Wholesale voice call termination on individual mobile networks. Wholesale SMS termination on individual mobile networks

Transcription

1 Market Review Wholesale voice call termination on individual mobile networks Wholesale SMS termination on individual mobile networks Public Consultation 03/11 11th May 2011 Gibraltar Regulatory Authority Suite 603, Europort Gibraltar Telephone Fax Web:

2 CONTENTS Executive Summary Introduction The EU Regulatory Framework for Electronic Communications Market review methodology Consultation Scope of the review Structure of this document Mobile market structure background Market Definition Methodology The relevant market - Voice call termination market The relevant market - SMS termination market Market Analysis Methodology Assessment of Market Dominance in Voice Call Termination Market Assessment of Market Dominance in SMS Termination Market SMP obligations Competition problems in the wholesale mobile markets Principles in determining SMP obligations SMP obligations in voice call termination market SMP obligations in SMS termination market...48 Annex A: Consultation questions Annex B: List of abbreviations

3 Executive Summary A new European regulatory framework for electronic communications networks and services entered into force on 25 July 2003 in the European Union. A reform package was then introduced in November 2009 which paves the way towards strengthening the European electronic communications market by revising rules to ensure more effective competition and better rights for consumers. The basis for the new regulatory framework is a set of five Directives. These five Directives were implemented by the Communications Act , (the Act) and accompanying Regulations. The legislation requires the Gibraltar Regulatory Authority (the Authority) to carry out reviews of competition in relevant electronic communications markets to ensure that regulation remains appropriate in the light of changing market conditions, otherwise known as market reviews. In conducting a market review the Authority must take account of the significant market power (SMP) procedures in the Act, sections 38-41, as well as the provisions dealing with co-operation with the European Commission and the regulatory authorities in the Member States, sections Section 39 of the Act requires the Authority to take due account of all applicable guidelines and recommendations which have been issued or made by the European Commission in pursuance of the provisions of a European Community instrument. Therefore, the Authority should take due account of the European Commission Recommendation 2 (the Recommendation) on relevant markets. This document contains two market reviews: The first concerns wholesale voice call termination on individual mobile networks in Gibraltar The second concerns wholesale SMS termination on individual mobile networks in Gibraltar. Voice call termination market The Authority s first round of market reviews for mobile termination concluded that there was no good substitute for termination services on mobile networks. The decision specified that the relevant product market consists of mobile call termination as supplied by a particular Mobile Network Operator (MNO) and that each MNO has a monopoly in the market for mobile termination on its own network. In this regard, two separate markets were identified: Wholesale voice call termination provided by Gibtelecom 1 Communications Act 2006, Act No. 15, Commission Recommendation of 17 December 2007 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 (2007/879/EC)

4 Wholesale voice call termination provided by CTS. The Authority found sufficient evidence to designate Gibtelecom and CTS with SMP in their respective market. Both operators were, therefore, subject to SMP obligations as per Decision Notice 03/08 3 and Decision Notice 09/09 4. The main obligation takes the form of a glide path to be applied to the wholesale mobile voice call termination rates of Gibtelecom and CTS. Reductions in mobile termination rates (MTRs) applied as from 2009 to 2011 for Gibtelecom and from 2010 to 2011 for CTS. This glide-path obligation for MTRs was determined in conjunction with other regulatory obligations, namely the provision of access, non-discrimination, transparency, and accounting separation. The market analysis carried out in the current review came to the preliminary view that both Gibtelecom and CTS have SMP for termination of calls to end users on their networks. The Authority proposes remedies in a similar manner where appropriate. Nevertheless when the Authority examines the detailed nature of these obligations it needs to be proportionate. Some obligations or some detail of the obligations imposed on Gibtelecom may be too burdensome to impose on CTS (that have a smaller market share of the total mobile market) and so would not be appropriate. The Authority believes that to remedy the identified competition problems in the market, the following obligations will be applied on Gibtelecom: Transparency Non-discrimination Accounting separation Access to and use of specific network facilities Price control and cost accounting. The following obligations will be applied on CTS: Non-discrimination Access to and use of specific network facilities Price control and cost accounting. The Authority proposes to continue to apply a price control which would require the SMP operator s termination rates to be in line with the European average. The Authority has paid particular attention to the Commission s Recommendation of 7th May 2009 on the regulatory treatment of fixed and mobile termination rates. 3 Wholesale Mobile Markets Decision Notice 03/08. 4 Wholesale Termination Markets Decision Notice 09/

5 The price control proposed applies symmetrically on both operators in the form of a 3 year glide path supported by the MTR benchmark provided by the Body of European Regulators for electronic communications. Table 1: Proposed Wholesale Mobile Termination Rate price control From this date, the maximum MTR shall not exceed MTR price cap (pence per min) Current 7.5 1st January st January st January SMS termination market The Authority s first round of market reviews for SMS termination concluded that there was no good substitute for SMS termination services on mobile networks. The decision specified that the relevant product market consists of mobile SMS termination as supplied by a particular MNO and that each has a monopoly in the market for mobile termination on its own network. In this regard, one separate market was identified: Wholesale SMS termination provided by Gibtelecom. The Authority found sufficient evidence to designate the sole market player at the time, Gibtelecom, with SMP in their respective market. The operator was then subject to transparency and non-discrimination regulatory obligations. In accordance with the one network, one market principle 5, the Authority proposes to designate Gibtelecom and CTS as having SMP in the SMS termination market in this second round market review. The Authority s view is that a relevant market for SMS termination can be identified and that the geographical extent of the market is Gibraltar. In this regard, two separate markets are now identified: Wholesale SMS termination provided by Gibtelecom Wholesale SMS termination provided by CTS. The Authority believes that to remedy the identified competition problems in the market the following obligations will be applied on Gibtelecom: Transparency Non-discrimination. 5 See page 8, On market reviews under the EU Regulatory Framework: Consolidating the internal market for electronic communications, SEC(2006) 86, COM(2006) 28 Final, 6 February

6 The following obligations will be applied on CTS: Non-discrimination. The Authority welcomes comments from all interested parties on the questions posed in this market review (full list of questions is set out in Annex A) and will accept written comments up until 3pm on Tuesday 28th June Under Regulation 15 of the Access Regulations and in order to promote further openness and transparency, the Authority will publish the names of all respondents and will make available for inspection responses to the consultation at its offices. Please note that this is subject to confidentiality. Respondents are asked to clearly identify material which is to be treated as confidential

