GCC member states to implement a new roaming regulation from 2016

GCC member states to implement a new roaming regulation from 2016 RRTEEN20150001 - Sep. 8, 2015 - Sufian Shunnaq The Gulf Cooperation Council (GCC) roaming working group (RWG) has finalised its report on roaming regulation across GCC countries. This follows the consultation of September 2014 (Report). The GCC Ministerial Committee for Post, Telecommunications and Information Technology approved the recommended regulations in its 24 th meeting of June 9, 2015 held in Doha, Qatar (but the RWG report has only been publicly available since the beginning of July). GCC member states have yet to adopt the necessary regulatory instruments that would oblige mobile network operators (MNOs) to implement the price controls and other regulatory measures. So far, none of the GCC regulators have published such regulatory instruments. However, CRA Qatar and TRA Oman have announced the new retail price caps that would apply starting from April 2016 (CRA Qatar announcement, TRA Oman announcement) The RWG has changed the underlying cost estimates of different roaming services following comments received from MNOs, changing the proposed price caps. In particular, changes are made: to reflect the wide variation of taxes among GCC countries (Table); and to take account of the fact that international gateways in Kuwait are still not liberalised, as a result of which MNOs incur additional costs (paid to the Kuwaiti ministry of communications) in order to terminate voice calls to MNOs in other GCC countries. The RWG report recommends to reduce the current level of price caps on outgoing calls and to introduce new price caps on incoming calls, SMS sent and data usage while roaming. Departing from the initial proposals to implement the new price controls in a single step, the RWG now proposes to reduce the price caps gradually to reach the desired price caps in 2018 for outgoing calls, received calls and SMS sent, and in 2020 for data. The RWG set the price control glide paths in such a way as to ensure that MNOs' international mobile roaming revenues remain in excess of the 2015 levels. The report estimates cumulative welfare gains of US$ 6.7bn by 2020, with the cumulative wealth transfer to consumers from the MNOs being expected to reach US$ 14.2bn. Cullen International September 2015 - RRTEEN2015000 - Page 1 of 10

Roaming price caps set out in the RWG report (Cullen research) Service Before 2016* 2016** 2017** 2018** 2019** 2020** Outgoing calls (local) Outgoing calls (international GCC) wholesale SDR 0.137 (US$ 0.21) retail SDR 0.181 (US$ 0.28) wholesale SDR 0.330 (US$ 0.50) retail SDR 0.435 (US$ 0.66) US$ 0.19 US$ 0.18 US$ 0.17 Undecided Undecided US$ 0.26 US$ 0.25 US$ 0.24 Undecided Undecided US$ 0.47 US$ 0.45 US$ 0.43 Undecided Undecided US$ 0.64 US$ 0.62 US$ 0.60 Undecided Undecided Incoming calls retail (GCC other than Kuwait) Not regulated US$ 0.35 US$ 0.28 US$ 0.22 Undecided Undecided retail (Kuwait) Not regulated US$ 0.66 US$ 0.60 US$ 0.55 Undecided Undecided SMS sent wholesale Not regulated US$ 0.04 US$ 0.04 US$ 0.04 Undecided Undecided retail Not regulated US$ 0.08 US$ 0.07 US$ 0.06 Undecided Undecided Data wholesale Not regulated US$ 0.80 US$ 0.50 US$ 0.35 US$ 0.30 US$ 0.25 retail Not regulated US$ 1.30 US$ 0.85 US$ 0.60 US$ 0.50 US$ 0.42 * SDR is the Special Drawing Rate; conversion to US$ being based on the values in the RWG report (which was converted at the time of producing the 2014 consultation). Using a more recent conversion rate, for example the 2Q 2015 conversion rate reported by the IMF (US$ 1= SDR 1.397), would reduce the current price caps (implemented since 2012) below those of the adopted price caps for the year 2016. ** Wholesale price caps apply as of January of each year, while retail price caps apply as of April of each year Retail and wholesale price controls The adopted RWG proposals are a response to a mandate from the GCC telecommunications ministers committee to address the issue of high prices for international mobile roaming in order to achieve regional integration and social cohesion, and to protect consumers in the GCC. The RWG considered different options: taking no action; encouraging MNOs to lower retail prices; implementing price controls; and taking steps to increase competition. However, the RWG concluded that retail and wholesale price controls are the most appropriate option to achieve lower roaming prices. The wholesale price caps for the different international roaming services were determined based on a calculation that started from the underlying cost estimates of the visited network in 2012 and allowing a sufficient mark-up that exceeds any reasonable measures of the weighted average cost of capital. Home network operators are subject to the retail price caps which were set to cover the wholesale payments to the visited network (wholesale roaming charges) plus a mark- up at a level reasonably above other incurred costs. For some types of roaming services (e.g. incoming voice calls), the price cap also covers other costs incurred by the home network, including traffic termination and international transit. To avoid any disruption to MNOs' revenues and profits, glide paths towards the desired retail and wholesale price caps were adopted. Wholesale price caps apply as of Cullen International September 2015 - RRTEEN201500021 - Page 2 of 10

