Annex 1. Analysis of the markets for voice call termination on individual mobile communications networks

Transcription

1 Annex 1 Analysis of the markets for voice call termination on individual mobile communications networks 4 April 2007

2 Contents Summary and conclusion Introduction and background Background Legal framework for the market analysis General Market Definition The product market The geographic market Criteria for identifying divergent relevant product markets Description and definition of the relevant product markets Market definition in the Recommendation Termination on mobile networks in Norway overview and history NPT s assessments of relevant market definition Introduction Assessment of demand-side substitutability - retail level Assessment of demand-side substitutability wholesale level Conclusion - demand-side substitutability Assessments of supply-side substitutability - retail level Assessment of supply-side substitutability wholesale level Conclusion - supply-side substitutability Special issues Summary and conclusion Definition of the relevant geographic markets Starting point Geographic market in defined part of Norway Summary and conclusion Analysis of the markets General - Significant Market Power Criteria for single dominance Market share Profitability Entry barriers and potential competition Countervailing buying power Prices and price developments Conclusion single dominance Competition problems General competition problems Specifics on competition problems in the markets for voice call termination on mobile networks Denial to interconnect Excessive pricing Cross-subsidisation Tacit collusion Price discrimination Non-price discrimination Notification of price changes etc Glossary

3 Summary and conclusion This document contains the analysis that the Norwegian Post and Telecommunications Authority (NPT) has carried out on the markets for voice call termination on individual mobile networks (Market 16). The analysis has been updated and revised after it was circulated for national consultation together with the notification of decisions on 6 December The market analysis will provide the basis for employing sector-specific measures in the markets in which operators with significant market power are identified. Chapter 1 contains a description of the background and legal framework for the analysis. The relevant product markets are defined in Chapter 2. Also provided here is an overview and history of the relevant markets in Norway. In its Recommendation, the ESA defined the relevant product markets for termination of voice calls on individual public mobile communications networks. NPT deems the relevant markets to be in accordance with the Recommendation. Sufficient substitution possibilities that make it relevant to broaden the product markets do not exist on either the demand or supply side. The Authority furthermore deems that termination of SMS is not covered by the markets. NPT finds that voice call termination on 2G networks, 3G networks and virtual mobile networks is covered by the product markets. As of April 2007 Norway has four mobile providers with both radio and core networks: Telenor, NetCom, Network Norway and Teletopia. Nordisk Mobiltelefon will start offering mobile services over the course of the time horizon of the analysis while Network Norway opened its first base stations in February NPT has consequently not defined separate markets for these two companies. Tele2 and TDC Song 1 are companies that offer mobile services based on MVNO agreements with Telenor. Furthermore, Ventelo and Barablu will likely launch mobile services based on MVNO agreements with Telenor within the time horizon of the analysis. On the basis of the market definition NPT defines the following markets: Voice call termination on Telenor s mobile communications network. Voice call termination on NetCom s mobile communications network. Voice call termination on Teletopia s mobile communications network. Voice call termination on Tele2 s virtual mobile communications network. Voice call termination on TDC Song s virtual mobile communications network. The relevant geographic markets are defined in Chapter 3. NPT has concluded that the relevant geographic markets shall be defined as the respective footprints of the individual mobile networks in Norway, including coverage achieved through agreements on national roaming, MVNO agreements or similar. 1 In the autumn of 2005, TDC Mobile A/S (Denmark) entered into an MVNO agreement with Telenor. TDC Song has since entered into a resale agreement with TDC Mobile. From now on the term TDC Song will be used to denote TDC Mobile A/S and TDC Song s mobile operations in Norway. 3