7 1 Introduction 1.1 The EU Regulatory Framework for Electronic Communications A new European regulatory framework for electronic communications networks and services entered into force on 25 July 2003 in the European Union. A reform package was then introduced in November 2009 which paves the way towards strengthening the European electronic communications market by revising rules to ensure more effective competition and better rights for consumers. The basis for the new regulatory framework is a set of five Directives: Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (the Framework Directive) 6 Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the Access Directive) 7 Directive 2002/20/EC on the authorisation of electronic communications networks and services (the Authorisation Directive) 8 Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services (the Universal Service Directive) 9 Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (the Privacy Directive) 10. These five Directives were implemented by the Communications Act and accompanying Regulations. The legislation enables the Gibraltar Regulatory Authority to carry out reviews of competition in relevant electronic communications markets to ensure that regulation remains appropriate in the light of changing market conditions, otherwise known as market reviews. 6 DIRECTIVE 2002/21/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive) OJ [2002] L 108/33. 7 DIRECTIVE 2002/19/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) OJ [2002] L 108/7. 8 DIRECTIVE 2002/20/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive) OJ [2002] L 108/21. 9 DIRECTIVE 2002/22/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) OJ [2002] L 108/ DIRECTIVE 2002/58/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications) OJ [2002] L 201/

8 1.2 Market review methodology In conducting a market review the Authority must take account of the SMP procedures in the Act, sections 38-41, as well as the provisions dealing with cooperation with the European Commission and the regulatory authorities in the Member States, sections Section 39 of the Act requires the Authority to take due account of all applicable guidelines and recommendations which have been issued or made by the European Commission in pursuance of the provisions of a European Community instrument. Therefore the Authority should take due account of the Recommendation. Once the Authority has defined relevant markets, it shall analyse the state of competition within these markets to determine whether they are effectively competitive or not. Where markets are deemed to be effectively competitive or prospectively effectively competitive within the lifetime of the review, any existing regulation must be withdrawn. Where markets are deemed to be uncompetitive, the Authority must consider appropriate regulatory obligations on any undertaking which has SMP. The main purpose of a market review is to identify the competitive conditions prevailing in a market by assessing systematically the competitive constraints which are faced by undertakings in the market. A market review commences by defining a market, which is then analysed to assess the degree of effective competition in that market. In accordance with European Commission Guidelines 11 (the Guidelines), the market analysis procedure is prospective that is, it must be forward-looking. A market review has three main components: Definition of the relevant market or markets Assessment of competition in each market, in order to identify competitive constraints and assess whether any undertaking has SMP Where market power is identified, consideration of the appropriate SMP obligations in relation to that market. The Authority is following the approach recommended by the European Commission, and has taken account of the various guidelines and recommendations published by the European Commission, as well as the experience of other European NRAs. The Commission Recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC has been taken into account when deciding which markets will be reviewed. It should be noted that Gibraltar does not have competition legislation. This is important because any SMP obligations proposed within the communications sector will be regulated only within 11 Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services (2002/C 165/03) OJ [2002] C 165/

9 the sector, there will be no recourse to competition law as there is in other jurisdictions. The Authority has identified a range of obligations which it proposes should be imposed on Gibtelecom and CTS in the markets defined in this review. These obligations are considered to be appropriate, proportionate and justified in light of the competition problems identified. 1.3 Consultation The Authority shall publish the results of market reviews to provide operators the opportunity to comment on the findings prior to adopting the final proposals. Furthermore, prior to adopting the draft measures proposed in the market review, the Authority is required to notify the Commission with the findings of the market reviews, the proposed remedies and the outcome of the national consultation process. The Authority therefore welcomes comments from all interested parties on the questions posed in this market review (full list of questions is set out in Annex A) and will accept written comments up until 3pm on Tuesday 28th June Under Regulation 15 of the Access Regulations, and in order to promote further openness and transparency, the Authority will publish the names of all respondents and will make available for inspection responses to the consultation at its offices. Please note that this is subject to confidentiality. Respondents are asked to clearly identify material which is to be treated as confidential. 1.4 Scope of the review This market review is concerned with two wholesale markets. These are: voice call termination on individual mobile networks in Gibraltar SMS termination on individual mobile networks in Gibraltar. 1.5 Structure of this document The rest of the document is structured as follows: Chapter 2 provides an overview of the mobile market structure in Gibraltar. Chapter 3 defines the markets for wholesale voice call termination and SMS termination on individual mobile networks in Gibraltar. It also examines demandside and supply-side substitution both at a retail and wholesale level. Chapter 4 conducts an analysis of the relevant markets for mobile call termination and SMS termination and identifies the operators having SMP on these markets. Chapter 5 sets out the Authority s reasoning on formulating regulation to promote competition in the market for voice call termination and SMS termination on mobile networks

10 Annex A summarises the consultation questions

11 2 Mobile market structure background Gibraltar is a peninsula which shares a land border with Spain and spans a physical area of 6.8km² with a population of approximately 29, as seen below in table 2. It has a total of 32,546 mobile subscribers 13 shared between two mobile network operators (MNOs) in one of the most densely populated areas in the world with over 4000 inhabitants per sq km 14. It has a varied topography with most of its footprint dominated by a rock over 400 metres tall extending from north to south which explains the fact that the mobile incumbent has a total of 38 base stations 15 currently covering the whole of the territory and nearby waters. In Gibraltar there are currently three authorised mobile network operators (MNOs). These are Gibtelecom, CTS (Gibraltar) Ltd (CTS) and Eazi Telecom Ltd, trading as Eazitel. Gibtel launched a GSM service in 1995 and is wholly owned by Gibtelecom (the incumbent fixed network and services operator). The 50% share in Gibtelecom previously held by USA Communications providers Verizon Communications was bought by Telekom Slovenije in April 2007 and is now part-owner together with the Gibraltar Government. Gibtel offers its services on a GSM 900/1800MHz platform as well as a 3G service to its customers. Other services are offered under Gibtelecom s Gibwireline and Gibconnect brands and include fixed telephony as well as broadband internet services. The second mobile operator CTS (Gibraltar) Ltd acquired their 3G license in March 2009 and is currently providing 3G services to its customers. The company offered VOIP international calling service years before their venture into mobile and did so under the trading name of Ad-Lib Communications. CTS have since begun to expand into offering fixed line services in addition to their mobile telephony services. A third licence was awarded to Eazi Telecom Ltd (Eazitel) in October To date Eazitel have not rolled out their network and do not provide any mobile services. However, they will be rolling out GSM services on the 1800MHz band with a view to expand to 3G services in the near future. Residents of and visitors to Gibraltar can often receive signals from one or more of the Spanish mobile network operators.. The Spanish operators all offer GSM services on 900/1800MHz as well as 3G services. In parts of Gibraltar, signals are also received from the Moroccan networks IAM and Meditel, though the effects of these networks are viewed to be peripheral and not considered further in this review. 12 Abstract of Statistics 2009, Government of Gibraltar. 13 Figures provided by both operators to the market review data requests See footnote 13 above

