Martin O'Neill MP
Chairman
Trade and Industry Committee
House of Commons
7 Millbank
London SW1P 3JA
13 November 2000
Dear Mr O'NeillOral evidence session with the Director of Telecommunications - 14 November 2000
The Service Provider Interest Group, SPIG, welcomes the opportunity to offer evidence to the Committee for the session on 14 November and would like to offer comments on a fundamental aspect of OFTEL's work, namely complaints handling and staffing.
SPIG submitted evidence to the Committee in November 1999 and subsequently wrote to you on 16 May 2000. Our concerns remain; indeed, if anything the situation is worse.
In general the business of telecommunications is becoming more and more complex. This leads to a demanding and elongated learning process for everyone involved. In many situations the potential for competition, and the consequent benefits for consumers, is ultimately determined by OFTEL's ability to come to grips with the issues and make an informed decision.
This can be difficult at the best of times; witness the year-long debate over the service components needed for telecoms operators and Internet Service Providers to implement flat rate Internet access.
From the look of press statements yesterday it seems at last likely that a variant of FRIACO available in 2001 might provide the Internet industry with what it asked for a year ago - the chance to compete fairly with BT in the unmetered Internet access market.
But it has taken many complaints to OFTEL and hard work by all the parties involved to reach this point, and progress has been rapid by comparison with other market areas, in part because of the high profile of this issue and because OFTEL has been fortunate enough not to lose any of the staff who have been working on the cases.
For any business a delay of more than a year in entering a new market (when their major competitor is already active) would be difficult. For a market that moves at the speed of the Internet, the delay has undoubtedly badly affected many Internet businesses and deprived consumers of the benefits of Internet access.
Extremely complex issues like this are likely to be even more common in future years. Although OFTEL were involved from the beginning and were able to dedicate staff to this area - something not always possible - the delays incurred underscore the need for OFTEL to be much more responsive and proactive than ever before.
Though there are at least some positive messages from OFTEL's handling of the unmetered Internet access issue, the result of OFTEL's investigation into Mobile Margin Squeeze is an example of how things can, and often do, go badly wrong, destroying companies' ability to compete in a market area and depriving consumers of the consequent benefits.
After a total of no less than seven years of inaction (explained in detail in the separate submission from the Independent Mobile Service Providers Group - November 2000) OFTEL initiated an investigation into the Margin Squeeze issue in July 1999 and one year later published a draft determination, which even now in November 2000 has yet to be ratified.
During the progress of the investigation at least two of the case officers left OFTEL to join one or other of the very companies that were being investigated - the mobile network operators.
This caused substantial delay in the progress of the case - a crucial issue in the fast-moving mobile 'phone market - and just as importantly resulted in the increasingly pressured Independent Mobile Service Providers seeing their only recourse of a fair and timely investigation of their complaints to OFTEL being denied them.
As with the unmetered Internet access issues companies have left this market, with the consequent reduction in competition and benefit to the consumer.
It seems from the viewpoint of companies trying hard to compete with established players in the market that OFTEL is unable to complete effectively the work that only it can do - namely carry out a timely and unbiased investigation into a complaint and then dispense justice in a fair manner.
To do this it is vital that OFTEL staff are sufficiently aware of the market under investigation and can investigate rigorously and fairly in a timely manner. Even now we see no evidence that OFTEL is resourced to hire or retain the staff who are key to its effectiveness as a competition authority.
The telecommunications business in the UK is not only a multi-billion pound industry, but also its efficiency and ability to deliver innovations to consumers has a direct effect on the economy of the UK as a whole. It has been consistently shown that the best way to deliver efficiency and innovation into a market is to encourage competition in that market.
Unless OFTEL's staffing situation is addressed with urgency, OFTEL will continue to be the bottleneck that restricts and delays competition and its benefits, rather than a promoter of growth not just in the telecoms business but in the entire UK economy.
Just as crucially, the question must also be asked whether OFTEL is yet in a position to evolve into an Office of Communications, able to deal with even wider and more complex issues of competition than it currently does.
Yours sincerely
Mark Cook
Chair, SPIG
A memorandum to the Trade and Industry Committee
October 2000
The Federation of Communication Services, which was formed in 1981, is the representative body for the mobile communications industry. It has represented the interests of the mobile phone service provider community since 1988, initially through the Cellular Service Provider Group and more recently through the autonomous Independent Mobile Service Providers Group, IMSP Group. FCS members are listed in the members directory on the website, www.fcs.org.uk.
