
competing products and services (including "new economy"
services) will be lost.
Independent service providers will
continue to abandon the mobile market and will not be replaced.
The consumer will have less choice.
The mobile operators' will have unhindered
The Independent Mobile Service Provider Group
encourages the Trade and Industry Committee to consider the issues
outlined in this brief submission in its oral hearing with the
OFTEL Director General on 14 November 2000. The Director General
has recently received a further three year contract to continue
at OFTEL and presumably oversee the transition to any new regime
outlined in the forthcoming Communications White Paper. Our confidence
in the regime as it presently stands is diminishing and we urge
a reconsideration of how OFTEL can move forward.
9 November 2000
ACQUISITION OF INDEPENDENT MOBILE SERVICE
PROVIDERS BY NETWORK OPERATORS
||Subscribers at time of purchase
|November 1996||Peoples' Phone
|February 1997||DX Communications
|April 1997||The Link
|October 1997||Securicor Cellular Services
|October 1997||Securicor Cellular Services
|October 1997||BT Mobile
|March 1999||Martin Dawes
|January 1999||Cable & Wireless Communications
|September 1999||DX Communications
|November 1999||Scottish Power
|March 2000||3A Telecom
1. Securicor Cellular Services transferred its 254,000 consumer
and small-medium enterprise subscribers to Cellnet at the same
time as transferring its 55,000 corporate subscribers to Martin
Mobile retailers are shown in italics.
Sources: Various publicly available sources.
BACKGROUND PAPER SUMMARISING CONCERNS ABOUT OFTEL'S HANDLING
OF SERVICE PROVIDER COMPLAINTS
1. In 1992 Talkland International (UK) Ltd, an independent
mobile service provider, submitted a complaint to OFTEL.
This alleged that the wholly owned downstream arms of the
network operators were:
being unfairly cross-subsidised; and
shown undue preference,
to the detriment of Independent Service Providers.
Other Independent Service Providers supported the complaint
during the following year. Even so, the investigation proceeded
very slowly during the remainder of 1992 and 1993 despite the
concerns of interested Independent Service Providers. Finally,
following the appointment of a new Director General (Don Cruikshank)
with a more dynamic agenda at the end of 1993, OFTEL announced
on 17 May 1994 that
it had completed the investigation and upheld the most significant
elements of the original Talkland complaint.
there was historical and continuing unfair cross-subsidies
by British Telecommunications Plc (BT) to BT Mobile Communications
(a division of BT) and Securicor Group Plc to Securicor Cellular
Services Ltd and
by Vodafone Group Plc to Vodac Ltd:
These cross-subsidies contravened the relevant licences;
if Call Connections Ltd (the wholly owned service
provider arm of Cellnet) were acquiring subscribers at a cost
which would not allow it to earn a reasonable return on its subscribers,
the Director General stated that he would consider that "an
unfair cross-subsidy exists" in contravention of the Cellnet
and BT licences;
OFTEL agreed with the complainant that a cross-subsidy is
unfair if it "seriously restricts the ability of Independent
Service Providers to compete with service providers linked to
the network operators."
2. THE "TALKLAND
OFTEL proposed to remedy these abuses in the long term by
insisting that a "mature" [tied] service provider business
must make a reasonable return on its investment such as its investors
would expect if it were a stand-alone business. The investment
was predominately the acquisition of subscribers. Therefore OFTEL
linked its definition of a "reasonable return" directly
to the net cost of acquiring and servicing a subscriber.
OFTEL set the required rate of return as 2 per cent per month
assuming that the average life of a subscriber was 35 months.
OFTEL stated that the rate of 2 per cent "took account of
the risky nature of the business, the level of returns earned
by the industry as a whole and of representations made during
the investigation." These numbers were to be kept under review.
3. REGULATORY ACTION
More immediately, OFTEL issued Directions to end the unfair
cross subsidies, which had been taking place.