12 The population of Gibraltar and the end users of mobile telephone services comprise four categories: Gibraltarians, UK citizens, daily commuters (largely Spanish) and visitors. These are shown for the years 2008 and 2009 in Table 2. Table 2: Population and visitor numbers to Gibraltar 2008 and 2009 Gibraltarians UK/ British Other Sub-total Visitors per day* Total ,757 3,247 2,282 29,286 27,802 57, ,907 3,129 2,395 29,431 28,206 57,637 Source: Abstract of Statistics 2009, Government of Gibraltar. * Average calculated from total visitors per year (total divided by ) A large fraction of the daily visitors to Gibraltar arrive overland from Spain and, according to the Employment Survey Report of October 2009, of these up to 5,000 are in regular employment 16. For those working in Gibraltar and living in Spain they will likely possess a Spanish mobile phone. When entering Gibraltar, these users will likely continue to be connected to their Spanish home network instead of roaming on a Gibraltar network. This is due to the high signal strength of the neighbouring Spanish networks which cover most of Gibraltar. The UK/British population comprise largely of private sector individuals, those in the forces and their families. Those who don't have a local account with one of the Gibraltar operators and who do not live in Gibraltar on a permanent basis may likely roam onto a Gibraltar mobile network with their UK registered mobile phone. Gibraltar spans an approximate area of 6.8 km² and most of the population resides within 4 km². Although small in area, coverage with a GSM network is challenging because of the topographical nature of Gibraltar and close proximity of four Spanish GSM networks. The Gibtel network has thirty eight base stations and frequency reuse is limited. Due to the use of 900MHz by the Spanish operators and Gibtel, it was best for the new operators to make use of alternative 1800MHz frequencies along with the 3G frequencies. As expected, CTS opted to go for a 3G frequency band and as a result now have eight 3G base stations covering Gibraltar. Eazitel has initially opted for 2G services over the 1800MHz frequency band although to date no services have yet been offered. 16 See Table 1 in Employment Survey Report October 2009, Government of Gibraltar Statistics Office

13 Figure 1 below illustrates the recent evolution in mobile teledensity in Gibraltar since % Figure 1 Mobile teledensity in Gibraltar 110% 100% 90% 80% 70% 60% Q Q Q Q Q Q Q Q Q Q Q Mobile teledensity in Gibraltar appears to have risen significantly since the conclusion of the first round of market reviews in August A logical explanation for this increase could be the ever growing popularity of online social networks which people of all ages can now access through 3G or WiFi enabled mobile phones. There also seems to be a cultural trend amongst the younger generation whereby mobile phones are now seen as a necessity rather than a luxury. However, mobile teledensity in Gibraltar is very difficult to assess accurately due to the ownership of Spanish registered mobile phones and to a lesser extent, ownership and use of UK registered mobile phones. In reality, mobile teledensity is higher than the figures shown in Figure 3. The total number of mobile subscribers in Gibraltar has been growing steadily in recent years, while the number of fixed subscribers has declined slightly. Figure 2 shows the recent history in the relation between mobile and fixed subscribers

14 Figure 2: Fixed and mobile subscribers in Gibraltar 17 Subscribers 35,000 30,000 25,000 20,000 Mobile Fixed 15,000 10,000 5,000 0 Q Q Q Q Q Q Q Q Q Q Q Figure 2 above shows the progression of telephone communications subscribers in Gibraltar over recent years in both mobile and fixed line subscribers. The graph clearly illustrates a significant growth in mobile subscriber numbers, which would suggest that there is a growing demand for mobile telecommunications services in Gibraltar. The decline in fixed line subscriber numbers may be attributed directly to the increase in mobile subscribers, as this service offers a similar quality product with the added benefit of true portability, a feature which traditional fixed lines inherently lack and is therefore more suited to the modern on the go lifestyle that most users lead today. 17 Source: Gibtele.com

15 3 Market Definition 3.1 Methodology The market definition procedures are designed to identify in a systematic way the competitive constraints encountered by providers of electronic communication networks and services. They do so in a way which also facilitates subsequent market analysis procedures. According to the European Court of Justice 18, a relevant product market comprises all products or services that are sufficiently interchangeable or substitutable with its products, not only in terms of the objective characteristic of those products, their prices or their intended use, but also in terms of the conditions of competition and/or the structure of supply and demand for the product in question. In essence, this leads to a definition of the market s boundaries. Market definition is about identifying the boundaries of a market for the purpose of correctly applying ex ante regulation. The process involves considering constraints arising on both the demand and supply sides of a market (and their interaction). The constraints are those that would apply to a so-called hypothetical monopolist, such that the hypothetical monopolist would be constrained in price setting behaviour. Hence, critical to the market definition process is the degree of substitution identified on the demand and supply-sides of the market. If there is a lack of current or potential substitutability on either the demand or supply-side of a market, the overall scope of the market will need to be more tightly defined. If substitutability or its potential exists, a broader definition may be appropriate 19. The competitive status of each relevant market can then be considered. European guidelines also require the geographic coverage of markets to be considered. A relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products and/or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas. 3.2 The relevant market - Voice call termination market There are separate wholesale markets for the termination of mobile voice calls on the networks of each MNO in Gibraltar, namely: Gibtelecom and CTS. With respect to each relevant product market, there is only one seller of the services (i.e. voice call termination to the customer base of an individual MNO) in question, although there are two purchasers. Eazitel has a licence to provide 3G services but at the time of this consultation it is still not operational. 18 See, for example, Case 322/81, Michelin v. Commission [1983] ECR 3461, as well as the Commission Notice on the definition of relevant markets for the purposes of Community competition law ( the Commission Notice on Market Definition ) OJ 1997 C 372/3, and the SMP Guidelines. 19 A method for identifying market boundaries is known as the hypothetical monopolist test (also known as the SSNIP test, small but significant non-transitory increase in price test). This test assesses whether a hypothetical monopolist is able to increase price profitably for a product or service

