II-2.10: The French telecommunications Regulator publishes a decision relating to the wholesale market of mobile voice termination rates

http://www.arcep.fr/uploads/tx_gsavis/10-1149.pdf

Context and Summary

Brief commentary

The ARCEP’s document provides a wealth of information about the structure and particularities of mobile telephone markets and regulation in France, both in France’s European territory and its overseas territories, through a detailed analysis of these various mobile markets and each operator’s costs and specific operating context.

However, we must note that the term habitually employed to describe the sector of wholesale mobile termination rates is “market”, whereas this sector hardly corresponds to the definition of “market” at all: indeed, on a market, one can expect that the interaction between supply and demand will produce a fair-market price. In the sector of mobile termination rates, there is no competition: each operator has a 100% market share over the rates it charges to its competitors to route an incoming call to its subscriber.

Therefore, Regulation must intervene by fixing tariffs in order to simulate a market, by setting the price that the hypothetical market would have fixed. This is performed asymmetrically, by according the smallest operator with the most favorable tariff in order to compensate its weaker market strength. In this way, asymmetrical regulation of the upstream sector (the wholesale market for call termination) allows for symmetrical regulation of the downstream market (retail to consumers). In other words, such asymmetrical regulation of wholesale tariffs is the necessary predicate for competition based on price and services on the retail market.

The decision to provide operators with tariff predictability over a period of three years corresponds to the ARCEP’s habitual methods, since this is the third three-year regulatory scheme published by this authority.

However, annex D of the ARCEP’s decision shows that one of its major regulatory goals for this decision is to lower landline-to-mobile costs for consumers, which remain expensive and are relatively little-used by consumers because of their cost. The ARCEP believes that the high cost of such calls is attributable to the overly-high rate of mobile termination rates, and hopes that its third regulatory package for 2011-2013 will remedy this problem and lower the cost for consumers of landline-to-mobile calls.

Furthermore, the ARCEP attributes the fact that mobile telephone offers include more ‘free’ services and are more and more ‘unlimited’ to its previous regulatory package. It therefore considers that its previous regulatory package was a success.

Nevertheless, prices of mobile telephone subscriptions in France are amongst the most expensive in Europe for equivalent services, a situation that contrasts with the fact that France has amongst the least-expensive high-speed Internet subscription prices in the whole world.

This situation leaves us to wonder if the ARCEP’s regulation of mobile telephony, mainly performed by regulation of mobile termination rates, is sufficient in increasing the competition necessary to lower prices and increase services for consumers. Indeed, the ARCEP itself notes that mobile operators have a strong incentive to encourage their subscribers to call ‘within-network’, because this avoids having to pay a mobile termination fee to another operator.

Therefore, one may wonder whether in this given situation asymmetrical regulation is sufficient to improve competition on the market. If this is true, the arrival in 2012 of a fourth mobile telephone operator on the French Market (Free Telecom) should lower end-consumer prices and increase services simply by the arrival of a new competitor, and would have more immediate, beneficial results for consumers than the ARCEP’s regulation of call termination rates.

Nonetheless, sector-specific regulation of the telecommunications sector, and notably of mobile termination rates is completely justified. Indeed, the French Competition Authority recently condemned French banks to pay record fines for ‘colluding’ on fees paid to one another for check image processing (Decision of the Autorité de la Concurrence, September 20, 2010, Decision 10-D-28). Check processing fees are conceptually analogous to mobile termination rates: the emitter of the call or check pays the processor of the call or check. However, unlike mobile termination rates, the banks agreed on a tariff, which was considered to be collusion by the French Competition Authority, even though this is arguably beneficial to consumers. Therefore, it is positive that such tariffs be regulated by a sector-specific Regulatory Authority, since it is beneficial to consumers that the rate be low, and cannot be considered as collusive by the Competition Authority. Indeed, markets where one operator has a monopoly over its own termination market present structural market failure, and require ex ante regulation of tariffs. In the mobile telephony market, simply, it is desireable that the ARCEP’s ex ante wholesale-tariff regulation be enhanced by increased competition on the ex post retail market.