4 In Chapter 4, the relevant markets are analysed based on the criteria for significant market power, to find out whether there are operators with significant market power in the identified markets. In NPT s opinion the most relevant criteria for analysis of this market are market share, profitability, an overall assessment of entry barriers and potential competition, countervailing buying power and prices and price development. The Authority has chosen to disregard several of the criteria in the Guidelines. In NPT s opinion, an assessment of the criteria that were omitted would not have changed the outcome of the analysis. Telenor, NetCom, Teletopia, Tele2 and TDC Song are each the sole provider of voice call termination on their respective networks, which correspond to the relevant markets. They all accordingly have a 100 per cent market share. Because the entry barriers within the individual relevant markets are absolute there is consequently no potential competition within the time horizon of the analysis. As a starting point, all three network providers and the two MVNOs will stand to have significant market power. There would have to be compelling factors with a disciplinary impact on market power for this not to be the case. Such factors can primarily be assumed to be associated with countervailing buying power. Bargaining power on the demand side is therefore assessed individually for Telenor, NetCom, Teletopia, Tele2 and TDC Song to uncover whether any of the providers are subject to countervailing buying power that has a sufficiently disciplinary effect on the setting of the company s termination charge. Telenor is still by far the largest network provider in the Norwegian mobile market and also has a dominant position within most electronic communications markets. Telenor is also by far the largest buyer of termination services in the wholesale market. NPT cannot see that conditions on the demand side can have any effect on Telenor s exercise of market power on the termination of calls on its own network. The company is therefore deemed to have significant market power in the market for termination of calls on its own mobile network. NetCom is the second largest network provider in the Norwegian mobile market. Here too, NPT cannot see that NetCom is subject to the bargaining power of other providers to such a degree that the company s termination charge would be put under significant pressure. In general, the company s termination charges have indeed been lowered in step with Telenor s, but NPT believes this is due to factors other than countervailing buying power. Teletopia, Tele2 and TDC Song have set their termination charges at a higher level than Telenor and NetCom. In isolation this indicates that the companies have a certain amount of freedom to set their termination charge independently of the market. However, by virtue of their dependence on Telenor as the supplier of wholesale inputs, NPT expects Teletopia, Tele2 and TDC Song to be considerably more subject than NetCom to Telenor s bargaining power. However, it is highly uncertain how this will impact termination charges. Until there is clearer documentation that countervailing buying power has a major bearing on the setting of termination charges, NPT believes that Teletopia, Tele2 and TDC Song must be deemed to have significant market power in the market for call termination on their respective mobile network/virtual mobile network. 4

5 On this basis NPT has determined that Telenor ASA, NetCom as, TDC Song AS, Tele2 Norge AS and Teletopia Mobile Communications AS have significant market power in the respective markets for voice call termination on individual mobile networks. Chapter 5 identifies a number of competition problems within the markets for voice call termination on mobile networks. They are largely due to the absolute entry barriers in the relevant markets. 5

6 1 Introduction and background 1. This document contains the second analysis that Norwegian Post and Telecommunications Authority (NPT) has undertaken of the markets for voice call termination on individual mobile communications networks (Market 16). The first analysis of the termination markets is dated 9 December 2003 and was subsequently updated in May, August and September The market analysis has been undertaken in accordance with applicable regulations for electronic communications. Both the product market and the geographical market are defined, and the relevant market analysed. The market analysis will provide the basis for employing sector-specific measures in the various markets in which operators with significant market power are identified. 3. The markets and the analyses of them are not fixed once and for all, but will be subject to regular review. This analysis has a time horizon of three to four years and is therefore limited in the extent to which it is forward-looking, cf. Guidelines paragraph 20. See further details about the Guidelines below under Section 1.2, Legal framework for market analysis. 1.1 Background 4. The regulatory framework for electronic communication is based on five directives adopted by the European Union (EU). 2 The directives came into force with effect for Norway from 1 November The directives have been implemented in Norwegian law through the Electronic Communications Act (Ecom Act) and related regulations, not least the Regulations of 16 February 2004 relating to Electronic Communications Networks and Services (Ecom Regulations). 5. This framework is meant to lay the groundwork for harmonising regulation in the EU/EEA, limit entry barriers and facilitate sustainable competition for the good of users. 6. As described in the document Methodology for Market Analysis (the methodology document), work on market analysis may be divided naturally into three phases 3 : 1. Define relevant markets by defining relevant product markets and defining geographic markets. 2. Carry out market analyses of each of the relevant markets, with a view to revealing the extent to which any provider has significant market power, as well 2 Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (Framework Directive); Directive 2002/20/EC on the authorisation of electronic communications networks and services (Authorisation Directive); Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the Access Directive); Directive 2002/22/EC on universal service and users rights relating to electronic communications networks and services (Universal Service Directive); Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications). 3 Metode for markedsanalyse (Methodology for Market Analysis) of 6 January 2005, prepared by NPT. 6

7 as examining whether there are or are not providers with significant market power in each of the relevant markets. 3. Impose obligations on those providers identified as having significant market power. 7. This document contains NPT s assessments in Phases 1) and 2). The analysis is an annex to decisions in which NPT imposes obligations on the (or those) provider(s) considered to have significant market power in the relevant market. After the draft decision is notified nationally, a notification will be sent to the EFTA Surveillance Authority (hereinafter called ESA) for consultation with a view to European harmonisation, cf. Electronic Communications Act Legal framework for the market analysis 8. The Act s definition of significant market power in 3-1 reads as follows: A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers and consumers. Significant market power in one market may result in a provider having significant market power in a closely related market. 9. The term significant market power in the Act on Electronic Communications is very close to the competition law standard dominance. It follows from Norway s obligations under the EEA Agreement that identification of providers with significant market power is to be carried out in accordance with the guidelines and recommendations prepared by ESA under the new framework directive for electronic communication services: Guidelines on market analysis and the assessment of significant market power (hereinafter referred to as the Guidelines ). 4 Recommendation on relevant markets (hereinafter referred to as the Recommendation ) ESA s Guidelines and Recommendation have the same legal status in the EEA countries as the European Commission (hereinafter called the Commission) documents have in the EU countries. These documents form the basis of the work on the market analysis and the imposition of sector-specific obligations. 11. In accordance with the Guidelines a market analysis is to provide the basis for the assessment of relevant markets and of significant market power and the assessment is to accord with competition law methodology. The Guidelines and the Recommendation, together with the provisions of the Act on Electronic 4 EFTA Surveillance Authority Guidelines 14 July EFTA Surveillance Authority Recommendation 14 July It follows from Recital No. 4 that for harmonisation purposes the Recommendation must be seen in connection with the more detailed assessments included in the Explanatory Memorandum to the EU Commission s recommendation on relevant markets (Commission Recommendation on Relevant Product and Service Markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services). 7