Both Groups have taken an active role in representing the interests of Service Providers to Oftel at the Oftel SP Forum, meetings with Oftel officials and by means of submissions in response to Oftel consultations. Independent mobile service providers contributed to the evidence submitted by SPIG to the TAIC in November 1999 regarding complaint handling by Oftel. They also contributed to the subsequent letter to Martin O'Neill MP dated 16 May 2000, which highlighted concerns about the continuing staff turnover in the Oftel competition casework department.
Radiospectrum is a scarce resource. Timescales for release for new spectrum for telephony are measured in years and do not match the pace of market place demand. The scarcity of this resource means there is, and will continue to be, an absolute barrier to entry at the network level. The recent round of auctions for third generation radio spectrum licences has demonstrated that not only is entry limited but is also exceedingly expensive, restricting access only to the large operators. In such circumstances regulatory intervention will continue to be needed to ensure competition can take place. In addition increasing public concern about the siting of radio masts will contribute to the difficulties of rolling out more radio networks. Maximising the use of existing radio infrastructure, therefore, has to be in the public interest.
The present four-company oligopoly in the mobile market serves to reduce competition at the point of sale by limiting the choice of services available to consumers. Independent provision of services is needed to ensure that competition flourishes and the consumer has a choice from a basket of services. In order to provide competing services independent service providers require access to the mobile networks on fair and reasonable terms.
Indirect Access, IA, to the mobile networks and establishing Mobile Virtual Network Operators, MVNO, are both ways in which greater occupancy of the mobile networks and diversity of supply can be achieved.
Independent Mobile Service Providers that have wished to access mobile network infrastructure to purchase simple conveyance (call minutes) rather than the operator’s branded retail services via IA or MVNO have been unsuccessful. Voluntary negotiations with the mobile licensees have not been fulfilled principally because:
References to Oftel for determination of IA issues, in particular the request by INMS Ltd. in December 1999 for Indirect Access to BT Cellnet and Vodafone, have led to excessive delays but have not changed the policy of the retail minus charging regime. We are aware that the UK Government has been subject to EC competition action as a result of its handling of the determination.
Since launch of mobile phone services in 1985, BT Cellnet and Vodafone have been obliged to offer services to service providers. Oftel has continued to determine that both BT Cellnet and Vodafone have Market Influence and the obligation to offer services continues.
However, Oftel has not acted in fact in response to acknowledged licence breaches. Oftel has failed the independent service provider community and by doing so has given a "green light" to the operators that these practices can continue. The attached background paper summarises an 8-year history of failure. During this period many independent SP businesses have ceased trading as a result of unfair competition that Oftel has not stopped, shrinking the competitive opportunity in services delivery (Appendix 1).
MISP members have the following concerns about OFTEL’s conduct:
If m- and e- commerce are to thrive in the UK and provide a competitive edge for the nation, a healthy service provider sector and a regime that encourages new entrants will be essential. Our analysis shows that, as a minimum, the regulatory framework should include the following conditions:
We have real concern that a regime where the regulator shrinks back to laissez faire, instead of facing up to the abuses of dominance and Market Influence will have the following results:
The Independent Mobile Service Provider Group encourages the Trade and Industry Committee to consider the issues outlined in this brief submission in its oral hearing with the Oftel Director General on 14 November 2000. The Director General has recently received a further 3 year contract to continue at Oftel and presumably oversee the transition to any new regime outlined in the forthcoming Communications White Paper. Our confidence in the regime as it presently stands is diminishing and we urge a reconsideration of how Oftel can move forward.
