Business Strategy and Regulation Forum

Complaint of price related anti-competitive practices

2009-10-21T14:31:00.006+02:00

In this short note I will consider price-related anti-competitive practices from a regulatory authority point of view, where considerations on competition authorities are sometimes very similar. From my viewpoint to understand the situation better, a separate and more detailed description of the context is needed.

Introduction

Price-related anti-competitive practices could exist when an alternative operator is not able to effectively replicate the offer of the SMP operator within a sufficient reasonable margin (margin squeeze) or when the offer is below cost (predatory pricing). In fact, there are many types of behaviour that could be regarded as anti-competitive by nature, namely

a. Predatory pricing, or selling a certain good or service below a certain cost threshold

b. Price squeeze, or the setting of margins between upstream and downstream services at levels which are insufficient for alternative operators to trade profitably

c. Cross subsidies, or the use of funds from a market to compensate losses in another market

d. Price discrimination or discounting, which implies the use of offers and discounts as a mechanism to drive competitors out of the market.

Predatory pricing can be defined as the situation where an undertaking is deliberately incurred through losses or foregoing profits in the short term, also called “sacrifice”. It can occur within the telecommunications sector when the SMP operator charges a price for the product on the retail market which, when compared to the price it charges on the wholesale market, does not allow a competitor buying equivalent services to trade profitably in the retail market. In other words the SMP Operator either sells equivalent regulated services to its own internal business units at a price below costs in order to have a competitive advantage on price, leveraging its market power, in the retail market.

Context

As a starting point I will investigate the two principal cases in which a pricing issue could be identified. Following this I will outline and discuss the remedies that could be imposed.

Regulatory authorities are usually able to identify pricing issues in two main non-exclusive contexts, these are:

1) During a market analysis

2) As a result of complaints from players in the market

A market analysis can identify pricing issues by comparing the wholesale and retail prices (see figure 1). By comparing the two it could be possible to establish the existence of competitive problems. If the investigation into market players is carried out to a greater extent, and if further requests are made on the preliminary high level costing data from operators, it may just make the identification of an issue more viable.

A market player can also file a complaint to the regulatory authority for anti-competitive behaviour on behalf of the SMP operator. Usually, alternative network operators (Altnets) explain with simple calculations that the margins are insufficient to trade in the market, for example this could be:

Retail Costs - Wholesale Costs = Loss

Other times, the pricing practice of the SMP operator would implicitly give an unfair vantage to its own retail business via volume discounts or by a complex pricing list for services. LLU services, for instance, could be the right usher to premises, security, air condition and rack spaces.

Finally, it is possible that the SMP operator is using non-regulated wholesale service prices to leverage its market power or that it bundles retail services together taking a loss in the non-regulated services.

Remedies

In the case where a regulator is confronted with pricing issues it has two key tools at its disposal:

- reducing wholesale rates to a level that permits an efficient operator to trade efficiently

- impose non-discrimination, cost orientation and price control remedies

I consider that, for both instances, a test to determine either the right level of wholesale rates or to approve the retail offer of the incumbent is needed to evaluate the entire situation.

As a final comment to this it should be noted that by reducing wholesale rates as such it may lead to the start of a vicious circle whereby the retail prices would follow the wholesale rates, which in turn would further reduce the margins of both SMP Operators and Altnets. Although this circle can be seen by some stakeholders as positive for consumers and far from self-destructing, in the long-run, and especially in competitive markets, this would deter investments in the communications market. For this reason a price control tool is usually recommended to monitor margins.

Predatory pricing in the broadband market

A pricing issue, and more precisely predatory pricing in the broadband market, could arise when the wholesale rates for direct (e.g. LLU) and/or indirect access (e.g. bitstream access) are considered by a party (the complainer) to be too high to be able to trade profitably in the retail market.

For detecting a pricing issue the most common methodology used is a predatory (or margin squeeze) test. In general mathematical terms this can be expressed as

P – C ≤0 [1]

Where (1) P is the price of the service or product and (2) C is the related costs incurred in the production of the product of service being tested.

When related to electronic communication services a predation can be identified as

P- (CW+CR+CN)≤0 [2]

Where (1) P is the price of the service, (2) CW is the wholesale costs, (3) CR is the retail costs and (4) CN is the specific own network costs.

The test would evaluate if an operator buying wholesale services at regulated rates from the incumbent operator could be profitable, in other words ending in the “replicability” of retail services.

The cost standard against which a predation is tested is an operator (either as efficient as the incumbent or as alternative operators) serving the national market with direct and indirect access technologies. It is important to clarify that from the equations presented above P and C do not refer to specific profits and costs of a specific operator (e.g. the complainer) but most frequently to an efficient operator.