Looking forward the two dominant players were told to submit
quarterly financial results of their Tied Service Providers Then,
Vodac Ltd and VHL Communications Ltd (Vodafone) and BT Mobile
Communications, Call Connections Ltd and Securicor Cellular Services
Ltd (Cellnet) for
independent audit. OFTEL stated that it would:
"deem an unfair cross-subsidy to have occurred if the
average net cost of acquiring subscribers in a quarter exceeds
the average economic value of those subscribers."
4. REVOCATION OF
OFTEL announced on 17 October 1994 that the Director General
had revoked the Direction given to BT and Cellnet:
this was followed by a similar announcement over the equivalent
Direction to Vodafone. However the Director General stressed that
the Directions were only being revoked because financial returns
showed that BT and Cellnet and Vodafone were complying with the
formula. He made
it clear that the decision to revoke the Directions had no effect
on the validity of the Talkland Formula.
"I would, however, like to stress that this decision
has no effect on the levels of profitability I am expecting Vodac
Ltd to achieve both currently and in the future. I shall be continuing
to monitor the financial results of that organisation, and of
Vodacom Ltd on the basis of information to be provided to me under
Condition 35 of the licence of Vodafone Ltd, and as I noted in
my earlier statement, I would expect to take appropriate action
if unfair cross-subsidy is found to exist in the future."
A similar statement was made about the application of the
Talkland Formula to the BT and Cellnet Group.
However, during the next six years OFTEL consistently failed to
make good its promise of "appropriate action".
5. BREACH OF
Within a year (by mid 1995) Independent Service Providers
had serious concerns that the Formula was systematically being
breached. The strength
of those concerns is shown by a statement by David Savage
made on 1 December 1995.
"Independent cellular service provision, the concept
established by the Government to create a competitive environment
within the mobile telecoms market, is now in danger of serious
erosion. I have received a number of requests from SP industry
members calling for a more effective complaints strategy and an
OFTEL investigation into independent SP's being bypassed by the
cellular networks. We believe that our industry is now on the
receiving end of predatory pricing, discriminatory marketing and
anti-competitive practices. Our message to the networks is clear:
please adhere to your Government licensing agreements."
During this period, OFTEL received complaints from many other
Independent Service Providers that the Formula was systematically
being breached by the Network Operators.
For example, Talkland lodged a further complaint that the criteria
were ineffective in early 1996. A good example of the lengths
to which Independent Service Providers were prepared to go to
explain their concerns to OFTEL is provided by submission on 23
February 1996 from the well established player, Cellcom.
"Cross subsidies by network operators of their respective
Tied Service Providers and Direct Sales Businesses has made the
market un-competitive for Independent Service Providers. Network
operators have, mainly as an adjunct to brand advertising, forced
their own retail pricing on consumers through the TSP and DSB
distribution channels under their control. This has had the effect
of virtually stopping competitive tariffs for the consumer."
Cellcom went on to state its concerns baldly: it was in no
doubt that there was a continuing unfair cross-subsidy in contravention
of the Talkland Formula.
"These factors have seriously damaged the business of
Independent Service Providers and have combined to put the very
future of independent service provision at risk. In addition the
increase in direct control of distribution channels by network
operators has led to less real competition and choice at the point
of sale which is ultimately detrimental for the consumer."
Although made well aware of these and similar concerns OFTEL
took no further enforcement action against the networks.
6. THE MAY
OFTEL's next major review of the relationship between Service
Providers and the network operators was issued on 24 May 1996.
This took the form of a Consultative Document inviting comments
by 6 August 1996.
OFTEL succinctly summarised the Talkland complaint in para
"The particular form taken by the cross-subsidy is that
the network operatorsthen a duopolymade high charges
to service providers for the use of airtime. Given the level of
retail prices charged by service providers for hardware, connection
and airtime, service provision was unprofitable whilst the network
operators made high profits. It was also noted that the network
operators exercised a considerable degree of influence over the
retail price through their TSPs. This meant that the Independent
Service Providers were subject to a `margin squeeze'. Losses made
by the TSPs could be supported by cross-subsidy from the network
operators; independents did not, of course, have an equivalent
source of funds."