16 The EC in its Recommendation states that NRAs should analyse the relevant market for voice call termination on individual mobile networks 20. The Commission has based its findings of this relevant market on several factors 21, including: The role of the calling-party-pays ( CPP ) principle 22 A lack of demand-side substitution at the retail and wholesale levels, including an analysis of the feasibility of re-routing possibilities, the role of buyer power, the possible internalisation of call externalities and/or the price sensitivity of mobile users A lack of supply-side substitution at the wholesale level The inability of MNOs to price discriminate between individual mobile terminals. European NRAs have consistently defined markets for voice call termination at the individual network level and the European Commission and competition authorities have agreed with this approach. This approach accords with the principle of one network, one market 23. The services under examination in this review are those for the termination of voice calls on a mobile network. Mobile call termination in Gibraltar is effected and charged at the wholesale level by the called party s MNO to the originating network or via the transit operator to the originating network. This termination charge is paid by the originating operator and is generally included in the retail price that the caller pays for the call. In principle, and consistent with the principle of technological neutrality, voice call termination on a 3G network would be no different to voice call termination on a 2G network in terms of the character of the service provided. In both cases, the MNO would be negotiating with other operators to terminate voice calls from their subscribers to its subscribers the extent to which those subscribers may be situated on different physical networks should not be material to the process of market definition. For that reason, the Authority considers that the termination of voice calls on a 3G network should be included in the scope of this market. However, the Authority also recognises that 3G is in the early stages of development and will take this into account when deciding on the appropriateness and proportionality of regulatory intervention regarding this market. 20 This market corresponds to that referred to in Annex I (2) of the Framework Directive. 21 Commission Staff Working Document Public consultation 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 (second edition) SEC(2006) Under CPP, the party making the call to a mobile phone pays the full cost for calling a mobile handset. The mobile user receiving the call incurs no charge for receiving it. An alternative to CPP is RPP (Receiving Party Pays) which applies in a number of countries outside of Europe, e.g. the USA. Under RPP the calling party pays the standard price for a comparable call to a fixed line and the mobile user receiving the call pays the cost of terminating the call over the mobile part of the network - often the same price as if the mobile user was making an outgoing call. Where numbers have not been specifically designated for mobile purposes, as in the United States, RPP is inevitable to prevent unwarranted use of arbitrage. 23 See footnote 17 above

17 3.2.1 Market Definition Procedure The Authority s forward looking approach to market definition is set out according to the EU Commission s Recommendation and Guidelines. In accordance with Recital (4) of the Recommendation, this procedure starts from a characterisation of the retail market over a given time horizon taking into account the possibilities for demand and supply-side substitution. Substitutability on the demand and supply sides will be assessed by first looking at the retail level followed by a similar exercise at a wholesale level. a. Demand Side Substitution at the Retail Level Demand-side substitutability means the extent to which customers can substitute other services or products for those in question. Demand-side substitution represents the most immediate and effective disciplinary force constraining the suppliers of a product or service. In theory, if suppliers increase the price of their goods and services customers could then choose to switch to alternatives, thereby constraining prices back to their original levels. The relevance of this argument for mobile call termination depends on the degree to which demand side substitution constrains MNOs in pricing this service. Indeed, pressure on MTRs could arise if customers of mobile telephony services value the price of incoming calls so much that it determines their choice of network to make their off-net mobile-to-mobile calls. This case is, however, not representative of normal customer behaviour, given that mobile call termination is governed by the Calling Party Pays (CPP) principle. Therefore, MNOs have no incentive to maintain low MTRs given that subscribers are not price sensitive to these rates, and most probably not even aware of this cost component in retail tariffs for mobile calls. An increase in the price of mobile termination could also determine the means of communication employed to reach mobile subscribers. Callers who are price sensitive to mobile termination charges could react to an increase in MTRs by switching to alternatives (substitutes) through which they could adequately terminate the calls on a mobile network to which the called party subscribes. The following sub sections will further evaluate demand side substitution at the retail level and its effects on wholesale mobile voice call termination both from a calling party perspective and a called party perspective. General the CPP principle The CPP principle applicable to mobile communications services in most European countries plays an important role in the market definition procedure described below. The CPP principle means that the party making the call i.e. the calling party, rather than the party receiving the call i.e. the called party, pays the entire cost of the call at the retail level. This results in the mobile call termination charge being included in the originating operator s cost base and in its retail prices

18 Calling party behaviour Mobile Numbers and Price Awareness In order for callers to be price-sensitive, it must be possible for them to be aware that they are calling mobile numbers and to identify the networks of the called parties via these numbers. In Gibraltar, the ability to know whether you are calling a fixed or mobile number is very easy as both types of numbers are highly distinguishable. For example, if a subscriber is calling a fixed number it would always start with either 200 (Gibtelecom) or 216 (CTS) followed by a five digit number. Alternatively mobile numbers start with either 54, 56, 57, 58 (Gibtelecom) or 606 (CTS). All mobile numbers are eight digits long. A reasonably high awareness of the type of calls users are making and to which network may exist due to the difference in starting digits for mobile telephone numbers. Having said this, consumers aren t necessarily aware of the underlying components of the price of a call, such as mobile termination charges. The end-user would only see a global retail tariff including the MTR and other costs. Consequently, the end-user cannot detect any changes in termination charges and cannot exert pressure on the setting of MTRs. Under the CPP arrangement end users are insensitive to the pricing of termination on mobile networks. It is important to know however, that at the time of publishing this consultation, mobile number portability is not available in Gibraltar. As a whole, the Authority believes that the behaviour of the calling party cannot adequately influence the ability of MNOs to set high MTRs. Calling party behaviour Alternative Services For the existence of a price sensitive caller base to be able to act as a competitive constraint on MTRs, it is necessary that such subscribers can bypass MTRs by selecting alternative means of communication. A number of possible demand-side substitutes are available at the retail level, which might arguably constrain the ability of an MNO to raise its termination charges. The following sections will assess other alternatives to determine whether these could have a significant impact on the setting of mobile termination charges and ultimately constrain MTRs. Calls to a fixed number Calling parties can use fixed telephony as a possible alternative to mobile telephony. Indeed, supposing that end users know on which network a call is terminated and the costs related to the call, calling parties can avoid high MTRs when calling on a mobile phone by calling to a fixed number rather than a mobile number. This is because calls to a fixed number usually involve cheaper (if any) termination charges. However, this consideration ignores the fundamental principle that mobile numbers are intrinsically by nature mobile and not set at fixed locations as a fixed line number. Therefore, an end user calling someone on a mobile number might not have a real choice to call that person on a fixed line number. This means that calls to a fixed number cannot be considered as a suitable alternative for calls to a mobile number