How to evaluate a complaint in practice

The first step for the regulator is to perform a standard administrative analysis in order to evaluate the scale and weight of the complaint. The analysis has the option to incorporate four main steps:

Verification of compliance with competition obligations: the tariff should be produced by a SMP Undertaking, no other case similar to this should be opened by the competition authority

Verification of compliance with regulatory obligations: the tariff’s analysis should be the consequence of a remedy imposed during a market analysis

Assessment of technical replicability: The assessment of technical replicability applies only to those service components within a service that affects markets where an obligation to provide non-discriminatory access has been imposed as a remedy to the SMP operator. In other words, an SMP operator will not be obligated to guarantee the technical replicability of other operators with those retail service components within the service that lies outside the markets affected by the aforementioned obligation.

Assessment of type of bundling (if relevant): the regulator will examine the bundle characteristics to determine whether the proposed bundle constitutes mixed-bundling, pure-bundling, tying or commercial packaging.

In the case where the bundle is found to constitute pure bundling or tying, the regulator will not approve it.

If the tariff is found to constitute mixed-bundling, the approval process will continue and the tariff will be subject to an economic analysis to detect potential anti-competitive pricing.

If the bundle is found to constitute commercial packaging - that is, if all the components within the bundle can be bought individually and the price of the bundle is equal to or higher than the sum of the corresponding stand-alone retail services, the tariff will be approved without the need for further investigation.

The second step involves the evaluation of the tariff under investigation in a testing tool that calculates wholesale, retail costs and profits of an efficient operator. To ensure a successful calculation there are some key elements that need to be factored in: size and demand of the operator, cost standard used, time value for money, source of data and cost of capital.

Subsequently, with reference to broadband services, there could be a discussion on the inclusion of costs and revenues of natural services to broadband (e.g. calls and other services, such as voicemail) or bundles (e.g. line rental for not naked ADSL) that should or should not be included.

There are three possibilities that could be concluded from the testing tool, namely

Pass: A tariff passes the test when there is a profit to be made in the sale of the reference tariff. The tariff is approved.

Not pass: A tariff does not pass the test when there is a loss. When the tariff fails the test the tariff is rejected or conditionally approved (for example, season offers).

Grey area: A tariff is in a grey area when the model does not give net results. In this case the service should be tested with direct costs only (no common and joint costs).

Conclusions

In case of review or complaint regarding pricing issues, it is usually recommended to perform a detailed analysis of the market, the scale and weight of the complaint and finally the replicability of the retail offer. In case of broadband services and in mature markets the existence of bundles (multi-play offers) increases the complexity of the exercise.

Termination a new step ahead, or not... (update)

2009-08-31T16:46:00.001+02:00

Update from 18/08/09 post

Today some friends of mine are celebrating after the Commission's new heartbreaking announcement regarding termination rates. Others will be surprised and astonished, as I am now.

This revelation could be the result of the hot summer in Brussels or the start of a new trend. This is for you to decide.

On 17/08 the Commission released a comment "Telecoms: European Commission comments on the German regulator's proposals for the regulation of fixed and mobile termination rates" regarding the German NRAs proposal to not regulate alternative operators and MVNOs’ termination rates.

BNetzA's argument is very simple - in my view - since termination rates of fixed alternative operators are the same as those of DT and MVNOs, as well as mobile termination rates being the same as the hosting operators, there's no need to regulate. Regulation would be not proportionate to the case and would do more harm than good.

Background

In its decisions of mid-2006 BNetzA expressed its expectation at that time that this would be the last time asymmetric rates were accepted. Previously BNetzA accepted asymmetric rates for two reasons:

1- Limited impact (traffic of alternative operator was very low)

2- Structural cost differences due to economies of scale

BNetzA is of the opinion that alternative operators’ rates should be below the one of an efficient operator

“Entgelte an ihren Kosten der effizienten Leistungsbereitstellung erfolgt, so dass die Entgelte gegenüber der Deutschen Telekom AG nur eine Obergrenze darstellen und eventuelle Effizienzgewinne der alternativen Teilnehmernetzbetreiber bei diesen verbleiben.“

Therefore, they should be the same of DT.

What is the Commission’s point of view?

"The Commission stressed that commercial agreements together with a non-discrimination

obligation cannot always ensure interconnection and that operators do not raise termination rates above costs."

This is true, but it's also true that we do not have an indication of termination costs of these operators in Germany right now. The French NRA indicated in 2008 in a Market Analysis that cost-orientation obligations for Altnets were not proportionate

"It has invited BNetzA to impose an access (interconnection) obligation and a cost

orientation obligation on each of the alternative fixed network and virtual mobile network

operators, taking into account the Commission's recent Recommendation on termination rates

(IP/09/710)."