8 Communications, particularly 3-1 to 3-3, will therefore form the legal framework for the market analysis. However, the Guidelines are not exhaustive and therefore in its methodology document NPT has elaborated on the criteria for the market analysis on certain points. If the Guidelines and the Recommendation are amended, NPT will amend the methodology document accordingly. It is the current version of the methodology document that provides the basis for the market analyses that NPT undertakes. 12. The document Methodology for Market Analysis prepared by NPT is not legally binding, but expresses the Authority s understanding of the guidelines to which NPT is obliged to adhere. The market analyses will therefore be carried out in accordance with the perceptions and assessments that are expressed in the methodology document. Should there prove to be discrepancies between the methodology document and the Guidelines or the Recommendation, the methodology document will yield. 13. The document Methodology for Market Analysis in no sense regulates the Norwegian Competition Authority s assessments in accordance with the Competition Act. Even if assessments based on the methodology document will largely be founded on competition law methodology, and will thus be closely aligned with ordinary competition law, NPT s assessments will be motivated by the requirement for general ex ante regulation, whilst the competition authorities assessments are as a rule ex post in connection with actual cases. The Competition Authority s and NPT s assessments in accordance with the two sets of rules may therefore differ even within the same or overlapping markets. 1.3 General Market Definition 14. As stated above, in regard to the market analyses, NPT must assess whether the predefined markets suit Norwegian circumstances. A description/definition of the product market is to be given and the geographic market defined. It must subsequently be assessed if there is a need for sector-specific regulation The product market 15. A relevant product market comprises products or services (the terms are used interchangeably below without difference in meaning) that are sufficiently substitutable. The starting point for the definition of a relevant product market is an assessment of demand-side substitutability. However substitutability may also exist on the supply side and may thus be relevant in definition of the relevant market Demand-side substitutability exists when two or more products in the market are, in the perception of the end user, mutually exchangeable or substitutable on the basis of characteristics, price and area of utilisation. 17. Supply-side substitutability exists when providers of other (non-substitutable) products, as a response to a marginal price change in the short term, can change their production or distribution and offer substitutable products without incurring significant additional costs or substantial risk. 6 See Guidelines paragraph 40 and Explanatory Memorandum to the Recommendation paragraph

9 18. An acknowledged method of analysing substitutability is the so-called hypothetical monopolist test (SSNIP) 7, where one endeavours to find the bestdefined market in which a hypothetical monopolist can exercise market power. The test is done on the basis of a marginal, but significant (in practice 5-10 per cent) and lasting price increase in the relevant product, based on the assumed price level in a market with effective competition. All other prices are assumed to be unchanged. Then one assesses the effect of the price increase in the relevant market and assesses the total effect on the producer s sales as a result of the price increase. 19. The method depends on a significant amount of data that will often be difficult to produce. ESA s Recommendation does not make use of the SSNIP test an absolute requirement in market definition for the market analyses. Approximation methods may therefore also be used. 20. The hypothetic assessment should be supplemented by actual information on behaviour on the supply and demand sides to the extent that such information is available. On the demand side, allowance should be made inter alia for the end users access to information, the costs of changing and other lock-in mechanisms. On the supply side, account should be taken of the actual potential a provider has to change production as well as any regulatory conditions that prevent rapid market entry by competitors in the market The geographic market 21. Once the relevant product markets are determined, the geographic market is defined. The outer geographic borders for the relevant product market will as a rule be determined by the extent of the network and the jurisdiction of the legal regulation of the market. The extent to which a more detailed geographic definition of the market has to be carried out will rest on an assessment of the substitutability of the relevant products and services on the supply and the demand side, with a permanent, marginal but significant price increase as described above. 22. The relevant geographic market is that area in which the relevant products and services are provided on sufficiently similar or homogeneous competitive terms. In assessment of substitutability on the demand side one should take account of preferences and geographic purchase patterns, if such information is available. With this as the basis the markets can be defined regionally within the national frontiers, nationally or trans-nationally. NPT can only define regional or national markets. 23. Assessment of the relevant geographic market will be somewhat different according to whether the assessment is made ex post or ex ante. A definition of geographic markets ex ante must inevitably have a wider basis and a more general approach than is taken with a definition ex post. An ex post definition is based on an actual event the extent of the effects of which one can chart, whilst the forwardlooking assessment must be based on completely different circumstances. This will therefore also characterise the scope of the assessment of the relevant geographic market. 24. In accordance with Electronic Communications Act 1-3, cf. Regulations No. 882 of 4 July 2003, the Electronic Communications Act applies to Svalbard, Jan Mayen, the dependencies and Antarctica. However in regard to Svalbard, exceptions have been made for Chapter 3 (significant market power), Chapter 4 (access) and 9-7 Small but Significant Non-transitory Increase in Price. See Guidelines paragraph 41. 9