Well aware of the risks of a continued margin squeeze OFTEL,
therefore, recommended that Formula should remain in place and
would continue to govern the financial relationship between the
Cellnet and Vodafone networks and their Service Providersalthough
with some changes to the detail.
OFTEL also requested views on the formal exclusion of Orange
and One2One from the Formula arrangements because of their lack
of market power. OFTEL also consulted on proposals to allow all
the networks more freedom to choose distribution channels and
to include brand promotion conditions in contracts with independent
During the Consultation period Independent Service Providers
made extensive representations to OFTEL that the regulatory controls
should not be unduly relaxed. They also again expressed concerns
that the Talkland Formula was being systematically disregarded.
7. THE APRIL
There was a further delay of eight months from the close
of the consultation before OFTEL issued the follow up Statement
"Fair Trading in the Mobile Telephony Market" in April
1997. Despite that delay, OFTEL largely reaffirmed its recommendations
made in the Consultation issued the preceding year.
In its final published form therefore the April Statement largely
focused on the relaxation of regulatory controls from the two
smaller network operators.
Even so OFTEL took the opportunity to reaffirm the relevance
of the Talkland Formula to the relationship between the two dominant
operators and their Service Providers and to update it in the
light of market changes.
OFTEL reviewed the regulatory framework, which determined
its enforcement powers towards the two dominant mobile networks.
"7.3.1 For so long as Vodafone and Cellnet continue to
possess market power, their licences will remain unmodified with
respect to the provision of mobile services. They will therefore
continue to contain:
(a) an obligation on the licensee to provide wholesale
airtime for resale to any service provider requesting it, subject
only to a right to refuse to do so where there is reasonable cause
to doubt the ability of the service provider to provide services
to others "in a proper and efficient manner" or to finance
the provision of those services, or where the service provider
is unwilling to sign a standard contract. (In Cellnet's licence
the relevant provisions are in Conditions 1.1, 37 and 41.5. Vodafone's
licence has analogous provisions);
(b) an obligation to connect the customers of service
providers to its network and not discontinue connections lawfully
made (c.f. Cellnet licence c.6.1);
(c) an obligation to publish charges and other conditions
(in effect wholesale charges, etc) and not to depart from the
published terms (c.f. Cellnet licence c.8);
(d) an outright prohibition of undue preference and undue
discrimination in relation to the provision of MRTS or the connection
of mobile apparatus. This will continue to be accompanied by a
provision deeming such preference or discrimination to arise if
the licensee unfairly favours to a material extent a business
carried on by it so as to place others at a significant competitive
disadvantage (c.f. Cellnet licence c.9);
(e) a power for the Director General to require action
to remedy unfair cross-subsidies provided by a Licensee's Systems
Business to other businesses it may run, including airtime retailing
businesses and the provision of enhanced services (c.f. Cellnet
(f) a requirement for accounting separation of the following
Businesses of a Licensee:
Apparatus Supply Business.
Apparatus Production Business.
Direct Business (ie retailing direct to the end-user).
Supplemental Service Business.
Any other distinct commercial business connected
Having stated that the regulatory framework would remain
intact so it continued to have enforcement powers to prevent unfair
cross-subsidy OFTEL then considered the practicalities of enforcing
the Talkland Formula.
"7.3.3 So long as Cellnet and Vodafone are still deemed
to have market power they should continue to be subject to controls
on cross-subsidy of tied service provision businesses by means
of the OFTEL formula for TSPs, though there is a case for modifying
particular parameters of the formula."
This clearly emphasises OFTEL's awareness of the continuing
need for the Talkland Formula was needed to control cross-subsidy
by mobile network operators of Tied Service Providers while Cellnet
and Vodafone possess market power.