Acquisition of independent mobile service providers by network operators
| Date | Service provider | Purchaser | Equity stake | Subscribers at time of purchase |
| July 1996 | Talkland | Vodafone | 67% | 400,000 |
| November 1996 | Peoples’ Phone | Vodafone | 100% | 400,000 |
| February 1997 | Astec | Vodafone | 80% | 97,000 |
| February 1997 | DX Communications | Cellnet | 26% | n.a. |
| April 1997 | The Link | Cellnet | 40% | n.a. |
| October 1997 | Securicor Cellular Services | Cellnet | 100%(1) | 254,000 |
| October 1997 | Securicor Cellular Services | Martin Dawes | 100%(1) | 55,000 |
| October 1997 | BT Mobile | Cellnet | 100% | 1,200,000 |
| March 1999 | Martin Dawes | Cellnet | 80% | 835,000 |
| January 1999 | Cable & Wireless Communications | Vodafone | 100% | 100,000 |
| August 1999 | Securicor | BT Cellnet | 100% | |
| September 1999 | DX Communications | BT Cellnet | 100% | n.a. |
| September 1999 | UniqueAire | Vodafone | 100% | 291,000 |
| November 1999 | Scottish Power | Vodafone | 100% | 66,000 |
| March 2000 | 3A Telecom | Vodafone | 100% | 25,000 |
1) Securicor Cellular Services transferred its 254,000 consumer and small-medium enterprise subscribers to Cellnet at the same time as transferring its 55,000 corporate subscribers to Martin Dawes. Mobile retailers are shown in italics |
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Sources: Various publicly available sources |
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November 2000
In 1992 Talkland International (UK) Ltd, an independent mobile service provider, submitted a complaint to OFTEL.
This alleged that the wholly owned downstream arms of the network operators were:
to the detriment of Independent Service Providers.
Other Independent Service Providers supported the complaint during the following year. Even so, the investigation proceeded very slowly during the remainder of 1992 and 1993 despite the concerns of interested Independent Service Providers. Finally, following the appointment of a new Director General (Don Cruikshank) with a more dynamic agenda at the end of 1993, OFTEL announced on 17 May 19941 that it had completed the investigation and upheld the most significant elements of the original Talkland complaint.
OFTEL concluded
OFTEL agreed with the complainant that a cross-subsidy is unfair if it "seriously restricts the ability of Independent Service Providers to compete with service providers linked to the network operators".
OFTEL proposed to remedy these abuses in the long term by insisting that a "mature" [tied] service provider business must make a reasonable return on its investment such as its investors would expect if it were a stand-alone business. The investment was predominately the acquisition of subscribers. Therefore OFTEL linked its definition of a "reasonable return" directly to the net cost of acquiring and servicing a subscriber.
OFTEL set the required rate of return as 2% per month assuming that the average life of a subscriber was 35 months. OFTEL stated that the rate of 2% "took account of the risky nature of the business, the level of returns earned by the industry as a whole and of representations made during the investigation." These numbers were to be kept under review.
More immediately, OFTEL issued Directions to end the unfair cross subsidies, which had been taking place.
Looking forward the two dominant players were told to submit quarterly financial results of their Tied Service Providers5 for independent audit. OFTEL stated that it would:
"deem an unfair cross-subsidy to have occurred if the average net cost of acquiring subscribers in a quarter exceeds the average economic value of those subscribers."6
OFTEL announced on 17 October 1994 that the Director General had revoked the Direction given to BT and Cellnet7: this was followed by a similar announcement over the equivalent Direction to Vodafone. However the Director General stressed that the Directions were only being revoked because financial returns showed that BT and Cellnet and Vodafone were complying with the formula8. He made it clear that the decision to revoke the Directions had no effect on the validity of the Talkland Formula.
"I would, however, like to stress that this decision has no effect on the levels of profitability I am expecting Vodac Ltd to achieve both currently and in the future. I shall be continuing to monitor the financial results of that organisation, and of Vodacom Ltd on the basis of information to be provided to me under Condition 35 of the licence of Vodafone Ltd, and as I noted in my earlier statement, I would expect to take appropriate action if unfair cross-subsidy is found to exist in the future."
A similar statement was made about the application of the Talkland Formula to the BT and Cellnet Group9. However, during the next six years OFTEL consistently failed to make good its promise of "appropriate action."
Within a year (by mid 1995) Independent Service Providers had serious concerns that the Formula was systematically being breached10. The strength of those concerns is shown by a statement by David Savage11 made on 1 December 1995.
"Independent cellular service provision, the concept established by the Government to create a competitive environment within the mobile telecoms market, is now in danger of serious erosion. I have received a number of requests from SP industry members calling for a more effective complaints strategy and an Oftel investigation into independent SP’s being bypassed by the cellular networks. We believe that our industry is now on the receiving end of predatory pricing, discriminatory marketing and anti-competitive practices. Our message to the networks is clear: please adhere to your Government licensing agreements."