10 3 (consultation procedure). However, electronic communications on Jan Mayen, the dependencies and Antarctica are assumed to have very little significance for the market analyses NPT carries out in accordance with the Act on Electronic Communications Criteria for identifying divergent relevant product markets 25. It may become relevant to define markets that diverge from those markets that have previously been defined by ESA. In such cases the consultation procedure under 9-3 of the Act on Electronic Communications is to be followed. When the relevant product market is defined, the following additional criteria, in accordance with Section 3.3 of the Explanatory Memorandum are to be present for the market to qualify for sector-specific ex ante regulation in the electronic communications area: 1. There are structural or regulatory entry barriers in the relevant product market. 2. The market has characteristics such that it will not sufficiently tend towards effective competition Ordinary competition law does not sufficiently address the objectives behind sector-specific regulation. 2 Description and definition of the relevant product markets 2.1 Market definition in the Recommendation 26. The Recommendation points out that the voice call termination on mobile networks product is an input factor for calls that originate on both fixed and mobile networks. The termination charge is set by the terminating provider. The Recommendation points out that customers of the termination product consequently do not generally have the ability to affect or influence the price under the current regime where it is commonly the calling party who pays for the call (the CPP principle) With respect to demand-side substitutability the Recommendation points out that termination of a call to a called party is not substitutable with termination of the call to another called party. Furthermore, providers will be obliged to terminate the call to the desired called party, since all providers of public telephone services are obliged to offer end-to-end connectivity. 28. In respect of supply-side substitutability the Recommendation points out that it would not be easy for other providers to offer substitutable services if a competitor 8 Here the Recommendation uses the term effective competition, which may best be translated into Norwegian as virksom konkurranse. The Guidelines define this as a market in which operators with significant market power are absent, cf. paragraph 19. This cannot be interpreted in an antithetical manner, i.e. the presence of a provider with significant market power will prevent the market from becoming more competitive. Proposition No. 58 ( ) to the Odelsting p. 99 states: If none of the providers has significant market power then there is assumed to be sustainable competition in the market. Although the meaning of the terms is not exactly the same, NPT still believes that the terms will coincide for this purpose. 9 Explanatory Memorandum page

11 should decide to raise its termination charges. This is because they would need access, among other things, to the end user data stored on the SIM card of the end user in question. This is data that is currently unavailable to providers other than the one to which the end user in question subscribes. According to the Recommendation supplyside substitutability does not exist either. The Recommendation furthermore points out that it is not possible for providers to readily price discriminate between termination charges to different end users on the same network. The Recommendation therefore finds that the relevant market is at least as wide as termination for each provider. 29. The Recommendation emphasises that provider and product are perfectly linked. Consequently, it is very important to assess whether other forms of communication could constitute real substitutes on the supply and demand sides. If so, this could represent an actual constraint on the provider s ability to freely set termination charges. 30. The Recommendation establishes that there are currently few substitution possibilities on the supply side, but that it could become feasible in the future by means, for example, of software enabled SIM cards. 31. In respect of demand-side substitution, the Recommendation assumes that there is no potential for such substitution at the wholesale level. Demand at the wholesale level is inextricably linked to supply, since the caller s provider has no other choice than to purchase the termination service from the provider to which the called party is connected. 32. However, the Recommendation points out that there are various possibilities for demand substitution at the retail level. Other forms of calls or communications such as call back, call forwarding and SMS messaging, tromboning (refiling) or rerouting are mentioned as examples. It is nevertheless considered unlikely that such alternative forms of communication will have sufficient scope to make it unprofitable all in all for a provider to raise its termination charges. 33. The Recommendation points out that buyer power at the retail level may in practice constitute a constraint on the provider s ability to freely set termination charges. In the first place, the ability to freely set termination charges may be constrained if the called party is aware of what it costs to terminate calls made to them, in the sense that this would in practice influence their choice of mobile providers. However, the Recommendation points out that mobile users have shown little price sensitivity with respect to how much it costs others to call them. The CPP principle is mentioned as a possible explanation for this. 34. Closed user groups are mentioned as another example of how buyer power at the retail level could conceivably have an impact on the ability to freely set termination charges for the majority of terminated voice calls. However, the Recommendation concludes that this type of buyer power is unlikely to constitute any appreciable constraint on the ability to set termination charges. The reason is that the provider will be able to offer the group in question a differentiated price below the ordinary termination charge level. 35. The Recommendation discusses certain possible alternative market definitions. The first option evaluated is a national market for mobile call termination. However, the option is rejected in reference to the fact that the necessary demand-side substitutability does not currently exist. 11