19 Mobile to mobile calls as a substitute for fixed to mobile calls A calling party incurs the same termination charges for mobile to mobile calls and fixed to mobile calls. This is because a call terminated on a mobile network will use the same network elements (and therefore incur similar costs) regardless of the origination network being it fixed or mobile. In this sense, in terms of termination rates, an end user calling a mobile number would be indifferent to whether the call is originated from a fixed or a mobile network. The Authority, therefore, believes that substitution from mobile to mobile calls to fixed to mobile calls does not impact wholesale MTRs. Mobile to mobile on-net calls as a substitute for mobile off-net calls or fixed to mobile calls According to the CPP principle, an end user is more concerned about the cost of making a call rather than what others have to pay in order to terminate a call on the network to which the called party is subscribed. Where an end user calling a mobile number is aware of the network terminating its call and the respective termination charges, an increase in these charges for off-net mobile to mobile calls and fixed to mobile calls would encourage the said customer to choose on-net mobile to mobile calls by switching to the mobile network to which the called party is subscribed. However, this would require the calling party to change SIM cards to make a call on a different network which would result in an impractical and time-consuming solution. Moreover, substitution from mobile on-net calls to off-net mobile calls or fixed to mobile calls would be highly unlikely as mobile termination charges are the same for all operators. The Authority recognises that local MNOs do not differentiate between on-net and off-net mobile to mobile voice call termination charges. In this sense, end users have no incentive to substitute on-net to off-net mobile to mobile calls on the basis of MTRs. SMS as a substitute to any voice call In certain instances, such as short and limited conversations, sending a text message may be considered to be a substitute for a voice call. However, in other circumstances an SMS may not be an adequate substitute to mobile voice calls for a number of reasons. These include the limited number of characters per message and the potential for delay in the transfer of text messages between networks due to their store and forward nature. The Authority, therefore, holds the view that SMSs and voice calls are considered to be complementary services rather than substitutes and that text messaging services do not currently constrain MTRs in the absence of regulation. Call back solutions The Authority holds the view that, in general, call-back services cannot sufficiently constrain MTRs. This is further compounded by the fact that retail voice call charges are very similar or identical when calling on-net or off-net

20 Furthermore, the Authority believes that, in the absence of regulation, the level of price sensitivity on the part of the calling party is insufficient to impact MTRs. Called party behaviour With the CPP arrangement, the called party is relatively insensitive to the pricing and costs of termination on mobile networks. In reality, customers care most about the prices they have to pay to subscribe and to place calls with a mobile operator rather than what others had to pay in order to contact them. In this sense, the behaviour of the called party is not expected to limit a provider s ability to charge others high prices for its services such as for mobile termination services. b. Demand Side Substitution at the Wholesale Level Demand for wholesale call termination is inextricably linked to retail demand for calls. This means that an operator wishing to terminate a call on a mobile number can only terminate it on the network to which that number is assigned. To attempt to terminate this call on another network would currently result in the call being unsuccessful. In effect, the current need to direct traffic to a specific mobile number ensures that there is no demand-side substitute service available to an operator seeking to terminate its traffic on a mobile number situated on a particular network. The Authority holds the view that currently there are no demand side substitutes for wholesale voice call termination which could sufficiently constrain MTRs. c. Supply Side Substitution at the Wholesale Level Supply-side substitution occurs when, in response to a rise in the price of a particular product or service, suppliers of other products or services switch without the need for significant new investments to supplying the product whose price has risen within a reasonable timeframe (thereby rendering the price increase unprofitable). In this sense, a small but significant increase in the price of MTRs could lead firms to consider providing mobile termination services in competition to those provided by existent MNOs. The Authority is of the view that there are no operators in Gibraltar currently providing voice call termination services that could provide effective supply-side substitution at the wholesale level. This is because no provider could readily substitute call termination on a network other than the network to which the called party is subscribed. Calls to a particular user can only be terminated on the network chosen by the called party. The Authority concludes that in these circumstances, supply-side substitution for mobile termination services is not possible The relevant geographic market A relevant geographical market comprises the area in which the undertakings concerned are involved in the supply and demand of products and/or services, in relation to which the conditions of competition are sufficiently homogeneous and

21 which can be distinguished from neighbouring areas because the conditions of competition are appreciably different to those areas. On the basis of this definition, the Authority takes the view that the relevant geographic market for the provision of mobile voice call termination services by individual MNOs is national in scope. Each MNO is considered to be a separate relevant product market for the provision of mobile voice call termination services. The geographic scope of the market then reflects the extent of physical coverage that characterises each MNO. The Authority finally notes that each MNO is licensed on a national basis and offers geographically uniform MTRs. On this basis, the Authority identifies Gibraltar as the relevant geographical market Preliminary Delineation of Mobile Voice Call Termination Markets There are currently no viable competitive substitutes at the wholesale level for the termination of mobile voice calls by individual MNOs, whether measured from the supply-side or the demand-side. Although the current method of charging for termination on MNOs (the CPP principle) has arguably contributed to the growth of the mobile market in Europe it perpetuates the fact that consumers are in general price-inelastic about mobile voice termination charges, further insulating individual MNOs from price competition. In respect of the analysis presented above, and in accordance with competition law principles, the Authority identifies wholesale voice call termination on individual mobile networks as relevant for the purposes of ex ante regulation. On this basis, the Authority identifies two wholesale mobile termination markets in Gibraltar: Wholesale voice call termination provided by Gibtelecom Wholesale voice call termination provided by CTS. Q1: Do you agree with the above preliminary conclusions regarding the wholesale voice call termination market definition exercise? Please give reasons for your answer 3.3 The relevant market - SMS termination market The European Commission did not recommend a separate termination market for SMS messages in the Recommendation. However, the French and the Polish NRAs (ARCEP and UKE respectively) presented before the Commission reasons why this market should be defined separately 24, and the Commission accepted their reasoning. 24 ARCEP: Decision n on the definition of wholesale market for SMS termination on public mobile telephone networks, SMP designation and SMP obligations (2006, 1 st market review) and Decision n on the definition of wholesale market for SMS termination on public mobile telephone networks, SMP designation and SMP obligations (2010, 2 nd market review) UKE : Decision on SMS regulation dated 14 th December

22 Since SMS uses the same mobile network equipment as mobile voice calls 25, the Authority considers the cost of wholesale SMS services to be inherently linked to the cost of wholesale mobile voice call services. The reasons put forward to support the conclusion that, as regards mobile voice call services, the relevant markets are wholesale mobile voice call termination on each MNO's network, should therefore carry equal weight as regards wholesale SMS termination Market Definition Procedure The Authority s forward looking approach to market definition is set out according to the EU Commission s Recommendation and Guidelines. In accordance to Recital (4) of the Recommendation, this procedure starts from a characterisation of the retail market over a given time horizon, taking into account the possibilities for demand and supply-side substitution. Substitutability on the demand and supply sides will be assessed by first looking at the retail level followed by a similar exercise at a wholesale level. To delineate a relevant market, the Authority considers the narrowest possible product market definition to be wholesale SMS termination to a specific subscriber (or number) i.e. wholesale SMS termination to a specific subscriber of Gibtelecom s or CTS s network. In principle, and consistent with the principle of technological neutrality, SMS termination on a 3G network would be no different to SMS termination on a 2G network in terms of the character of the service provided. In both cases, the MNO would be negotiating with other operators to terminate SMS from their subscribers to its subscribers the extent to which those subscribers may be on different physical networks should not be material to the process of market definition. For that reason, the Authority considers that the termination of SMSs on a 3G network should be included in the scope of this market. However, the Authority also recognises that 3G is in the early stages of development and will take this into account when deciding on the appropriateness and proportionality of regulatory intervention regarding this market. a. Demand Side Substitution at the Retail Level To assess whether there are any demand-side substitutes that should be included in the relevant market, the Authority assesses effects in the retail market which are linked with the wholesale market. The test is whether retail customers would switch to readily available substitutes in response to a hypothetical small (in the range of 5 to 10%) but permanent relative price increase for SMS services. From a demand-side perspective, there are a number of possible substitutes. 25 SMS services use the same transmission and switching equipment as voice services. Customers database HLR (Home Location Register) and VLR (Visitor Location Register) are also used by both services. Moreover SMS services use specific equipment managing the storage and sending of SMS (Short Message Service Center)