January of each year and retail price caps apply as of April of each year to enable GCC regulatory authorities to ensure that wholesale price caps are implemented before the retail prices that depend on them. Outgoing voice calls The figures below show the retail and wholesale price caps for outgoing voice calls within the visited country and to the other GCC countries, respectively. The estimated underlying cost to the visited network is US$ 0.15, covering the costs of call origination (US$ 0.04), call termination (US$ 0.08), the signalling and roaming overhead (US$ 0.02) and taxes (US$ 0.01). For outgoing calls to other GCC countries, the total cost is higher at US$ 0.20 because a transit cost of US$ 0.03 is added and the call termination cost is higher at US$ 0.10 (this is because MNOs in GCC discriminate between the termination of traffic originated locally and traffic originated in other countries). As an exception, for roaming calls from Kuwait to another GCC member state, the relevant costs to the visited network cover the international gateway (US$ 0.35), call origination (US$ 0.04) and the signalling and roaming overhead (US$ 0.02). Taxes in Kuwait are negligible. For the home network, the wholesale payment to the visited network is the major cost. Other costs include: retail activities, and the roaming overhead and signalling costs, which should be funded by the mark-up over the wholesale price cap (the difference between the retail and wholesale price caps). Retail and wholesale price caps for outgoing voice calls within the visited country, in US$ per minute (Cullen research) Retail and wholesale price caps for outgoing voice calls to GCC countries, in US$ per minute (Cullen research) Cullen International September 2015 - RRTEEN201500031 - Page 3 of 10

Incoming voice calls Despite its initial proposal to impose price caps at the wholesale and retail levels for incoming calls, the RWG is now proposing only retail price caps. The RWG noted that some GCC MNOs pay wholesale charges (in addition to paying an MTR to the visited network) to Kuwaiti visited networks (up to US$ 0.04). The RWG is of the view that these fees should not be permitted to increase above the current levels. The underlying cost to the home network to connect the call to the roamer is US$ 0.14 which compromises: an international mobile termination rate (MTR) to the visited network (GCC MNOs discriminate between traffic originated locally and internationally) but, at the same time, the home network receives an MTR from the caller's network (or retail revenue if the call is on-net) - therefore, the net cost to the home network is the difference between the MTR paid and the MTR received (net MTR), with the assumption being that the average difference is not more than US$ 0.06; an international transit cost to carry the voice call from the home network to the visited network (US$ 0.03); roaming overhead and signalling (US$ 0.02); taxes (US$ 0.01); and costs associated with retail activities (US$ 0.02). For roamers from Kuwait to other GCC countries (i.e. Kuwaiti MNOs are the home network), home networks incur additional costs related to the international gateway arrangements. The total estimated costs in this case are US$ 0.40. This amount should be less if the MNO receive a wholesale payment as mentioned above. Retail price caps for incoming voice calls, in US$ per minute (Cullen research) Outgoing SMS The estimated costs to the visited network for sending an SMS while roaming is less than US$cent 1. The RWG retains its original position to set the wholesale and retail price caps at much higher levels to avoid the case that SMS prices for roaming might become cheaper than for domestic SMS. Cullen International September 2015 - RRTEEN201500041 - Page 4 of 10