During this period, Oftel received complaints from many other Independent Service Providers that the Formula was systematically being breached by the Network Operators.12 For example, Talkland lodged a further complaint that the criteria were ineffective in early 1996. A good example of the lengths to which Independent Service Providers were prepared to go to explain their concerns to OFTEL is provided by submission on 23 February 1996 from the well established player, Cellcom.
"Cross subsidies by network operators of their respective Tied Service Providers and Direct Sales Businesses has made the market un-competitive for Independent Service Providers. Network operators have, mainly as an adjunct to brand advertising, forced their own retail pricing on consumers through the TSP and DSB distribution channels under their control. This has had the effect of virtually stopping competitive tariffs for the consumer."
Cellcom went on to state its concerns baldly: it was in no doubt that there was a continuing unfair cross-subsidy in contravention of the Talkland Formula.
"These factors have seriously damaged the business of Independent Service Providers and have combined to put the very future of independent service provision at risk. In addition the increase in direct control of distribution channels by network operators has led to less real competition and choice at the point of sale which is ultimately detrimental for the consumer."
Although made well aware of these and similar concerns OFTEL took no further enforcement action against the networks.
Oftel’s next major review of the relationship between Service Providers and the network operators was issued on 24 May 1996 13. This took the form of a Consultative Document inviting comments by 6 August 1996 14.
OFTEL succinctly summarised the Talkland complaint in para 2.9:
"The particular form taken by the cross subsidy is that the network operators - then a duopoly - made high charges to service providers for the use of airtime. Given the level of retail prices charged by service providers for hardware, connection and airtime, service provision was unprofitable whilst the network operators made high profits. It was also noted that the network operators exercised a considerable degree of influence over the retail price through their TSPs. This meant that the Independent Service Providers were subject to a "margin squeeze". Losses made by the TSPs could be supported by cross-subsidy from the network operators; independents did not, of course, have an equivalent source of funds."
Well aware of the risks of a continued margin squeeze OFTEL, therefore, recommended that Formula should remain in place and would continue to govern the financial relationship between the Cellnet and Vodafone networks and their Service Providers - although with some changes to the detail.
OFTEL also requested views on the formal exclusion of Orange and One2One from the Formula arrangements because of their lack of market power. OFTEL also consulted on proposals to allow all the networks more freedom to choose distribution channels and to include brand promotion conditions in contracts with independent retailers.
During the Consultation period Independent Service Providers made extensive representations to OFTEL that the regulatory controls should not be unduly relaxed. They also again expressed concerns that the Talkland Formula was being systematically disregarded.
There was a further delay of eight months from the close of the consultation before OFTEL issued the follow up Statement "Fair Trading in the Mobile Telephony Market" in April 1997. Despite that delay, OFTEL largely reaffirmed its recommendations made in the Consultation issued the preceding year 15. In its final published form therefore the April Statement largely focused on the relaxation of regulatory controls from the two smaller network operators.
Even so OFTEL took the opportunity to reaffirm the relevance of the Talkland Formula to the relationship between the two dominant operators and their Service Providers and to update it in the light of market changes.
OFTEL reviewed the regulatory framework, which determined its enforcement powers towards the two dominant mobile networks. It stated:
"7.3.1 For so long as Vodafone and Cellnet continue to possess market power, their licences will remain unmodified with respect to the provision of mobile services. They will therefore continue to contain:
Having stated that the regulatory framework would remain intact so it continued to have enforcement powers to prevent unfair cross-subsidy OFTEL then considered the practicalities of enforcing the Talkland Formula.
"7.3.3 So long as Cellnet and Vodafone are still deemed to have market power they should continue to be subject to controls on cross-subsidy of tied service provision businesses by means of the OFTEL formula for TSPs, though there is a case for modifying particular parameters of the formula."
This clearly emphasises OFTEL’s awareness of the continuing need for the Talkland Formula was needed to control cross-subsidy by mobile network operators of Tied Service Providers while Cellnet and Vodafone to possess market power.
In that Statement OFTEL announced the following changes to update the Formula:
OFTEL also stated that it would review those arrangements in the light of market developments "although the Director General did not "expect this review to be necessary before 1998.
Independent Service Providers continued to be extremely concerned that Vodafone and Cellnet were disregarding the Formula. OFTEL failed to take any enforcement action to address those concerns. Meanwhile, the number of Independent Service Providers continued to fall as they were absorbed by the dominant network operators.