What are the implications for fixed operators?

All 56 small operators should calculate the costs of providing termination services and set termination rates on costs. [can you imagine reviewing and negotiating the new tariffs?]

Potentially some will have higher termination rates of DT, therefore, I am sure DT will not accept them and go to court. Moreover, it is possible it will have an impact also on the retail market.

NOTE:

I cannot be certain that 56 termination rates are consistent with the recent recommendation on termination rates that advocate one single termination rate for mobile networks. What do you think?

What are the implications for MVNOs?

MVNOs will have to set termination rates at the same levels of the negotiated MVNO termination price (for non full MVNOS) or as a combination of their costs. Also, in this case it is probable that we will have several MTRs for every small MVNO.

NOTE:

Again, as above, I am not sure the commission has really internalised its own recommendations. What do you think?

What about in other countries?

There are reciprocal termination rates since 1997. In a statement issued in July 1997, Network Charges from 1997, the Director General supported the principle of reciprocal charging for Operators termination. The aim of reciprocity was to ensure competitive neutrality between BT and Operators and to remove the distortive effects of the call termination externality. The current Operator Charge Change Noticedistinguish between single switching operators and multi switching operators.

France

In France, reciprocal termination charges were ordered in earlier rulings, in 1999 and 2001. In decisions taken on 20 June 2003, ART has allowed Completel, Estel and UPC France to require charges from France Télécom until the end of 2007 not more than the level of charges that the incumbent had levied for like services five years previously. In 2008 Arcep in a market review proposed new caps and a glide path to reach harmonisation.

Italy

In Italy Agcom decided with a costing model differential termination rates for Altnets, however, the asymmetry will be eliminated in July 2010. As you can see from the table below Fastweb had in 2007 a 400% higher termination rate than Telecom Italia.

	Fastweb	Wind	BT Italia	Tiscali	Tele2	Eutelia	Other Operators
1/07/2007	2,01	1,90	1,78	1,76	1,45	1,25	1,25
1/07/2008	1,53	1,44	1,38	1,36	1,15	1,02	1,02
1/07/2009	1,05	1,01	0,97	0,97	0,86	0,80	0,80
1/07/2010	0,57	0,57	0,57	0,57	0,57	0,57	0,57

My view

It is a very interesting development to a very boring and old subject. I don't think the effort is worth the costs (potentially very high for operators and regulators) of developing costing models, negotiating new tariffs, changing business models and retail rates. It will be interesting to see the development of this new trend and monitor its implication.

The international experience highlight that harmonisation will be reached in two or three years in Europe. Thus, the burden or calculating with a cost model termination rates for alternative operators is very high, and, in my view, it does not justify the effort.

What do you think?

www.regulation.tk

Telecoms Cost Accounting Conference Dubai

2009-08-10T11:20:00.000+02:00

Meet me at the IIR's Telecoms Cost Accounting Conference Mövenpick Hotel Bur Dubai, Dubai, 25th - 29th October 2009

I will present a workshop on “Strategic Costing for Practitioners and Decision-Makers".

www.regulation.tk

Margin Squeeze Testing

2009-08-01T15:10:00.001+02:00

SVP Advisors has provided NITA (the Danish National IT and Telecom Agency) with a document on margin squeeze tests in Denmark, including a methodology report, a description of the model and a trial version of the model employed for testing.

If you have any comment don't hesitate to contact me at marco.gatti svpadvisors.com

www.regulation.tk

MENA and New Markets MVNO Executive Forum 2009

2009-07-18T10:35:00.000+02:00

Meet me at the MENA and New Markets MVNO Executive Forum 2009 Dubai, 28th-30th September 2009

Assessing the Costs and Benefits of Emergent MVNOs.

I am presenting "Implementing a MVNO offer that satisfies commercial objectives and regulatory obligations"

www.regulation.tk

The Regulatory Cost Modelling and Accounting Conference,

2009-05-30T13:32:00.000+02:00

30/05/2009 - Movenpick, Berlin, 25th -29th May 2009
The Regulatory Cost Modelling and Accounting Conference,

I gave a workshop on "Building a reliable price squeeze model", reviewing the current situation in Europe and highlighting the importance of price squeeze tests in the current regulatory environment.

www.regulation.tk

Fibre: a new bottleneck?

2008-09-23T08:12:00.019+02:00

Spain was on summer holidays, but on the hot morning of friday 1st August, CMT (the Spanish NRA) ruled out that Telefonica will not be regulated in wholesale fibre market, opening up the launch in September of their first commercial offer. See here.

