Alternative approaches to mobile termination charges: an empirical assessment

1
Alternative approaches to mobile termination
charges an empirical assessment

• Stephen Littlechild
• Encore Workshop
• The Hague, 22 April 2008

2
Outline

• 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

3
Problems of regulation 1960s

• Utility economics regulation to deliver optimal
  pricing investment (pmc)
• 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

4
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

5
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

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Mobile Termination Charges

• Paradox most competitive and innovative utility
  sector is still heavily regulated. Why?
• Receiving subscribers 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

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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 gt100 , 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

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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 US4 - 57 per capita
  per year (UK, Australia, NZ)

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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 gt2000 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?

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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

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Cross section comparisons

• FCC used Merrill Lynch data 2005
• 9 CPP and 4 RPP high income countries
• CPP RPP
• 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

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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

13
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

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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

15
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 gt
  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

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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

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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)

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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

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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

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Bill and Keep systems

• BK operators have discretion how to charge their
  own customers
• What prevents BK operators from charging them
  for (retail) termination? Answer Nothing
• Most choose RPP but they could choose CPP
• Some BK 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

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Appraising the alternatives

• CPP creates problems that it cant 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
• BK offers all the advantages of RPP
• All prices at competitive levels, lower than now
• Higher usage, less subsidised handsets
• No reduction in mobile penetration
• BK has advantages of RPP without the downside
• No requirement to charge to receive calls

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Disadvantages of BK?

• 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 BK by phasing out
  termination charges

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Conclusion

• Liberalisation regulation have proved
  successful internationally, BUT
• Some utility regulation becoming untenable
• E.g. regulation of mobile termination charges
• BK no need for intrusive costly price
  controls
• BK 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