8. CHANGES TO
In the Statement OFTEL announced the following changes to
update the Formula:
Its scope was extended to include all incentive
payments made by the two network operators direct to dealers or
other distributors and which were not channelled through service
providers or covered by returns. Vodafone and Cellnet were required
to record and monitor those payments and include them in the quarterly
returns into OFTEL. In Practice most high street retailers receiving
those payments arranged network connections through a Tied Service
Provider. Therefore, OFTEL was concerned that these payments could
be potentially discriminatory (and an additional source of subsidy)
even though they were not channelled overtly to the Tied Service
Providers. This change took account of concerns expressed by Independent
Service Providers that the dominant networks were unfairly using
incentive payments to tie high street retailers to Tied Service
The Formula was adjusted to take into account:
reductions in subscriber life to around 27
reductions in the required annual rate of
return for the service providers to 1.5 per cent a month or just
under 20 per cent a year.
OFTEL also stated that it would review those arrangements
in the light of market developmentsalthough the Director
General did not "expect this review to be necessary before
9. INDEPENDENT SERVICE
THE 1997 AND
Independent Service Providers continued to be extremely concerned
that Vodafone and Cellnet were disregarding the Formula. OFTEL
failed to take any enforcement action to address those concerns.
Meanwhile, the number of Independent Service Providers continued
to fall as they were absorbed by the dominant network operators.
10. THE FEBRUARY
In the April 1997 Statement OFTEL had promised a follow up
review of the mobile market and, particularly, the effectiveness
of the Talkland Formula. This commitment eventually resulted in
a further Consultation Document "Competition in the Mobile
market" issued in February 1999.
The Statement covered a wide range of related issues.
Even so, OFTEL's response to concerns about the effectiveness
of the Talkland Formula formed a large part of Chapter 2 of the
OFTEL once again confirmed the basic principles behind (and
continuing need for) the Talkland Formulathat Tied Service
Providers must achieve sufficient margins to earn a reasonable
rate of return and that compliance should be measurable. OFTEL
also confirmed its view that the Talkland Formula (appropriately
adjusted by the 1997 update) continues to be the appropriate yardstick.
(Therefore OFTELas in 1997now measured average subscription
life at 27 months and the required rate of return at 1.5 per cent
OFTEL reaffirmed its awareness of how Independent Service
Providers could suffer from a margin squeeze in a statement that
is entirely compatible with the principles of Community Competition
law in this market.
(unprofitable margins) "may be viable in the context
of the overall Group within which a TSP operates because the parent
company is likely to be generating profits through supply of wholesale
services [but] it would not enable ISPs to earn a reasonable return."
OFTEL concluded that:
"the margins achieved by most of the service providers
owned by the operators' Group have fallen below what is reasonable.
This suggests that the margins of Independent Service Providers
may be being squeezed for anti-competitive purposes."
11. THE OPERATION
1997 TO FEBRUARY
OFTEL stated "prior to changes made to the formula in
1997, Cellnet service providers and BT Mobile generally achieved
the required return of 2 per cent per month over the 35 months
assumed to be the average subscription life. Vodafone's service
providers achieved mixed returns, with Vodacom achieving this
requirement in most quarters and Vodacall and Vodac consistently
failing to achieve the 2 per cent per month minimum rate of return
over the assumed average subscription life."
Vodacall and Vodac, which were major Tied Service
Providers owned by Vodafone, had received systematic and unfair
cross subsidies from May 1994 when the Talkland Formula was set
until April 1997 when it was revised;
Even the better performing tied service providersVodacom
within the Vodafone Group and Cellnet service providers and BT
Mobile had received some cross-subsidies during that period.
Even for that period, there was clear evidence of a margin
squeeze used to strengthen the position of the Tied Service Providers.
This was in line with the representations made by Independent
Service Providers to OFTEL during that period.