23 Voice calls ARCEP in France has concluded on a number of different occasions that SMS does not provide an adequate alternative for voice calls to mobile phones on the demand side, primarily because consumers perceive SMS as a limited substitute for a voice call and as an activity largely additional to voice calls to mobile phones 26. The main reasons for this are that SMS enables parties to exchange only relatively short messages and that SMS can be delayed because, unlike a mobile voice call, an SMS is transferred between networks on a store and forward basis. The Authority supports this conclusion and does not therefore consider voice calls to be substitutable for SMS. MMS MMS offers much more advanced features than SMS. Obviously they can serve the same uses as interpersonal SMS since both transmit a message, but the point of MMS is that the message can include photos, voice recordings, music or video. In this sense, there is a clear distinction between the two services reflected in the uses and prices associated with them. Furthermore, the retail price of MMS appears to be around 3 times higher than the price of SMS 27. In other words, given current price levels, a 5 to 10% increase in SMS prices would not be sufficient to cause a substitution effect among consumers. In this sense, MMS are not a substitute for SMS. Internet data services (mobile , Instant Messaging) s and instant messages require a connection to a message service mailbox for SMS or to an Internet portal for Internet data services ( , Instant Messaging, etc.) so they differ both in the way they are used and in the way they are invoiced. The Authority considers SMS to be distinct from the above services (and therefore not in the same product market) because it has a number of distinguishing characteristics. For instance, The use of Internet data services requires for both parties to have an Internet connection through their mobile subscription, which is not still widely used in Gibraltar 28 In the Internet economic model, the receiving party pays: the user is billed on a flat-rate basis depending on the connection time or capacity 26 Decision n on the definition of wholesale market for SMS termination on public mobile telephone networks, SMP designation and SMP obligations (2006, 1st market review) and Decision n on the definition of wholesale market for SMS termination on public mobile telephone networks, SMP designation and SMP obligations (2010, 2nd market review). 27 Based on operators response to data request. 28 No distinction between 2G and 3G customers provided by the operators

24 independently of the content, destination or direction of transmission. Therefore, the user is billed for both sending and receiving the message, which affects both how the service is perceived and how it is used Besides the low equipment rate in compatible mobile phones and the incompatibility of underlying economic models, chat instant message services establish real-time communication between several mobile service subscribers 29, while an essential function of SMS is to establish communication in deferred time between two people on the move. For the reasons listed above, the Authority considers that Internet data services such as mobile and instant messaging are not a substitute for SMS. b. Demand Side Substitution at the Wholesale Level Demand for wholesale SMS termination is inextricably linked to retail demand for SMS. This means that an operator wishing to terminate a SMS on a mobile number can only terminate it on the network to which that number is assigned. To attempt to terminate this SMS on another network would currently result in the SMS sending being unsuccessful. In effect, the current need to direct traffic to a specific mobile number ensures that there is no demand-side substitute service available to an operator seeking to terminate its traffic on a mobile number situated on a particular network. The Authority holds the view that currently there are no demand side substitutes for wholesale SMS termination which could sufficiently constrain wholesale SMS termination rates. c. Supply Side Substitution at the Wholesale Level The Authority is of the view that there are no operators in Gibraltar currently providing SMS termination services that could provide effective supply-side substitution at the wholesale level. This is because no provider could readily substitute SMS termination on a network other than the network to which the called party is subscribed. SMS sent to a particular user can only be terminated on the network chosen by the called party. The Authority concludes that in these circumstances, supply-side substitution for SMS termination services is not possible The relevant geographic market A relevant geographical market comprises the area in which the undertakings concerned are involved in the supply and demand of products and/or services, in relation to which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different to those areas. 29 Instant Messaging requires that the called party s mobile phone be powered on and that the recipient of the message be immediately available to answer

25 On the basis of this definition, the Authority takes the view that the relevant geographic market for the provision of mobile SMS termination services by individual MNOs is national in scope. Each MNO is considered to be a separate relevant product market for the provision of mobile voice call termination services. The geographic scope of the market then reflects the extent of physical coverage that characterises each MNO. The Authority finally notes that each MNO is licensed on a national basis. On this basis the Authority identifies Gibraltar as the relevant geographical market Preliminary Delineation of SMS Termination Markets There are currently no viable competitive substitutes at the wholesale level for the termination of mobile voice calls by individual MNOs, whether measured from the supply-side or the demand-side. In respect of the analysis presented above, and in accordance with competition law principles, the Authority identifies wholesale voice call termination on individual mobile networks as relevant for the purposes of ex ante regulation. On this basis, the Authority identifies two wholesale SMS termination markets in Gibraltar: Wholesale SMS termination provided by Gibtelecom Wholesale SMS termination provided by CTS. Q2: Do you agree with the above preliminary conclusions regarding the wholesale SMS termination market definition exercise? Please give reasons for your answer

26 4 Market Analysis 4.1 Methodology Having first identified the relevant markets relating to voice call termination and SMS termination on individual mobile telephone networks in Gibraltar, the Authority is required to conduct an analysis of whether the markets are effectively competitive. Recital 27 of the Framework Directive states that a relevant market will not be effectively competitive where there are one or more undertakings with significant market power. Regulation 25(1) of the Framework Regulations states that: A reference in these Regulations... to an undertaking with significant market power is to an undertaking (whether individually or jointly with others) enjoys a position which is equivalent to dominance of that market, that is to say a position of economic strength affording it the power to behave to an appreciable extent, independently of competitors, customers, and ultimately, consumers. An undertaking may be deemed to have SMP either individually or jointly with other undertakings in a relevant market. In addition, where an undertaking has SMP on a relevant market, it may also be deemed to have SMP on a closely related market, where the links between the two markets are such as to allow the market power held in one market to be leveraged into the other market, thereby strengthening the market power of the undertaking. The SMP guidelines provide a long list of criteria for assessing market dominance. However, the Authority is of the opinion that, in light of market evidence and the principle of proportionality, this exercise must carefully take into account a select number of criteria, namely: Market shares Barriers to entry Countervailing buyer power Pricing behaviour. 4.2 Assessment of Market Dominance in Voice Call Termination Market Market shares The SMP guidelines state that the existence of a dominant position cannot be established on the sole basis of large market shares and that NRA s should undertake a thorough and overall analysis of the economic characteristics of the relevant market before coming to a conclusion as to the existence of SMP. However, the SMP guidelines state that according to established case-law, very large market shares in excess of 50% - are in themselves, save in exceptional circumstances, evidence of the existence of a dominant position