In the April 1997 Statement OFTEL had promised a follow up review of the mobile market and, particularly, the effectiveness of the Talkland Formula. This commitment eventually resulted in a further Consultation Document "Competition in the Mobile market" issued in February 1999.
The Statement covered a wide range of related issues. Even so, OFTEL’s response to concerns about the effectiveness of the Talkland Formula formed a large part of Chapter 2 of the new Consultation.16
OFTEL once again confirmed the basic principles behind (and continuing need for) the Talkland Formula - that Tied Service Providers must achieve sufficient margins to earn a reasonable rate of return and that compliance should be measurable. OFTEL also confirmed its view that the Talkland Formula (appropriately adjusted by the 1997 update) continues to be the appropriate yardstick. (Therefore OFTEL - as in 1997 - now measured average subscription life at 27 months and the required rate of return at 1.5% per month.)
OFTEL reaffirmed its awareness of how Independent Service Providers could suffer from a margin squeeze in a statement that is entirely compatible with the principles of Community Competition law in this market.
(unprofitable margins) "may be viable in the context of the overall Group within which a TSP operates because the parent company is likely to be generating profits through supply of wholesale services [but] it would not enable ISPs to earn a reasonable return."
OFTEL concluded that:
"the margins achieved by most of the service providers owned by the operators' Groups have fallen below what is reasonable. This suggests that the margins of Independent Service Providers may be being squeezed for anti-competitive purposes."
OFTEL stated "prior to changes made to the formula in 1997, Cellnet service providers and BT Mobile generally achieved the required return of 2% per month over the 35 months assumed to be the average subscription life. Vodafone’s service providers achieved mixed returns, with Vodacom achieving this requirement in most quarters and Vodacall and Vodac consistently failing to achieve the 2% per month minimum rate of return over the assumed average subscription life."
Even for that period, there was clear evidence of a margin squeeze used to strengthen the position of the Tied Service Providers. This was in line with the representations made by Independent Service Providers to OFTEL during that period.
OFTEL’s analysis made it clear that compliance with the Talkland Formula had deteriorated still further following its revision in 1997. In reality by February 1999 the dominant networks were simply disregarding it.
"3.6 Since the formula was changed in 1997, BT Mobile has continued to achieve the required rate of return in every quarter except Q1 of 1998/9. Cellnet's performance has been far less satisfactory, failing to achieve the required rate of return in every quarter except Q2 of 1997/8."
Vodafone’s record was worse.
"3.7 Vodafone service providers all consistently failed to achieve the required rate of return over the assumed average subscription life."
OFTEL’s conclusions were unequivocal - with the exception of BT Mobile, Tied Service Providers of the dominant networks had been receiving cross-subsidies in clear breach of the Talkland Formula for the entire period. OFTEL then looked at the effects in the market.
"3.8 The exact values appearing in particular periods do not automatically denote anti-competitive behaviour and the returns must be considered in the light of prevailing circumstances, not in isolation. However, it is now evident that the failures indicated by the returns submitted for the quarters, which immediately followed the modification of the formula, were not isolated events. With the exception of BT Mobile, tied service providers are consistently failing to achieve the margins required by the formula. Furthermore, the minimum average subscription life consistent with achieving the required margins is substantially longer than the assumed average life of 27 months. Indeed in some periods Vodafone service providers report figures, which would take twice the assumed average life to generate the required rate of return. The discrepancies are so great that it is unlikely that they can be accounted for by short term market fluctuations." (Our italics).
Meanwhile Vodafone and BT Cellnet acquired many of the major Independent Service Providers, which had been unable to compete on equal terms with the existing Tied Service Providers.
OFTEL backed away from enforcement action, apparently because it was unsure about how watertight the "Group licence condition was." (This was intended to impute actions of subsidiaries to parent companies.) Instead OFTEL merely stated that it would discuss its concerns with the operators in parallel with the consultation. Action was however, promised for the future. OFTEL stated that if the Director General was still not satisfied then he "will use those enforcement mechanisms which seem most likely to be effective in ensuring that Independent Service Providers are supplied with airtime on a fair and non discriminatory basis."
Although OFTEL rejected immediate enforcement action because of perceived difficulties with the Group licence it stated that this problem would be overcome by introducing a more watertight replacement condition into operator licences.
In the meantime OFTEL turned to other possible remedies and considered:
After some analysis OFTEL consulted on these alternative courses of action (and on wider issues such as the future of enhanced services and branded airtime.
