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Tuesday, August 13, 2013

The Romanian Competition Council starts a market test in respect of commitments regarding the mobile termination rates

The Romanian Competition Council (RCC) launched today, 13 August 2013, the market test of the commitments proposed by the Romanian mobile network operators - Orange, Vodafone, Cosmote (part of the Deutsche Telekom Group) and RCS&RDS (Digi Mobile) - in the investigation started by RCC in 2011 regarding the level of the mobile termination rates (MTR, or the interconnection tariffs, as they are called sometimes), charged for terminating a call in another network than the one of origin e.g. when an Orange subscriber call a number in the Vodafone network.  This tariff is charged by the network of destination as a wholesale tariff but it will reflect in the retail tariff applied to its users by the network where the call is originated, as I will explain below.
RCC requires and waits for feedback from the business community, the specialists and the consumers on the capability of these commitments, approved, prima facie, by the Board of RCC, to provide an adequate solution to the market problem identified when the investigation was started. Because the announcement posted today on the website of RCC does not include the background of the investigation and of the commitments, I explain in this post how the investigation is framed and how the proposed commitments should be analyzed.
In February 2011 RCC launched one of the most important (and I would say, ambitious) investigations, regarding a possible abuse of dominance committed by each of the 4 mobile network operators (MNO) – Orange, Vodafone, Cosmote and RCS&RDS – by keeping the level of the tariffs they charge for the termination of the calls originated in other networks (from Romania or from abroad) in their own networks at levels much higher than the costs  for the provision of this service.  The maximum level of the MTR was set by the telecom regulator (ANCOM) but the MNOs always kept their tariffs exactly at the ceiling permitted by ANCOM (a phenomenon which is often met when the prices are capped).  It is important to specify that ANCOM could not make any proper assesment as to the reality of the costs and the basis of the MTR, due to the fact that the operators were not under an obligation to have a separate evidence for such costs. 
Since 2009 the European Commission started to pay attention to the high level of the termination tariffs and pursued actively a process for their gradual but steady reduction, through decisions imposed by the national telecom regulators in the Member States (Recommendation 2009/396/EC). This reduction went in parallel with the process for reducing the roaming fees, which was handled directly by the Commission.  The Commission found that, since each MNO is a monopolist in its own network (there is no other possibility to terminate a call in that network) and the tariffs applied for the termination of the calls were high, this raised a significant barrier between different networks.  Thus, consumers were ”locked-in” their home network and most of the traffic (up to 80-90%) was flowing inside the same network. Whenever consumers wanted to call a number in another network, they had to pay significantly higher prices.  As a result, the national markets remained divided and mobility among different networks was very reduced, even if the mobile phone numbers could be transferred among networks in the same country (the portability).  This effect of the high tariffs barriers is called the ”club effect” – consumers will move and stay in the networks where the majority of their akin, colleagues and friends are also users, thus keeping their spending on mobile calls at the lowest possible level.
The investigation initiated in 2011 by RCC aims at finding the exact difference between the real costs incurred by each of the MNOs and the tariffs they applied for terminating the calls in their respective networks.  In parallel, ANCOM embarked, alongside its peers in the Body of European Regulators for Electronic Communications (BEREC), in a procedure for calculating the right level of the termination rates, based on a methodology in line with Recommendation 2009/396/EC and which details were approved by BEREC – the LRIC methodology (Long-Run Average Incremental Costs).  According to LRIC, operators could not include all the costs they incurred for the building and the functioning of their network in the tariffs applied to other MNOs but only a fraction of that – the costs necessary to accommodate the additional traffic generated outside their network and terminated in their network. 
In 2012, due to the fact that ANCOM already imposed two successive reductions of the MTR (to the current level of 3,07 eurocents/minute) and further to proposals received from the investigated MNOs, to adopt measures which would eliminate the concerns expressed by RCC, the competition authority agreed to enter into discussions with the MNOs in order to assess the feasibility of such proposals. In parallel, the investigation on the practices of the MNOs went ahead, although calculating the exact level of the mobile termination rates, for each operator, proved to be a difficult endeavor.  Initially, the MNOs were supposed to commit to a certain level of their MTR, which would reduce the barriers between networks at the lowest level. 
However, there were two problems in connection to such commitments:
1)    The accuracy of the numbers put forward by the MNOs was almost impossible to check and
2)    There was a significant risk of ending up with two different, but equally compulsory, levels of the MTR – the level committed by each MNO to RCC and made binding through the decision issued by RCC and the level imposed by ANCOM, based on the LRIC methodology. It should be noted that the LRIC model is based on a hypothetical MNO, not on any of the MNOs present in Romania, in particular, and its result may be seen, at best, as an average of the costs incurred by every MNO. Hence, it was almost certain that after the conclusion of the commitments procedure, estimated to be in the same time with the calculation made by ANCOM and the decision confirming the maximum MTR, the MNOs, the market and anyone interested would have been in the odd and undesired situation of applying not one but two tariffs! This was, of course, unacceptable. 