12 36. Another possible definition that is evaluated is national markets where mobile services are defined as a bundle, i.e. termination is viewed as linked with access and call origination. For this definition to be valid, called parties must be sufficiently concerned about what it costs others to call them, which is believed not to be the case. 37. The Recommendation concludes that voice call termination on individual mobile networks is the relevant market. 10 One consequence of the definition is that all mobile providers are monopolists within their own mobile network. However, it is pointed out that this still does not automatically mean that providers will have significant market power. This will depend on an assessment of whether there is a sufficient degree of countervailing buyer power limiting that market power in practice. 38. The Recommendation also maintains that the market definition will have to be reassessed if it becomes technically possible to terminate a call via other networks, if end users largely employ alternative forms of communication to circumvent high termination charges or if end users begin choosing their mobile subscription based on what it costs to terminate calls on the network in question. 2.2 Termination on mobile networks in Norway overview and history 39. Mobile providers who technically and economically control the access to terminate voice telephony to retail customers are relevant providers in the relevant market. Norway currently has four mobile providers with both radio and core networks: Telenor ASA (Telenor), NetCom as (NetCom 11 ), Teletopia Mobile Communications AS (Teletopia) 12 and Network Norway AS (Network Norway). In addition it is likely that Nordisk Mobiltelefon Norway AS (Nordisk Mobiltelefon) will also be able to offer mobile voice services over the course of the time horizon of this analysis. Telenor and NetCom both have nationwide networks where they control termination to their retail customers. These two companies are by far the biggest providers in the total Norwegian mobile market. 40. All together, just over 2.3 billion minutes that originated externally (internal traffic on Telenor s and NetCom s network is excluded) were terminated on Norwegian mobile networks in the first half of Of this Telenor s share came to about 56 per cent Teletopia has its own radio network in the Oslo region. Its coverage elsewhere in the country is offered through national roaming on Telenor s network. Wherever Teletopia can offer its retail customers coverage, they also control termination access. At the end of the first half of 2006 Teletopia had a market share of under 0.5 per cent 10 Explanatory Memorandum, page 36, cf. market definition no. 16 in ESA s list of relevant markets. 11 NetCom as is a wholly owned subsidiary of TeliaSonera AB (TeliaSonera). Since this market analysis deals with markets related to mobile operations in Norway, subsequent references will, however, refer to NetCom. 12 Teletopia was acquired by MTU Gruppen AS in the first quarter of 2007 but the license has not been formally changed hands at the time of the notification. NPT will in the following therefore refer to the company subject to regulation as Teletopia and if necessary change the name in the final decision. 13 The figures include termination of calls originated on Norwegian fixed networks, originated on other Norwegian mobile networks and calls originated abroad. 14 Source: Telecom statistics obtained by NPT for first half of

13 in the total Norwegian call termination market, measured by number of terminated minutes Network Norway holds Norway s third GSM-900 licence. The company is in the process of rolling out its own mobile network and launched commercial services in February Furthermore, Network Norway has entered into an agreement on national roaming with NetCom. Since NPT analysed the market before the company launched its services and the rollout of the network has just begun, the Authority has not defined termination on Network Norway s network as a relevant market in this analysis. 43. Nordisk Mobiltelefon currently offers mobile data communications (mobile broadband/portable broadband) based on the rollout of its own network with CDMA technology under the name/brand name ICE (I Communicate Everywhere). At this time, the company offers neither voice telephony nor voice call termination on its own mobile network. Nordisk Mobiltelefon and its current operations thus fall outside what has been defined as the relevant market in this analysis. The company is therefore omitted from the further analysis of the markets for voice call termination on individual mobile communications network. However, on the basis of information from Nordisk Mobiltelefon there is much to indicate that the company will begin offering voice telephony over the course of the coming regulatory period. 44. Tele2 Norge AS (Tele2) and TDC Song AS (TDC Song) 16 are both virtual providers on Telenor s network. A virtual provider (Mobile Virtual Network Operator, MVNO) does not have its own radio network, but enters into agreements with providers who own their own mobile network on access to the radio portion of this network. A MVNO has its own core network, switching network and associated support systems, and its own mobile network code (MNC). A MVNO will enter into separate interconnection agreements with other providers in the same way as ordinary mobile providers, thereby controlling access to terminating voice telephony to its retail customers. At the end of the first half of 2006 Tele 2 had a market share of just over 8 per cent in the total Norwegian call termination market, measured by number of terminated minutes. 17 TDC Song started up as a MVNO on Telenor s network on 31 March 2006 and therefore had only a very small number of terminated minutes in the first half of On 20 October 2005 Ventelo signed a MVNO agreement with Telenor and is expected to launch mobile services based on this platform within the time horizon of the analysis. The same applies to Barablu Mobile Norway Ltd. (Barablu), which signed a MVNO agreement with Telenor on 1 November For network operators and MVNOs who over the course of the decision period launch services that fall under the relevant market, the Authority will have to undertake a post-launch assessment of the market power of the individual companies. 47. Figure 1 shows the market shares in the total Norwegian market for voice call termination on mobile networks: 15 Source: Telecom statistics obtained by NPT for first half of In the autumn of 2005, TDC Mobile A/S (Denmark) entered into an MVNO agreement with Telenor. TDC Song has since entered into a resale agreement with TDC Mobile. From now on the term TDC Song will be used to denote TDC Mobile A/S and TDC Song s mobile operations in Norway. 17 Source: Telecom statistics obtained by NPT for first half of