12. THE TALKLAND
1997 TO FEBRUARY
OFTEL's analysis made it clear that compliance with the Talkland
Formula had deteriorated still further following its revision
in 1997. In reality by February 1999 the dominant networks were
simply disregarding it.
"3.6 Since the formula was changed in 1997, BT Mobile
has continued to achieve the required rate of return in every
quarter except Q1 of 1998-99. Cellnet's performance has been far
less satisfactory, failing to achieve the required rate of return
in every quarter except Q2 of 1997-98."
Vodafone's record was worse.
"3.7 Vodafone service providers all consistently failed
to achieve the required rate of return over the assumed average
OFTEL's conclusion were unequivocalwith the exception
of BT Mobile, Tied Service Providers of the dominant networks
had been receiving cross-subsidies in clear breach of the Talkland
Formula for the entire period. OFTEL then looked at the effects
in the market.
"3.8 The exact values appearing in particular periods
do not automatically denote anti-competitive behaviour and the
returns must be considered in the light of prevailing circumstances,
not in isolation. However, it is now evident that the failures
indicated by the returns submitted for the quarters, which immediately
followed the modification of the formula, were not isolated events.
With the exception of BT Mobile, tied service providers are consistently
failing to achieve the margins required by the formula. Furthermore,
the minimum average subscription life consistent with achieving
the required margins is substantially longer than the assumed
average life of 27 months. Indeed in some periods Vodafone
service providers report figures, which would take twice the assumed
average life to generate the required rate of return. The discrepancies
are so great that it is unlikely that they can be accounted for
by short-term market fluctuations." (Our italics).
Meanwhile Vodafone and BT Cellnet acquired many of the major
Independent Service Providers, which had been unable to compete
on equal terms with the existing Tied Service Providers.
13. OFTEL'S RECOMMENDATIONS
OFTEL backed away from enforcement action, apparently because
it was unsure about how watertight the "Group licence condition
was." (This was intended to impute actions of subsidiaries
to parent companies.) Instead OFTEL merely stated that it would
discuss its concerns with the operators in parallel with the consultation.
Action was however, promised for the future. OFTEL stated that
if the Director General was still not satisfied then he "will
use those enforcement mechanisms which seem most likely to be
effective in ensuring that Independent Service Providers are supplied
with airtime on a fair and non discriminatory basis."
Although OFTEL rejected immediate enforcement action because
of perceived difficulties with the Group licence it stated that
this problem would be overcome by introducing a more watertight
replacement condition into operator licences.
14. CONSULTATION ON
In the meantime OFTEL turned to other possible remedies and
a prohibition on the operator supplying airtime
to that other company; and/or
a control of wholesale prices for airtime.
After some analysis OFTEL consulted on these alternative
courses of action (and on wider issues such as the future of enhanced
services and branded airtime).
15. CONSULTATION ON
OFTEL also consulted on a significant adjustment to Talkland
"OFTEL does not propose to change any of the economic
inputs to the returns, including the minimum monthly rate of return.
However, rather than assume, for the purposes of the return, that
the life of an average subscription is 27 months, the operators
will be asked to treat that figure as a variable established by
the actual costs and revenues and OFTEL's requirement that service
providers within the parent Group should achieve a minimum return
of 1.5 per cent per month. Furthermore, the operators will be
asked to state what in practice is the average life of a subscription.
OFTEL proposes to publish the two figures."
However, many Independent Service Providers considered that
instead of taking regulatory action against the two dominant operators
for systematic breaches of the Talkland Formula, OFTEL was looking
for an excuse to abandon measurement of cross-subsidy altogether.
If the life of an average subscription became a "variable"
figure it would be impossible to measure an acceptable rate of
return. (Which had been the entire point of introducing the Formula
in May 1994). It would no longer be possible to measure a price
squeeze by showing that "the price which the network operator
charges in the downstream market is insufficient to allow a reasonably
efficient service provider to obtain a normal profit." It
seemed that faced by clear evidence of consistent anti-competitive
behaviour OFTEL was looking to abandon the appropriate yardstick
itself rather risk taking enforcement action in accordance with
its duties as a competition authority.