27 The area covered by each MNO is considered to constitute a separate wholesale termination market given that termination on a particular network cannot be substituted by termination on another network. This implies that termination of voice calls over a particular network will have to be terminated on the network of the respective mobile operator. Hence, every MNO has a 100 per cent market share in terminating calls on its network, in terms of both volumes and revenues Barriers to entry The Authority recognises that an SMP operator has a strong incentive to foreclose markets and to behave in such a way that makes market entry inefficient and difficult at the very least. Termination of voice calls is governed by the CPP arrangement which eliminates any opportunity for supply side substitutability. It is, in fact, not possible for existent market players and new market entrants, including 3G operators, to terminate a call other than on the network to which the called party is subscribed. Given the current level of technological developments and the forward looking nature of this document, this market condition is set to prevail within the timeframe of this market review Countervailing buyer power Countervailing buyer power exists where large customers have the ability within a reasonable timeframe to resort to credible alternatives (e.g. not to purchase or to retaliate) if the supplier decides to increase prices or to deteriorate the conditions of delivery. a. Countervailing buyer power at retail level In Gibraltar, as in all European countries, the calling party pays economic model prevails: the operator bills only outgoing calls to the customer and no fee is charged for receiving the call. The voice call termination rate is set by the called party s operator (and depends on the choice of operator), but is paid by the calling party s operator and ultimately by the calling party. However, called parties choose their MNO. They make that decision based only on criteria which affect them directly, that is the price of the mobile phone (whether subsidised or not), the price of a bundled offer which takes into account, among other things, the price of outgoing calls. The Authority maintains the view that consumers are not necessarily aware of the underlying components of the price of a call, such as mobile termination charges. The end-user would only see a global retail tariff including the MTR and other costs. Consequently, the end-user cannot detect any changes in termination charges and cannot exert pressure on the setting of MTRs. As a whole, the Authority believes that the behaviour of the calling party cannot adequately influence the ability of fixed operators to set high fixed termination rates

28 Moreover, since the CPP principle is in force, the called parties do not sufficiently care about the costs that other parties incur when calling them, e.g. the MTR. This means that consumers do not have sufficient countervailing buyer power to impact on MTRs set by their mobile service providers. b. Countervailing buyer power at wholesale level Fixed to Mobile Fixed network operators are important buyers of mobile call termination services. In this sense, local fixed network operators Gibtelecom and CTS could have a relatively strong weight as purchasers of mobile call termination services to put enough pressure on a provider and constrain its ability to set high termination charges. A hypothetical way of how fixed network operators could exercise countervailing buyer power is to threaten not to interconnect unless the price of mobile termination services is considered acceptable or reasonable. However, it is very difficult for this scenario to materialise given that all operators require interconnection with each other to permit call traffic between their customers and those subscribed to other networks. This ensures that all operators are interdependent on each other to provide access to each others networks and services with a view to provide fully comprehensive communications services. Furthermore, Gibtelecom is also designated with a universal service obligation. Gibtelecom is therefore obliged to terminate all calls in order to ensure end-to-end connectivity. As a result, any countervailing buyer power that Gibtelecom might have through its market share in the fixed calls market is not sufficient to constrain MTRs. The Authority therefore believes that fixed-to-mobile countervailing buyer power is not sufficient to ensure competitive MTRs. Mobile to Mobile (off-net) It is in the interest of each individual operator to impose a high mobile termination charge on incoming voice calls in order to increase its interconnection revenues, while obtaining low MTR for outgoing voice call (off-net) to minimise interconnection costs. Therefore, if an operator were to decide to unilaterally raise its voice call interconnection rate, the other one would likely respond with a similar increase in order to balance incoming and outgoing flows. On the other hand, if an operator were to decide to unilaterally lower its voice call interconnection rate, the other one would have no interest in decreasing it because its interconnection costs would decrease without its revenues being affected. Under these conditions, an operator wishing to increase its voice call interconnection rate above the cost of providing the service could set it at an arbitrarily high level. In this sense, the countervailing buying power of mobile call termination buyers appears very small. The Authority therefore believes that mobile-to-mobile (off-net) countervailing buyer power is not sufficient to ensure competitive MTRs

29 International to Mobile Mobile network operators also terminate international calls on their network. The share of international minutes terminated on mobile networks has been declining recently and now only accounts for less than half of the total call minutes terminated on mobile networks 30. International operators may also, in theory, have increased bargaining power, stemming from the possibility of differentiating the retail price by substantially raising the prices of calls to operators who implement higher termination rates. Although possible, for this form of pressure to be successful it would have to be applied to all the originating operator s tariffs and by all other operators in the market. If this were not the case, customers of operators who choose to increase retail prices could simply switch provider thereby reducing or even eliminating any bargaining power. Overall, the Authority concludes that there is no one particular factor that would persuade local operators to reduce their charges with respect to mobile call termination. It is also worthwhile to point out that there is no wholesale operator or group of operators that can effectively constrain MTRs to a level equal to a competitive outcome Pricing behaviour The comparison of Gibtelecom s and CTS MTRs with those of other European operators shows that the level of MTRs in Gibraltar is particularly high. 30 Source: Answers to the Authority s wholesale mobile data requests provided by Gibtelecom and CTS

30 Pence per minute 9.00 Figure 3 ERG MTR Benchmark snapshot (as of 1st July 2010) in 27 European member states 8.00 Gibtelecom s and CTS MTR: 7.5 ppm (as of January 2011) CY SE AU FR PL LT SI FI RO HU UK ES DK Average NL PT EL CZ SK LV DE EE IE IT LU MT BE BG Source: (Exchange rate 1 GIB = ; source: oanda.com as of March 2011) The Authority s regulatory intervention in the price setting behaviour of MTRs has, for the last few years, taken the form of a glide path. In its price cap control compliance Public Consultation, the Authority states that Gibtelecom shall set rates for mobile voice call termination and do so with annual reductions for three years. According to the wholesale termination market review direction and SMP obligations 31, CTS was subject to the same Price Control as from the 1 st January Table 3: Wholesale Mobile Termination Rate (pence per minute) Price Cap year Gibtelecom CTS 1st January st January st January The Authority believes that factors such as countervailing bargaining power or selfinterest did not contribute to the decline in MTRs. Indeed, without the glide-path obligation, termination rates would have probably remained well above the existing rates. The Authority believes that, in the absence of regulatory intervention, MNOs would have no incentive to reduce their interconnection rates. 31 Decision Notice No. 09/09 Decision and SMP Obligations Wholesale Termination Markets (