14 Share of the total Norwegian market for termination in mobile networks 8,2 % 35,8 % 55,9 % Telenor NetCom Tele2 Figure 1: Market share in the total Norwegian market for mobile termination measured in number of terminated minutes. Source: Telecom statistics obtained by NPT for first half of In the first half of 2006, termination revenues (from calls) for the Norwegian mobile market totalled just over NOK 1.9 billion for the network operators Telenor, NetCom and Teletopia and the virtual operator Tele2. Telenor s, NetCom s and Tele2 s share of total termination revenues is approximately 45 per cent, 43 per cent and 12 per cent respectively. The distribution of revenues from calls from fixed networks, other mobile networks and abroad is shown in Figure 2. Revenues from termination of calls in Norwegian mobile networks 5,0 % Termination of calls originated in Norwegian fixed networks 51,3 % 43,7 % Termination of calls originated in other Norwegian mobile Network Termination of calls Originated abroad Figure 2: Revenues from termination of calls on Norwegian mobile networks, first half of Source: Telecom statistics obtained by NPT for first half of Termination of calls on mobile networks requires the connection of the relevant networks and agreements regulating compensation and other terms and conditions. Connection of networks can take place either through a direct connection to the terminating provider or by using a third party to carry calls between the two networks (so-called transiting). For example, many smaller national providers use Telenor s fixed network for transit to the mobile networks. In contrast to fixed networks, the exchange of interconnection traffic with mobile networks takes place via a handful of network points. Direct connections for voice calls will usually be associated with considerable fixed costs and require a rather considerable volume of traffic to be profitable. At the same time direct connection can be necessary in relation to certain services such as MMS. However, transiting agreements can therefore be an important 14

15 prerequisite for allowing smaller operators access to interconnection with other mobile networks. 50. The interconnection agreements between network providers regulate price and other terms and conditions for interconnection services. A number of interconnection agreements have been signed in Norway. 18 The interconnection product consists of different price elements, including registration charge, fixed charges, start-up charges and minute rates. On both the national fixed network and in many other countries, the minute rates are differentiated based on time of day or weekend (so-called peak/off peak). Such differentiation does not currently exist for interconnection on mobile networks in Norway. 51. In Norway the termination charge is usually based on a combination of minute rate and start-up charge. Providers who have direct interconnection among themselves normally have an interconnection agreement with direct settlement, which means that the difference in the compensation is settled directly between them. For providers who utilise transiting, settlement is accomplished by the terminating operator invoicing the transiting party, who in turn invoices the originating operator. Via such indirect settlement, smaller providers can indirectly benefit from interconnection agreements already entered into by major providers. In combination with transiting, indirect settlements can therefore be an important prerequisite for allowing new providers to quickly establish themselves and offer end-to-end connectivity. 52. Electronic Communications Act 1-5 defines interconnection as the function that provides for handling traffic between providers so that end users may communicate with each another and have access to public electronic communications services independently of the provider connection. 53. Interconnection is a form of access. The regulation of interconnection is and has been one of the most important elements in sector-specific regulation, since interconnection is virtually a prerequisite for allowing new providers to establish themselves in the market and offer services in competition with other providers. In the mobile communications sector, the obligation to negotiate on interconnection has traditionally been generally applied (obligation to comply with reasonable requests for interconnection), whereas the weightiest obligations (obligation to offer interconnection at cost-oriented prices) have been reserved for providers with significant market power. Interconnection-related revenue constitutes a large share of the overall market for electronic communication, and interconnection with mobile networks has increased steadily in recent years. 54. NPT issued a decision on the designation of undertakings with significant market power and imposition of specific obligations in the market for voice call termination on mobile networks on 19 September As a result of the decision Telenor reduced its termination charge to NOK per minute plus a call set-up charge of NOK 0.20 from 1 July At the same time NetCom s termination charge was reduced to NOK 0.83 per minute plus a call set-up charge of NOK Based on a MVNO agreement, Tele2 began offering mobile telephony including termination on its virtual network on 1 December The termination charge is NOK 1.04 per minute. A start-up charge of NOK 0.23 comes in addition. 18 Telenor Mobil s standard interconnection agreement is available on Telenor s website: 15