OFTEL also consulted on a significant adjustment to Talkland Formula.
"OFTEL does not propose to change any of the economic inputs to the returns, including the minimum monthly rate of return. However, rather than assume, for the purposes of the return, that the life of an average subscription is 27 months, the operators will be asked to treat that figure as a variable established by the actual costs and revenues and OFTEL’s requirement that service providers within the parent Group should achieve a minimum return of 1.5% per month. Furthermore, the operators will be asked to state what in practice is the average life of a subscription. OFTEL proposes to publish the two figures."
However, many Independent Service Providers considered that instead of taking regulatory action against the two dominant operators for systematic breaches of the Talkland Formula, OFTEL was looking for an excuse to abandon measurement of cross-subsidy altogether. If the life of an average subscription became a “variable” figure it would be impossible to measure an acceptable rate of return. (Which had been the entire point of introducing the Formula in May 1994.) It would no longer be possible to measure a price squeeze by showing that "the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider to obtain a normal profit.” It seemed that faced by clear evidence of consistent anti-competitive behaviour OFTEL was looking to abandon the appropriate yardstick itself rather risk taking enforcement action in accordance with its duties as a competition authority.
On 13 July 1999 OFTEL produced this follow up Statement. As with the preceding Consultation it summarised OFTEL’s views on the state of competition in the mobile market and covered a number of wider policy issues17 for the future of the market. Therefore, the relationship between Network Operators and Service Providers did not form a major part of this statement. Even so, the failure of the network operators to comply with the Talkland Formula was analysed at length in Chapter 2.
OFTEL once again noted the impact of consolidation in the market:
"2.4 Consolidation has also been paralleled by a tendency for the services and tariffs of Independent Service Providers to approximate to those of the operators’ own service providers. There may be many reasons for this, but the structuring of wholesale airtime products in forms which shadow the operators’ own retail products, the offering of bonuses and discounts to service providers which are willing to promote the operators’ brands and the provision of assistance with marketing programmes reinforcing those brands have played a large part. If this process continues, Independent Service Providers may find themselves forced to become little more than the managers of franchise-type operations."
OFTEL then correctly linked this consolidation to the continuing margin squeeze in breach of the Talkland Formula.
"2.5 Independent Service Providers have also been constrained by wholesale airtime prices which, relative to prevailing retail prices, fail to offer a reasonable margin on which to operate. There is evidence that although, in accordance with their licence obligations, BTCellnet and Vodafone may have charged Independent Service Providers and those within its Group the same prices for wholesale airtime, these operators have conducted a margin squeeze by cross subsidising service providers within their Group with profits taken at the wholesale level. Here again, this has limited the ability of Independent Service Providers to compete with differentiated products." (Our italics).
For the first time OFTEL unequivocally accepted that systematic unfair cross-subsidy had been taking place between the two dominant networks and their Tied Service Providers in breach of the Talkland Formula.
"2.7 Following consultation in 1997, OFTEL set the required rate of return at 1.5% per month. Both BTCellnet and Vodafone have failed to achieve this return of 1.5% per month. 2.8 OFTEL considers that failure of service providers within each operator’s Group to recover the cost of capital for an undertaking of this kind is an indicator of potential unfair cross subsidy."
OFTEL also admitted that neither BT Cellnet nor Vodafone had kept separate regulatory accounts as required under the Accounting Separation regime 18. Nor had OFTEL called for these accounts in "recent years." We can only assume that this laxity has compounded OFTEL’s failure to enforce the Talkland Formula. OFTEL itself commented:
"..in the absence of published accounts reflecting the regulatory businesses defined in the BTCellnet and Vodafone licences, it is unclear which bonuses, discounts and marketing support programmes are funded at the network level by the Systems Business in order to stimulate incremental use of a network and which are intended to promote the brands and products of service providers within a licensee’s Group."
OFTEL had failed to follow the recommendations of the Access Guidelines by requiring the production of "audited separated accounts dealing with all necessary aspects of the dominant company’s business."
OFTEL again discussed the possibility of enforcement action but again without taking any action. Again OFTEL revisited its powers under the relevant fair trading and competition licence conditions. This time, however, OFTEL stated that it was opening a formal investigation. The remaining Independent Service Providers assumed that this would finally lead to a decision reaffirming OFTEL’s preliminary conclusions about systematic unfair cross-subsidy. They asked for a decision by 1 November 1999.