Retail and wholesale price caps for SMS sent, in US$ per message (Cullen research) Data The estimated costs to the visited network for sending or receiving data while roaming (US$ 0.12 per MB) includes data traffic costs (US$ 0.05), roaming overheads (US$ 0.03), international transit and signalling costs (US$ 0.03) and taxes (US$ 0.01). In addition to the wholesale payment to the visited network, the home network incurs costs related to international transit, signalling, and roaming and retail activities. Retail and wholesale price caps for data sent or received, in US$ per MB (Cullen research) Currency used for price controls The first roaming regulation was specified in term of Special Drawing Rates (SDR) for the price caps on retail and wholesale incoming calls. In its consultation of September 2014, the RWG was of the view that using the US$ would be more appropriate than using the SDR as all GCC currencies are pegged to the US dollar. However, respondents to the consultation preferred to keep SDRs rather than US$ as the basis for defining price controls. In the final report, the RWG acknowledged the stakeholders' preference and decided that price caps should continue to use SDR. However, the analysis throughout the report remains in US$ (using the US$/SDR exchange rate at the time of producing the consultation document). The RWG recommended that the final regulation implemented by Ministers should be formulated in terms of SDRs, using the exchange rate for US$/SDR at some to be specified date. Cullen International September 2015 - RRTEEN201500061 - Page 5 of 10

As the final decision of the ministerial committee is not publicly available, it is not clear what US$/SDR exchange rate is used. For the price controls in effect as of January 1, 2016, the RWG proposed using the exchange rate in effect as of April 30, 2015 (page 82 of the report). It is likely that the 2016 price caps of outgoing voice calls will become slightly higher than the current price caps as the analysis of the RWG (also shown in the figures above) are based on the exchange rates at the time of producing the consultation which was published in September 2014. The impact of the adopted price controls on operators revenues In the absence of sufficient data to predict the price elasticity of demand (PED) of international mobile roaming in GCC, the RWG believes that PED estimates of other regions would be relevant. In particular, the RWG adopted the values of a study conducted for the European Commission in 2011 (PED for calls made: -0.27, for calls received: -0.24, for SMS: -0.24 and for data -1.23). Under these assumptions of PED, the RWG set price control glide paths to ensure that MNOs' international mobile roaming revenues remain in excess of their 2015 levels (see figure below). This was possible because of the relatively elastic demand for data roaming services (less than -1) which means that the percentage increase in the consumption of data services will be higher than the percentage decrease in data roaming prices. Consequently, lower prices should result in higher revenues from data roaming services. However, for the other roaming services, which experience inelastic demand (between 0 and -1), the decrease in prices will always result in a decrease in the revenues of these roaming services. GCC MNOs international mobile roaming revenues (RWG analysis) Welfare analysis of the adopted price controls The RWG provides estimates of the social welfare transfer from MNOs to consumers and the reduction in deadweight loss that would result from the implementation of the adopted price caps. By 2020, it is expected that the cumulative welfare gains will be US$ 6.7bn, while the cumulative wealth transfer from MNOs to consumers is expected to be US$ 14.2bn. Cullen International September 2015 - RRTEEN201500061 - Page 6 of 10

Reduction in deadweight loss under the adopted price controls (RWG analysis) Welfare transfer from MNOs to consumers under the adopted price controls (RWG analysis) Supporting measures In addition to the price controls, the report proposes the adoption of a number of supporting measures. Collection of statistics The report proposes to initiate a six monthly comprehensive collection of data associated with the provision of roaming services. The proposed methodology and questionnaire (set out in the annex of the report) are inspired by models employed by the EU's Body of European Regulators for Electronic Communications (BEREC). For each GCC member state, the regulatory authority or ministry will collect data from the MNOs in its country and submit these data to the GCC statistics office. The GCC statistics office will then produce a consolidated public GCC roaming report of aggregate statistics every six months. Cullen International September 2015 - RRTEEN201500071 - Page 7 of 10