16 56. Teletopia s mobile services were officially launched on 15 October The termination charge is NOK 1.14 per minute, with a call set-up charge of NOK TDC Song launched mobile telephony services based on a MVNO agreement, including termination on their virtual network on 31 March The termination charge is currently NOK 1.04 per minute plus a call set-up charge of NOK Neither Tele2 nor Teletopia nor TDC Song reduced their termination charges as a result of Telenor and NetCom reducing their termination charges the summer of Figure 3 shows the development of mobile termination charges in Norway from 1995 to 2006: NOK 3 2,5 2 1,5 1 0,5 0 jan. 95 jul. 95 Prisutvikling - termineringspriser jan. 96 jul. 96 jan. 97 jul. 97 jan. 98 jul. 98 jan. 99 jul. 99 jan. 00 jul. 00 jan. 01 jul. 01 jan. 02 jul. 02 jan. 03 jul. 03 jan. 04 jul. 04 jan. 05 jul. 05 Telenor Mobil NetCom Tele2 Teletopia T3 TDC Song jan. 06 jul. 06 Figure 3: Development of mobile termination charges in Norway from 1995 to 1 November Charges are per minute when call set-up charges are included. Only charges for termination of traffic from other domestic networks are included in the estimates, and the peak/off peak breakdown for traffic is assumed to be 50/ NPT s assessments of relevant market definition Introduction 60. Even though it is simple in practice for an end user to switch provider, the CPP principle means that end users generally do not have sufficient incentive to do this even if termination charges were raised. Another factor making it difficult to prevent a provider from imposing high termination charges, is that the provider and the product are very strongly linked. In the first place, termination of voice calls to an end user is not substitutable with termination of voice calls to another end user. Secondly, demand at the wholesale level derives directly from demand at the retail level, which means that the originating provider has no other choice than to terminate the call on the mobile network to which the called party in question is connected. 61. Like ESA, NPT believes that these factors make it especially important to assess whether alternative forms of communication on the demand and supply sides are suited to acting as an actual constraint on the ability to freely set termination charges. Based on the SSNIP test this will be examined below. Afterwards, certain special issues will be assessed. In assessing whether substitutability exists on the demand and 16

17 supply sides, NPT will first look at the retail market before assessing the wholesale market Assessment of demand-side substitutability - retail level 62. At the retail level there is reason to assess the behaviour of both the calling party and called party in the event of a small but significant non-transitory increase of the termination charge. The calling party s behaviour is assessed first followed by that of the called party Behaviour of calling party in the event of a small but significant nontransitory price increase 63. If the calling party reacted to a small but significant lasting price increase by making calls via other forms of communication, there may be reason to include the alternative form of communication in the market definition. However, this presupposes that the price increase affects the behaviour of enough callers to render the price increase unprofitable all in all. 64. For the calling party to react to a small but significant non-transitory price increase by switching to other forms of communication, NPT deems that the calling parties must: know that they are calling a mobile terminal on a certain network, know what it costs to call the mobile network in question, and be concerned about termination price increases, in the sense that it is probable that in such cases they will prefer to use other forms of communication even though these are distinguishable technologically and otherwise from ordinary mobile calls. 65. In addition, an increase in the termination charge must automatically become evident in different retail prices for the various networks. This is not necessarily the case, since there are providers who do not have the same price for calls to different networks. 19 In such cases of equal retail prices for various networks, the increase of a single termination charge will most likely not be visible to end users (or just as a general price increase for all networks). The use of price models where the retail price is the same regardless of which network the call is terminated on, makes it less probable that the increase of a single termination charge will lead to fewer calls to the network in question. 66. NPT commissioned TNS Gallup to conduct a consumer survey in autumn 2004 to obtain better facts for determining how much knowledge Norwegian end users have about which network the call is terminated on along with the costs (in cases where the retail price is not the same regardless of which provider terminates the call). Despite the fact that the survey was conducted just over two years ago, there is little reason to believe that the situation uncovered in 2004 has changed since then. The Authority therefore believes that the survey is still relevant in this context. The sample that was polled numbered approx. 1,000 people, all of whom were end users in the residential market (not companies etc.). In brief, the questions posed were to what degree the end users: 19 One example of this is NetCom s Talk subscriptions where the price for calls is the same regardless of which network they are terminated on. 17