16. "OFTEL'S REVIEW
On 13 July 1999 OFTEL produced this follow up Statement.
As with the preceding Consultation it summarised OFTEL's views
on the state of competition in the mobile market and covered a
number of wider policy issues
for the future of the market. Therefore, the relationship between
Network Operators and Service Providers did not form a major part
of this statement. Even so, the failure of the network operators
to comply with the Talkland Formula was analysed at length in
17. OFTEL'S VIEWS
OFTEL once again noted the impact of consolidation in the
"2.4 Consolidation has also been paralleled by a tendency
for the services and tariffs of Independent Service Providers
to approximate to those of the operators' own service providers.
There may be many reasons for this, but the structuring of wholesale
airtime products in forms which shadow the operators' own retail
products, the offering of bonuses and discounts to service providers
which are willing to promote the operators' brands and the provision
of assistance with marketing programmes reinforcing those brands
have played a large part. If this process continues, Independent
Service Providers may find themselves forced to become little
more than the managers of franchise-type operations."
OFTEL then correctly linked this consolidation to the continuing
margin squeeze in breach of the Talkland Formula.
"2.5 Independent Service Providers have also been constrained
by wholesale airtime prices which, relative to prevailing retail
prices, fail to offer a reasonable margin on which to operate.
There is evidence that although, in accordance with their licence
obligations, BT Cellnet and Vodafone may have charged Independent
Service Providers and those within its Group the same prices for
wholesale airtime, these operators have conducted a margin squeeze
by cross subsidising service providers within their Group with
profits taken at the wholesale level. Here again, this has limited
the ability of Independent Service Providers to compete with differentiated
products." (Our italics).
18. OFTEL ACKNOWLEDGES LIKELY
For the first time OFTEL unequivocally accepted that systematic
unfair cross-subsidy had been taking place between the two dominant
networks and their Tied Service Providers in breach of the Talkland
"2.7 Following consultation in 1997, OFTEL set the required
rate of return at 1.5 per cent per month. Both BT Cellnet and
Vodafone have failed to achieve this return of 1.5 per cent per
"2.8 OFTEL considers that failure of service providers
within each operator's Group to recover the cost of capital for
an undertaking of this kind is an indicator of potential unfair
19. FAILURE BY
BT CELLNET AND
OFTEL also admitted that neither BT Cellnet nor Vodafone
had kept separate regulatory accounts as required under the Accounting
Nor had OFTEL called for these accounts in "recent years".
We can only assume that this laxity has compounded OFTEL's failure
to enforce the Talkland Formula. OFTEL itself commented:
". . . in the absence of published accounts reflecting
the regulatory businesses defined in the BT Cellnet and Vodafone
licences, it is unclear which bonuses, discounts and marketing
support programmes are funded at the network level by the Systems
Business in order to stimulate incremental use of a network and
which are intended to promote the brands and products of service
providers within a licensee's Group."
OFTEL had failed to follow the recommendations of the Access
Guidelines by requiring the production of "audited separated
accounts dealing with all necessary aspects of the dominant company's
20. OFTEL FINALLY OPENS
OFTEL again discussed the possibility of enforcement action
but again without taking any action. Again OFTEL revisited its
powers under the relevant fair trading and competition licence
conditions. This time, however, OFTEL stated that it was opening
a formal investigation. The remaining Independent Service Providers
assumed that this would finally lead to a decision reaffirming
OFTEL's preliminary conclusions about systematic unfair cross-subsidy.
They asked for a decision by 1 November 1999.