31 4.2.5 Preliminary conclusion on SMP designation The Authority concludes that each MNO in Gibraltar, namely Gibtelecom and CTS, enjoys SMP over calls terminated on its own network. This conclusion is based on the following: Each MNO holds 100 per cent market share on termination over its network Absolute barriers to entry for potential competitors Lack of sufficient countervailing buyer power with respect to voice call termination The calling party pays (CPP) principle predominates. In respect of the analysis presented above and in accordance with competition law principles, the Authority is of the view that: Gibtelecom should be designated as having SMP in the market for call termination on its mobile network in Gibraltar CTS should be designated as having SMP in the market for call termination on its mobile network in Gibraltar. Q3: Do you agree with the above preliminary conclusions regarding mobile voice call termination market analysis and proposed SMP designations? Please give reasons for your answer 4.3 Assessment of Market Dominance in SMS Termination Market Market shares The area covered by each MNO is considered to constitute a separate wholesale termination market given that termination on a particular network cannot be substituted by termination on another network. This implies that termination of SMS over a particular network will have to be terminated on the network of the respective mobile operator. Hence, every MNO has a 100 per cent market share in terminating SMS on its network, in terms of both volumes and revenues Barriers to entry The Authority recognises that an SMP operator has a strong incentive to foreclose markets and to behave in such a way that makes market entry inefficient and difficult at the very least. Termination of SMS is governed by the CPP arrangement which eliminates any opportunity for supply side substitutability. It is in fact not possible for existent market players and new market entrants, including 3G operators, to terminate a SMS other than on the network to which the called party is subscribed

32 Given the current level of technological developments and the forward looking nature of this document, this market condition is set to prevail within the timeframe of this market review Countervailing buyer power Countervailing buyer power exists where large customers have the ability within a reasonable timeframe to resort to credible alternatives (e.g. not to purchase or to retaliate) if the supplier decides to increase prices or to deteriorate the conditions of delivery. a. Countervailing buyer power at retail level In Gibraltar, as in all European countries, the calling party pays economic model prevails: the operator bills only outgoing SMS to the customer and no fee is charged for receiving the SMS. The SMS termination rate is set by the called party s operator (and depends on the choice of operator), but is paid by the calling party s operator, and ultimately by the calling party. However, called parties choose their MNO. They make that decision based only on criteria which affect them directly, that is the price of the mobile phone (whether subsidised or not), the price of a bundled offer which takes into account, among other things, the price of outgoing calls and the possibility of sending messages (number of SMS included in the package, price of SMS per unit, etc.). The Authority maintains the view that consumers are not necessarily aware of the underlying components of the price of a SMS, such as SMS termination charges. The end-user would only see a global retail tariff including the SMS termination rate and other costs. Consequently, the end-user cannot detect any changes in termination charges and cannot exert pressure on the setting of SMS termination rates. As a whole, the Authority believes that the behaviour of the calling party cannot adequately influence the ability of fixed operators to set high fixed termination rates. Moreover, since the CPP principle is in force, the called parties do not sufficiently care about the costs that other parties incur when sending them SMS, for e.g. the SMS termination rate. This means that consumers do not have sufficient countervailing buyer power to impact on SMS termination rates set by their mobile service providers. b. Countervailing buyer power at wholesale level Mobile to Mobile (off-net) It is in the interest of each individual operator to impose a high SMS termination charge on incoming SMS in order to increase its interconnection revenues, while obtaining low SMS termination rate for outgoing SMS (off-net) to minimise interconnection costs. Therefore, if an operator were to decide to unilaterally raise its SMS termination rate, the other one would likely respond with a similar increase in order to balance incoming and outgoing flows. On the other hand, if an operator were to decide to unilaterally lower its SMS termination rate, the other one would have no interest in decreasing it because its interconnection costs would decrease without its revenues being affected

33 Under these conditions, an operator wishing to increase its SMS termination rate above the cost of providing the service could set it at an arbitrarily high level. In this sense, the countervailing buying power of mobile SMS termination buyers appears very small. The Authority therefore believes that mobile-to-mobile (off-net) countervailing buyer power is not sufficient to ensure competitive SMS termination rates. International to Mobile Mobile network operators also terminate international SMS on their network. International operators may also, in theory, have increased bargaining power, stemming from the possibility of differentiating the retail price by substantially raising the prices of calls to operators who implement higher termination rates. Although possible, for this form of pressure to be successful it would have to be applied to all the originating operator s tariffs and by all other operators in the market. If this were not the case, customers of operators who choose to increase retail prices could simply switch provider thereby reducing or even eliminating any bargaining power. Overall, the Authority concludes that there is no one particular factor that would persuade local operators to reduce their charges with respect to SMS termination. It is also worthwhile to point out that there is no wholesale operator or group of operators that can effectively constrain SMS termination rates to a level equal to a competitive outcome Pricing behaviour The current wholesale SMS termination rate charged by Gibtelecom is CTS reciprocates Gibtelecom s charges at the rate of The comparison of Gibtelecom s and CTS s SMS termination rates with those of other European operators shows that the level of the termination rates in Gibraltar is in line with the European average. The table below outlines the current SMS termination rates of the European MNOs. The data was originally collected by ARCEP during its second review of SMS termination market review in June The data was provided to ARCEP by the different NRAs. The names of the countries have not been included at the request of the NRAs. 32 This Euro rate is converted into a sterling equivalent according to the rate published by the Financial Times on the relevant date

34 Figure 4 SMS termination rates benchmark in 23 European countries (as of 1st January 2009) Gibtelecom s SMS termination rate: c 4 (as of February 2011) Source: ARCEP, Decision n on the definition of wholesale market for SMS termination on public mobile telephone networks, SMP designation and SMP obligations (2010, 2nd market review) Preliminary conclusion on SMP designation The Authority concludes that each MNO in Gibraltar, namely Gibtelecom and CTS, enjoy SMP over SMS s terminated on its own network. This conclusion is based on the following: Each MNO holds 100 per cent market share on termination over its network Absolute barriers to entry for potential competitors Lack of sufficient countervailing buyer power with respect to SMS termination The calling party pays (CPP) principle predominates. In respect of the analysis presented above, and in accordance with competition law principles, the Authority is of the view that: Gibtelecom should be designated as having SMP in the market for SMS termination on its mobile network in Gibraltar CTS should be designated as having SMP in the market for SMS termination on its mobile network in Gibraltar. Q4: Do you agree with the above preliminary conclusions regarding mobile SMS termination market analysis and proposed SMP designations? Please give reasons for your answer