Challenges to Boosting Trade in Communication Services

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1 Challenges to Boosting Trade in Communication Services J. Scott MARCUS, Abteilungsleiter OECD Workshop Towards a Services Trade Restrictiveness Index (STRI) Paris 10 December

2 Challenges to Boosting Trade Many kinds of trade in telecommunications services: - International voice calls, SMS and data transfer; - Mobile roaming; - Commercial presence of foreign companies; - Staff transfers, provision of services by individuals. Inherent tendency toward inflated prices for termination and for mobile roaming. - Encourages mobile telephone penetration (discourages fixed?). - Encourages mobile roaming to work everywhere. - Depresses usage and ARPU. Regulatory disparities discourage firms from operating in multiple countries. 1

3 Calling Party's Network Pays (CPNP) Call placed Call received Retail CPP Payment Originating Network Terminating Network Wholesale CPNP Payment 2

4 So what s wrong with termination? So what s wrong with CPNP call termination, anyway? 3

5 Calling Party's Network Pays (CPNP) CPNP is not a consequence of regulation; it is a consequence of terminating monopoly power (consider the European mobile sector prior to 2003). A wholesale payment compensates for an asymmetry in retail payment arrangements. Rationality tacitly rests on many assumptions: - That there is a fundamental and easily discerned difference between placing and receiving a call. - That the wholesale payment approximates the cost of call termination. - That the network exists primarily to carry voice. - That the retail service party is the same as the wholesale network operator. 4

6 Minutes of Use (MoU) per Month Mobile usage responds to unit price Mobile Usage Responds to Unit Price Merrill-Lynch Data 4Q2006, as quoted by the U.S. FCC 12th CMRS Report 900 United States US ARPU 600 y = x R 2 = Canada 400 Hong Kong 300 Singapor e Finland, South Korea France France ARPU UK Sweden, Australi a German ARPU 0 $- $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 Service-Based Revenue per Minute Italy Japan Germany Note: ML does not count on-net mobile termination in CPNP countries thus under-counting by perhaps as much as 20%. 5

7 The move to NGN poses challenges The Internet is not collapsing under the weight of streaming video. In the near term, the most formidable challenge that online video poses for the Internet will be flash crowds rather than the overall volume of traffic. Source: Cisco (2007) 6

8 The move to NGN poses challenges Network operators with market power will attempt to retain high MTRs as long as possible. - Direct revenue benefits (15-20% or more of revenue). - High MTRs depress usage and ARPU, but may inflate profit. - High MTRs facilitate on-net off-net price discrimination that prevents challengers from competing on price. The migration to IP does not in and of itself eliminate the termination monopoly. Inefficiently high termination rates will continue to depress domestic and international use of the service. The problem is unlikely to go away by itself. 7

9 The economics of interconnection: Mobile Roaming Roaming is a broken market with some similarities to termination. - Consumers have limited visibility into the charges that they must pay. - Consumers have few alternatives. - Normal demand elasticity does little to constrain the operators. - Absent regulatory intervention, prices will tend to be well in excess of the predicted monopoly price (e.g. more than a euro per minute). Again, high prices depress use. Some noteworthy changes in recent years. - Emergence of a transnational operators (e.g. Vodafone). - Emergence of carrier alliances. - Emergence of the SIM application toolkit to implement over-the-air programming of SIMs, which for the first time enables the home operator to direct its customers to the lowest cost network. Retail and wholesale rates are now regulated in Europe. 8

10 The economics of interconnection: Mobile Roaming: Definitions Visited network operator: mobile operator in the country where the subscriber is travelling. Home network operator: mobile operator in the home country to which the consumer subscribes. Wholesale roaming services: the services a visited mobile operator offers to mobile operators licensed in other countries, allowing the subscribers of the latter to use the visited mobile operator s network. Inter-Operator Tariff (IOT): a tariff between mobile network operators, charged by the visited network operator to the home network operator for the use of the visited network. 9

The economics of interconnection: Roaming-Out Payment Flows Outbound (originating) call made towards the visited/home network : the roamer is billed a roaming tariff corresponding to this

11 The economics of interconnection: Roaming-Out Payment Flows Outbound (originating) call made towards the visited/home network : the roamer is billed a roaming tariff corresponding to this international call to country A. The roamer s home network pays an IOT to the network in country B. Network in B provides the whole call. SOURCE: ARCEP, The Market for International Roaming, February