Even so, despite constant requests OFTEL still failed to
complete the investigation or to take any regulatory action against
the network operators for systematically failing to comply with
the Talkland Formula over the last six years. Meanwhile, Vodafone
and BT Cellnet acquired several more of the remaining Independent
21. OFTEL "UPDATE"MARCH
An OFTEL official presented an "update" on the
investigation into breaches of the Talkland Formula at the bimonthly
industry participation group the "Service Provider Forum"
on 30 March 2000. Despite the exhaustive analysis of the market
and of the Formula which has been undertaken for previous reviews,
OFTEL informed service providers that it still needed to consider
further "key parameters" before reaching a decision.
Those "key parameters" were not, as might be supposed,
a list of complex issues. Rather they restated obvious points
Whether cross-subsidy was "unfair";
Whether operators have market power in the mobile
Whether developments since 1994 may require the
Formula to be updated.
22. PAST ABUSES
Service Providers were also informed that OFTEL would be
unlikely (despite earlier assurances) to investigate and take
action on part abuses of the Talkland Formula. Rather OFTEL proposed
to disregard its own clear evidence of a margin squeeze during
the previous six yearsand which has considerably reduced
competition in the market.
23. SERVICE PROVIDER
FORUM 6 JUNE
This presentation concentrated not on enforcement action
but on options to revise and update the Talkland Formula. This
approach was subsequently confirmed in the Consultation Paper
on proposed action against BT Cellnet issued on 3 July.
24. DRAFT DIRECTION
AGAINST BT CELLNET3
OFTEL decided to limit the investigation to the first Quarter
of 2000 and to disregard the evidence of the failure of BT Cellnet
and Vodafone to comply with the Talkland Formula during 1997-99.
OFTEL at a later meeting on 23 July rejected requests to widen
that investigation to include that period. In effect, OFTEL was
trying to "wipe the slate clean."
OFTEL reaffirmed the continuing market influence of BT Cellnet
and Vodafone. The economists had measured the earnings per subscriber
of the BT Cellnet and Vodafone Tied Service Providers. For the
first Quarter of 2000
"In all of the tests which OFTEL ran Vodafone achieved
positive results, whilst BT Cellnet had negative ones. Consequently
the OFTEL formula returns indicate that BT Cellnet is cross-subsidising
its TSPs as it is clear from the data that if the TSPs were stand
alone companies they would not be covering their costs. It appears
to the Director, based on current information, that BT Cellnet's
cross-subsidy of its TSPs amounts to, on average, between £1.50
and £8.00 per subscriber."
OFTEL concluded that this amounted to a margin squeeze.
"This margin squeeze is made possible by BT Cellnet's
cross-subsidisation. (sic). This cross-subsidy significantly restricts
the ability of ISPs to compete with the Licensee's TSPs because
ISPs still have to compete with the prices of TSPs but in doing
so they cannot earn an adequate return."
Surprisingly OFTEL found no evidence to show that Vodafone
was engaged in similar cross-subsidy during that three month period.
Hence the draft Direction to end cross-subsidy was addressed to
BT Cellnet only.
OFTEL consulted on these views. ISPs have put their case
face to face and in writing. At a meeting on 23 July with the
case manager, OFTEL made it clear that it was not prepared to
widen the investigation beyond the first Quarter of this yeareven
though the limited scope excluded a substantial period during
which Vodafone and BT Cellnet had almost certainly been engaged
in a margin squeeze.
MISP has subsequently replied to the OFTEL proposal making
this point but also raising substantial concerns about the methodology.
In particular ISPs believe that OFTEL considerably underestimates
the true churn figures for the various reasonsbut particularly
due to the growth of the pre-pay sector which has a different
usage profile. The Group concludes that corrections to the OFTEL
assumptions will take pre-paid churn to similar proportions to
churn in the subscription sector of the market and produce a subscriber
life of at (or even below) 22 months rather than OFTEL's conclusion
of 4852 months.
This would of course, have a corresponding effect on the point
at which Service Providers can recover their costs. The Group
has also raised other concerns about anti-competitive behaviour
by Vodafone including unilateral reduction in margins and changes
to connection bonuses.