18 know what it costs to call other mobile phones, and know which mobile network the called party is connected to. 67. The figures from the survey show that consumer awareness is very limited about which mobile network the person they are calling is connected to and the cost of calling this network. With respect to awareness of prices, 55 per cent of those asked responded that they did not know. 24 per cent responded that they were aware (i.e. in under half the cases) of the costs to only a small degree. 68. With respect to awareness of which mobile network the person they are calling is connected to, the figures are about the same. Fully 63 per cent of those asked responded that they did not know. 20 per cent responded that they were aware of it to only a small degree (i.e. in under half the cases). 69. The figures from the surveys show that consumers have relatively little knowledge about which mobile network the call is terminated on and how much the call costs. In NPT s opinion, number portability is making further contributions to a situation where in many cases it is difficult to know which mobile network a call is terminated on. One consequence of this is that calling parties in general are unlikely to react to a small but significant non-transitory price increase in voice call termination charges on mobile networks by making calls via other forms of communication. 70. One consequence of the above is that it is improbable that a small but significant non-transitory increase of the termination charge will mean that a sufficient number of callers will choose other forms of communication to reach called parties. This applies even if satisfactory alternative forms of communication exist. 71. Since the validity of the figures from surveys can be questioned, NPT will assess below whether there are other forms of communication that could functionally serve as substitutes for voice calls to mobile terminals. Consequently, despite the fact that the surveys clearly found the opposite to be true, it will be assumed below that a sufficient number of calling parties know which network a call is terminated on and its related costs, and that they are also price-sensitive with respect to the cost of terminating the call. 72. NPT has assessed the following alternative forms of communication: calls to fixed phone as substitute for calls to mobile terminal, on-net mobile-to-mobile calls as substitute for calls between different mobile networks or calls from fixed phone, and SMS as substitute for calls to mobile phone. 73. The forms of communication are reviewed below. a) Calls to fixed phone as substitute for calls to mobile terminal 74. In response to high mobile termination charges it is conceivable that calling parties would choose instead to reach the called party via a fixed phone. NPT assumes for example that there will be a number of situations where an attempt will be made to contact the called party via a fixed phone before a call is made to the party s mobile terminal. The Authority nevertheless does not consider that substitutability will accordingly exist in a sufficient number of cases, since some of the point with calls to mobile terminals is to be able to reach the called party regardless of whether the party 18

19 is near a fixed phone. The alternative is therefore unsatisfactory in many cases. NPT therefore finds that calls to fixed phones will function only as a substitute in a limited number of cases. The effect of such substitution is therefore too small to have an impact on the market definition. This is in line with the Recommendation. b) On-net mobile-to-mobile calls as substitute for calls between mobile terminals on different mobile networks or calls from fixed phone to mobile terminal 75. On-net calls are understood to mean calls where both the calling and called party are connected to the same mobile network. In Norway the retail charges for on-net calls have usually been substantially lower than what the case is for calls between different mobile networks (i.e. calls where the calling and called party are not on the same network). On-net calls have thus been a reasonable alternative in comparison with calls from a fixed phone or calls between different mobile networks. Theoretically speaking, an increase in termination charges resulting in higher retail prices could, for example, mean that the calling party, instead of calling from a fixed phone, makes the call from a mobile terminal connected to the same network as the called party. 76. Particularly for Telenor with a market share of almost 60 per cent 20 at the wholesale level there is reason to believe that the possibility of making on-net calls may constitute a practical substitution option in a number of cases. The reason for this is that many who have fixed phones will also have a subscription to the company s network, and thus the option of making on-net calls to called parties on this network. 77. In the same way that on-net calls can in certain cases constitute a substitute for calls from fixed phones, such calls could also constitute substitutes for calls between different mobile networks. However, this presupposes that the calling party has the option of making on-net calls to a called party on another mobile network. In practice this requires the calling party to have several mobile subscriptions that the party in question can switch between to obtain the most favourable termination charge for each call. Few are believed to have this, so it is consequently more uncertain whether on-net calls could constitute a real substitute for mobile-to-mobile calls. 78. Given the assumptions of knowledge among end users that NPT is operating with under this section, NPT concludes that on-net calls could constitute a real substitute for calls from fixed phone to mobile terminal. They could possibly also constitute a real substitute between mobile terminals on different mobile networks. c) SMS as substitute for calls to mobile terminal 79. In the retail market NPT anticipates that SMS will to a certain extent be used by end users as a substitute for calls. Particularly for shorter calls, which do not necessarily have to take place in real time, SMS could represent a real alternative. However, NPT assumes that during the time horizon of this analysis SMS will not constitute a substitute in a sufficient number of cases for a small but significant nontransitory price increase in the termination charge to be unprofitable all in all. Substitution possibilities alone are therefore hardly a sufficient basis for including 20 Source: Telecom statistics obtained by NPT for first half of The market share covers Telenor s own end users and end users of service providers on Telenor s network. 19