12 The economics of interconnection: Roaming-In Payment Flows Receiving an incoming (terminating) call from a caller in the home country : the home network of the roamer in country A perceives a termination charge from the caller s operator and bills the reception of the call to the called party. The called network charges no IOT. SOURCE: ARCEP, The Market for International Roaming, February

13 Roaming: What to do? What not to do? Reducing wholesale roaming prices is clearly desirable, and it appears that only regulation or the threat of regulation can bring about change. There is no assurance at all that retail prices would fall proportionate to any decline in wholesale prices; consequently, retail controls (or at least monitoring) are essential. At the same time, retail price controls entail significant risk of introducing economic distortions; one should avoid needlessly limiting pricing flexibility of operators. It is vital to avoid capping retail prices at levels below true cost. - Inevitably leads to substantial distortions. - Significant risk that services will simply not be on offer. 12

14 VoIP: The impact of regulatory disparities A WIK-Cullen 2008 study for the European Commission found, despite good intentions, that significant differences in the regulation of VoIP persist among EU Member States. Our interviews confirmed that VoIP providers often chose to enter the market in only one or two Member States, and that regulatory differences were a significant factor in these decisions. Recommended enhanced harmonisation, inasmuch as the marketplace for VoIP services had become sufficiently mature. - An appropriate and consistent regulatory environment for VoIP would tend to reduce costs and promote efficiency, and thus benefit all operators who aim to provide their services in multiple Member States or throughout the EU. - It would tend to result in greater choice and in services with better price/performance, thus, benefiting EU consumers. 13

15 VoIP: The impact of regulatory disparities Numbering: Despite pronouncements from the Commission and the European Regulators Group (ERG), huge differences in numbering arrangements (e.g. geographic versus nongeographic) and number portability remain between Member States. Emergency Services: Complex problem, large differences between Member States. Interconnection: Huge distortions, as previously noted. Lawful intercept: Differences seem to be problematic. Further study warranted. 14

16 VoIP: The impact of regulatory disparities The economic rationale for harmonisation of regulation flows from the needs (1) to ensure that Europe is fully competitive with other regions of the world, some of which enjoy a large, relatively homogeneous market, and (2) to maximise societal welfare, and especially consumer welfare. Lack of harmonisation in regard to VoIP implies a number of potential welfare losses. - Operators that offer services in multiple Member States incur higher economic transaction costs. - Consequently, competitive entry is inhibited; thus, denying consumers the potential benefits that competition would yield (in terms of price, quality, and choice). - Operators do not make potential profits in the countries where it is not cost-effective to enter, and lose the scale economies that would have come with pan European operation. - Enterprise customers may lose the scale and scope economies that would have flowed from having a single provider that could make a pan European service offer. - Electronic communications is a key enabler of all forms of commerce; consequently, there can be large spill-over effects. To the extent that electronic communications are more expensive and/or less efficient than could otherwise be the case, everyone loses; European enterprise as a whole is less efficient than it could be, and less competitive with enterprise in other regions. Lack of harmonisation thus has the potential to negatively impact network operators, service providers, enterprise customers and individual consumers. 15

17 Challenges to Boosting Trade Many kinds of trade in telecommunications services: - International voice calls, SMS and data transfer; - Mobile roaming; - Commercial presence of foreign companies; - Staff transfers, provision of services by individuals. Inherent tendency toward inflated prices for termination and for mobile roaming. - Encourages mobile telephone penetration (discourages fixed?). - Encourages mobile roaming to work everywhere. - Depresses usage usage and ARPU. Regulatory disparities discourage firms from operating in multiple countries. 16

WIK-Consult GmbH Postfach 2000 53588 Bad Honnef Deutschland Tel +49 (0)

18 WIK-Consult GmbH Postfach Bad Honnef Deutschland Tel +49 (0) Fax +49 (0) www. wik-consult.com 17

Mobile Roaming. J. Scott Marcus, Senior Consultant, WIK-Consult GmbH

Mobile Roaming. J. Scott Marcus, Senior Consultant, WIK-Consult GmbH Mobile Roaming J. Scott Marcus, Senior Consultant, WIK-Consult GmbH Breakfast Seminar: European Parliament, Committee on Internal Market and Consumer Protection Brussels, December 19, 2006 The opinions