As far as we know, OFTEL is still considering these and other
representations: at 10 November 2000 a final Determination has
not yet been issued.
25. OFTEL REVIEW OF
This is of equal concern: OFTEL launched a full-scale review
of the mobile market on 19 September 2000. This will focus on
how competition has developed since the 199899 review and
whether the existing levels of regulation (particularly on BT
Cellnet and Vodafone) are still required. At a "Stakeholder"
meeting OFTEL officials made it clear that no options have been
ruled outincluding the removal of regulatory controls from
BT Cellnet and Vodafone if they no longer have "Market Influence".
The network operators will be lobbying OFTEL hard for this result.
It now appears to Independent Service Providers that OFTEL would
rather surrender its residual powers of regulation than face up
to the responsibilities of enforcement.
13 November 2000
May 1994 "Fair Competition in Mobile Service Provision". Back
The licences held by the Securicor Group were considered separately
from those held by the BT Group because at that time Cellnet was
a joint venture between BT and Securicor. Sole ownership was subsequently
acquired by BT. Hence elsewhere we have reflected the commercial
reality by referring simply to "BT Cellnet". Back
Vodafone's Tied Service Provider arm. Back
The complaint was rejected for the then new entrant third mobile
operator Mercury One2One because it was then in the first year
of start up operation (The activities of Orange were not considered
in this part of the statement because it was just beginning full
national operation under the ownership of Hutchison Cellular Services).
As OFTEL never attempted subsequently to enforce the Talkland
Formula against Orange or Mercury One2One (a position finally
regularised by a licence modification in April 1998) their position
is not considered in any detail here. OFTEL also rejected some
miscellaneous allegations of undue preference and abuse of dominant
position against BT Cellnet and Vodafone. Back
Then, Vodac Ltd and VHL Communications Ltd (Vodafone) and BT Mobile
Communications, Call Connections Ltd and Securicor Cellular Services
Ltd (Cellnet). Back
OFTEL also noted that bonuses paid by the network operators and
related to the size of the subscriber base were relevant-Tied
Service Providers might (through cross-subsidy) obtain larger
bases "from which to benefit from the higher bonuses."
Therefore, discounts or bonuses were disregarded on any subscriber
base in excess of 50,000. Back
Then Telecom Cellular Radio Ltd. Back
Under the licence Conditions under which OFTEL had taken action
a Direction could only be made if the Director General was satisfied
that a breach of licence was likely in the future. The Fair Trading
Condition was-at least in part intended to remedy this lacuna. Back
OFTEL press releases 17 October and 21 October 1994. Back
In August 1995 OFTEL extended the exemption for Orange and Mercury
One2One-as operators without market power-from the restrictions
on cross-subsidy. Back
Then Chairman of the Federation of Communications Services (FCS)
Cellular Service Providers Group (CSPG). Back
The CSPG even asked Mr Ungerer at the Commission to include Fair
Trading Condition obligations in the provisions of Mobile Communications
Directive. (Letter of 22 September 1995). This was ultimately
"Fair Trading in Mobile Service Provision"-The Regulatory
regime governing the relationship between the mobile telephone
network operators and their service providers. Back
The length of the consultation period seemingly reflected the
seriousness with which OFTEL was analysing the issues. Back
The most important change was the removal of the obligation to
sell through service providers from Orange and One2One-this was
linked directly to the introduction of the Fair Trading Condition
into operator licence. Back
Including the competitiveness of the market for calls from mobile
phones and (again) whether the two dominant operators should continue
to be under an obligation to provide wholesale airtime to service
Including OFTEL's approach to Indirect Access (Chapter 3) and,
more widely, the future regulatory environment (Chapter 4). Back
Condition 39 of the BT Cellnet licence and Condition 44 of the
Vodafone licence. Back
Letter sent 8 August 2000. Back
This could even be an underestimate. Experience shows that churn
in the first six months following pre-pay connection can exceed
8 per cent per month. Back