The RWG contends that data about termination rates is also needed for a full understanding of international mobile roaming. Therefore, if the monitoring of GCC termination rates is not done in a different work stream, it should be considered as a part of the international mobile roaming data collection. Billing increment Despite the initial proposal to implement per-second billing for voice calls and per MB billing (or even smaller units) for data services, the RWG now does not propose action on the billing increment. The RWG, however, proposes to adopt regulation on maximum billing units: per minute for voice, and per MB for data offers based on volume of usage. Measures to reduce bill shock Technical measures can be taken to reduce bill shock by warning consumers (typically by means of SMS) when their usage approaches a threshold, and to cut off the service when the threshold is exceeded unless the consumer signals a desire to continue. Such measures, currently, are only implemented by the MNOs in Oman. The RWG expects all operators to implement some sort of threshold system for roaming voice, SMS, and data within one year of the publication of the new Regulation. The RWG will at that stage assess whether any obligatory system should be imposed. LTE local breakout For LTE networks, that have new network and functional elements, interfaces and protocols, international roaming will require special technical arrangements (for example, see the GSMA LTE and EPC Roaming Guidelines). One characteristic of LTE roaming is the possibility of local breakout. This technical option allows the visited network to hand off data traffic to the internet directly without the need for traffic to be hubbed back to the home network. Therefore, LTE roaming would potentially reduce the costs of data roaming substantially by eliminating the need for international connectivity between the home and visited network. No specific policy interventions were identified in the public consultation process but the GCC RWG recommends that policymakers in the region continue to track the evolution of LTE services in the GCC region to ensure that they evolve. Future review By 31 December 2018, the RWG will decide whether reasonable grounds exist to commence a review of the roaming regulation. GCC v. EU price controls It can be noted that the price controls adopted by the RWG are at much higher levels than the roaming price controls imposed in the EU (see below for information on the EU Roaming Regulation). The figures below compare the price controls adopted by the GCC RWG that would apply at the end of the glide path (i.e. from 2018 for outgoing/ incoming voice calls and SMS, and from 2020 for data services) with the EU price controls applicable from July 1, 2014 (which will not change until the end of the current regulation in 2022, subject to a possible lifting of the retail price caps by June 2017). Cullen International September 2015 - RRTEEN201500081 - Page 8 of 10

Comparison of the GCC and EU price controls on outgoing/incoming voice calls (Cullen research) Comparison of the GCC and EU price controls on SMS/ Data In most cases, the adopted price caps by the GCC RWG are set at a higher levels compared with those adopted by the EU. Aside from any policy objectives that might be taken into consideration when setting such price controls, Cullen International would like to emphasis on the following facts: The underlying costs facing European operators seem to be lower than the costs faced by GCC operators - for instance: Cullen International research shows that the simple average of mobile termination rates (MTRs) in GCC countries (excluding Kuwait) is US$cents 4.14 (Table) while the simple average of MTRs in the 28 EU countries is 1.14 cents (1.26 US$cents) (Table). MTRs can be higher if a call originates in a GCC country other than the country of the terminated network. By contrast, in the EU, MNOs normally apply the same regulated MTRs for all traffic originated within the EU. As a special case, international gateways in Kuwait are not liberalised and Kuwaiti MNOs therefore incur additional costs (paid to the ministry of communications) in order to terminate voice calls to MNOs in other GCC countries. Cullen International September 2015 - RRTEEN2015001001 - Page 9 of 10

The RWG has to set price controls that accommodate the very wide variation in regulatory conditions among GCC countries (e.g. taxes, level of interconnection rates, level of liberalisation), while such variations are less prominent among the EU countries because they all follow the same regulatory framework (albeit regulatory differences do still exist). Roaming regulations have been in place in the EU since 2007 and it is arguable that there is now a better understanding of the underlying costs. In the GCC, the roaming regulation was implemented for the first time only in 2012. Moreover, the RWG has acknowledged that it had only limited data to work with when preparing its proposals. Background on EU roaming regulation International mobile roaming has been regulated in the EU since 2007 (Tracker). The first roaming regulation (Roaming Regulation I) applied from August 30, 2007 until June 30, 2010, setting price caps using a glide path for wholesale and retail outgoing voice calls and for retail incoming voice calls. The second roaming regulation (Roaming Regulation II) extended the duration of the regulated price caps for outgoing and incoming voice calls until June 30, 2012. It also extended the scope of regulation to SMS (retail and wholesale) and wholesale data roaming as from July 1, 2009. Transparency measures to prevent bill shock for data traffic were also introduced. Roaming Regulation III covers a ten-year period from July 1, 2012 to June 30, 2022. It extends the price cap regime on mobile roaming charges to include retail charges for data roaming. In addition, two structural measures to encourage competition were introduced: MVNO wholesale access from July 1, 2012, decoupling, i.e. separate selling of roaming services from domestic mobile services, from July 1, 2014. The transparency measures to prevent bill shock for data use were extended to cover European end users roaming outside the EU. The draft Regulation on the Telecoms Single Market (TSM, Tracker) may abolish the retail roaming charges from June 2017, subject to the European Commission having taken legislative steps to address any related wholesale issues by that date. Operators can implement fair use policies to prevent the abuse of regulated roaming services and can retain surcharges if they can demonstrate to their NRA that they cannot cover their costs of providing roaming (Flash). Cullen International September 2015 - RRTEEN2015001001 - Page 10 of 10