Even so, despite constant requests OFTEL still failed to complete the investigation or to take any regulatory action against the network operators for systematically failing to comply with the Talkland Formula over the last six years. Meanwhile, Vodafone and BT Cellnet acquired several more of the remaining Independent Service Providers.
An OFTEL official presented an "update" on the investigation into breaches of the Talkland Formula at the bimonthly industry participation group the "Service Provider Forum" on 30 March 2000. Despite the exhaustive analysis of the market and of the Formula which has been undertaken for previous reviews, OFTEL informed service providers that it still needed to consider further "key parameters" before reaching a decision.
Those "key parameters" were not, as might be supposed, a list of complex issues. Rather they restated obvious points such as:
Service Providers were also informed that OFTEL would be unlikely (despite earlier assurances) to investigate and take action on past abuses of the Talkland Formula. Rather OFTEL proposed to disregard its own clear evidence of a margin squeeze during the previous six years - and which has considerably reduced competition in the market.
This presentation concentrated not on enforcement action but on options to revise and update the Talkland Formula. This approach was subsequently confirmed in the Consultation Paper on proposed action against BT Cellnet issued on 3 July.
OFTEL decided to limit the investigation to the first Quarter of 2000 and to disregard the evidence of the failure of BT Cellnet and Vodafone to comply with the Talkland Formula during 1997-1999. OFTEL at a later meeting on 23 July rejected requests to widen that investigation to include that period. In effect, OFTEL was trying to "wipe the slate clean."
OFTEL reaffirmed the continuing market influence of BT Cellnet and Vodafone. The economists had measured the earnings per subscriber of the BT Cellnet and Vodafone Tied Service Providers. For the first Quarter of 2000
"In all of the tests which OFTEL ran Vodafone achieved positive results, whilst BT Cellnet had negative ones. Consequently the OFTEL formula returns indicate that BT Cellnet is cross-subsidising its TSPs as it is clear from the data that if the TSPs were stand alone companies they would not be covering their costs. It appears to the Director, based on current information, that BT Cellnet’s cross-subsidy of its TSPs amounts to, on average, between £1.50 and £8.00 per subscriber."
OFTEL concluded that this amounted to a margin squeeze.
"This margin squeeze is made possible by BT Cellnet’s cross-subsidisation. (sic). This cross-subsidy significantly restricts the ability of ISPs to compete with the Licensee’s TSPs because ISPs still have to compete with the prices of TSPs but in doing so they cannot earn an adequate return."
Surprisingly OFTEL found no evidence to show that Vodafone was engaged in similar cross-subsidy during that three month period. Hence the draft Direction to end cross-subsidy was addressed to BT Cellnet only.
OFTEL consulted on these views. ISPs have put their case face to face and in writing. At a meeting on 23 July with the case manager, OFTEL made it clear that it was not prepared to widen the investigation beyond the first Quarter of this year - even though the limited scope excluded a substantial period during which Vodafone and BT Cellnet had almost certainly been engaged in a margin squeeze.
MISP has subsequently replied to the OFTEL proposal making this point but also raising substantial concerns about the methodology 19. In particular ISPs believe that OFTEL considerably underestimates the true churn figures for the various reasons - but particularly due to the growth of the pre-pay sector which has a different usage profile. The Group concludes that corrections to the OFTEL assumptions will take pre-paid churn to similar proportions to churn in the subscription sector of the market and produce a subscriber life of at (or even below) 22 months rather than OFTEL’s conclusion of 48-52 months20 . This would of course, have a corresponding effect on the point at which Service Providers can recover their costs. The Group has also raised other concerns about anti-competitive behaviour by Vodafone including unilateral reduction in margins and changes to connection bonuses.
As far as we know, OFTEL is still considering these and other representations: at 10 November 2000 a final Determination has not yet been issued.
This is of equal concern: OFTEL launched a full-scale review of the mobile market on 19 September 2000. This will focus on how competition has developed since the 1998-9 review and whether the existing levels of regulation (particularly on BT Cellnet and Vodafone) are still required. At a "Stakeholder" meeting OFTEL officials made it clear that no options have been ruled out - including the removal of regulatory controls from BT Cellnet and Vodafone if they no longer have "Market Influence." The network operators will be lobbying OFTEL hard for this result. It now appears to Independent Service Providers that OFTEL would rather surrender its residual powers of regulation than face up to the responsibilities of enforcement.