On the other hand, RCC noticed that, in spite of the process undertook by ANCOM, which would result for sure in a reduction of the maximum MTR close to the levels from the other Member States, there was still a ”risk zone”, which could reduce or even annihilate the positive effects of such a reduction.  To explain the weak point identified, I must say that the final price paid by the subscribers of an MNO is made of two essential parts: the mobile termination rate charged by the MNO terminating the call and the margin (including its own costs) of the MNO where the call is originated.  Whilst the reduction of the first element would create the conditions for an overall decrease of the price, the MNO where the call is originated may also take advantage and increase its margin, whilst prices remain unchanged or only witness a small reduction. This was something which should not have happened and RCC communicated to the MNOs that its concerns regard a possible discrimination between the tariffs applied for calls inside the home network (”on-net”) and calls terminated outside the home network (”off-net”).  In other words, the MNOs were expected not to take an undue advantage from the reduction of the mobile termination rates and to bind themselves  to transfer this benefit to the end users (the consumers). RCC decided to fill this gap and amended its concerns accordingly. 
The MNOs largely understood the revised concerns and committed to make available and to maintain for a certain duration (at least 1 year after the final approval by RCC) at least one offer – both for pre-paid and post-paid users – which does not differentiate between the destination of the calls – on-net or off-net.  Besides, such an offer should be attractive – available to a large number of users, ideally to all the users and at least to the s0-called ”marginal users” – those more likely to need to call outside the home network and for which the switching costs would run high. 
It is interesting to note that the market evolutions went in the same direction as that envisaged by RCC – in December 2012 one MNO already included such non-discriminatory tariff plans in its retail offer and the other major operators quickly followed suite (competition obliges!). This evolution is a good sign that such offers are feasible, benefiting the consumers and without putting unnecessary constraints on the MNOs. 
In addition, one of the MNOs – RCS&RDS (which operate in the mobile telephony market as Digi Mobile), the smallest of all 4 MNOs – committed to a secondary measure, provided that the commitment not to discriminate will not be considered as sufficient: to reduce its wholesale MTR to 1 eurocent/minute, which includes its costs and a reasonable margin of profit.  This commitment is interesting, insofar as it offers a glimpse on the likely maximum MTR calculated by ANCOM based on the LRIC model.  If Digi Mobile, the smallest operator in the market, has its costs below 1 eurocent/minute, it can be assumed that the larger carriers, which investments in the networks are in large part already depreciated and which enjoy much larger scale economies (never forget Metcalfe’slaw!), should not have costs higher than that (even if is true that a larger network also means higher costs) and the final tariff which will be imposed by ANCOM should not be, either, higher than this benchmark.  We will see.
This is the background promised to you, Ladies and Gentlemen. You may fire – only with valid and solid arguments – to the contact details mentioned on the website of RCC ( but you may use also this blog as a battleground!