It was my first summer in Madrid, and I thought it was a joke when one of my colleagues explained to me about the perfect move of the Spanish regulator. In Telecom regulation slang this practice is called "regulatory holidays", and CMT couldn't find a better time for it. But,...

...as the new manager of the Irish Football Team ,Giovanni Trapattoni, once said "don't say cat, if you don't have it in the bag",....

... in the meantime, during the summer, Vodafone and Orange's regulatory experts and lawyers have been called back to work on preparing their positions and propositions to the press and finally the court. They are questioning why Telefonica's investments in new technologies are protected, and why theirs are not.

After critics from the EU commission and a preliminary hold ruled by a national court, (La Audiencia Nacional) Telefonica had to stop its plans to commercialise FTTH in Spain.

Is this decision Bad or Good for the market? Let's try to evaluate the possible impact.

Bad for Innovation in the short term: In general terms we can say that with this move the Audiencia National has postponed FTTH in Spain for at least one year.

Good for service competition: It is certain that giving absolute rights on the fibre network would have reduced competition on the very high speed internet market. It is most unlikely that competitors, like Jazztel, would have been able to provide a comparable offer to Telefonica's.

Bad for infrastructure competition: It is also true that by launching new services competitors would have felt the pressure to combine their resources with other investors, like public utilities for example, and invest in open access models. Moreover, communities can promote open system networks, instead of closed ones.

Neutral for municipalities: It is also true that in some Municipalities the incentives to protect Telefonica (a major contributor to the national welfare) might be very hight. However, in distant locations and autonomous regions local partnerships have more possibilities to build FTTH networks than the Spanish giant.

Good for new entrants and investors: New entrants, such as utility companies that do not suffer from economic downturns, cable companies, that do not have a modern network infrastructure that can compete with FTTH, and financial investors, have the opportunity to profit from a polical/burocratical/legal still-stand and invest in the lucrative areas.

For example, if compared to other European cities Madrid has bad coverage of the ADSL and Fibre access network: there are many areas of the city where the maximum speed offered by Telefonica for DSL is still 3MB!
__________________________________________________

I personally like the French approach, of having only one operator cabling the building, while the others can access on an equally first come first basis of the house infrastructures.

__________________________________________________

Finally, what are the options policy makers have?

- the deep pockets firm takes all model: we let operator X with larger capital build the network and maintain a monopoly for following years. Operator X will invest in the most lucrative areas, and postpone the entrance in rural areas. The entrance of a second large operator is unlikely. A small regional operator, with regional financial aid, might be able to build regional FTTH networks.

- the sharing model: operators that invest in FTTH are obligated to deploy extra fibre to rent to competitors and permit access to the houses and to other firms. It might be possible also to introduce obligatory network coordination. All operators have the same chance of entering the market and investing.

- the utility-type model: network providers build regional networks and offer dark fiber or wholesale services. This model would probably promote service competition in rural areas.

- a combination of the three: there is a first mover (investor) advantage of 2 years, but it has to build a network that supports the sharing model and open access. Moreover, ADSL and VDSL wholesale prices will be massively reduced, to increase competition from alternative operators in areas where FTTH is deployed.

The best model? Drop me a line and we can discuss about it.

The national and European policy on this subject is still wide open. Many European countries these days have policy makers, regulators, stakeholders and investors who are discussing how to bring Europe into the next century of communications services. Interests are very strong for one and the other model, and the threat of another era of high prices/low quality monopoly is back!

-----
The Audiencia Nacional has given right, for the moment, to CMT on 26/09/2008. The case is still to be decided in court, probably before December.
-----

www.regulation.tk

See also my previous posts on NGN.

Managing Regulation in a NGT World

2008-09-01T15:00:00.002+02:00

I have been asked to organise a workshop in Berlin at the next Next Generation Telecom Wholesale forum organised by Marcus Evans in January 2009.

I will chair the event's first half workshop and my colleague Julio Villalobos will do one of the presentations.

The topic for this year is Managing Regulation in a NGT World:

The bottom line of regulation: producing innovative regulatory practices

- Discussing current and future challenges in regulation

- Inspecting the current regulatory toolbox and its usefulness for NGT

- Analysing how the current framework can develop

- Introducing to new regulatory practices

- Developing a regulatory strategy that can adapt to a changing environment

How to succeed in turbulent waters: regulatory strategy in practice

- Proposing models to exploit opportunities and avoid risks in regulation

- Analyzing how strategic games are being played by operators and regulators

- Introducing innovative practical techniques to take advantages from regulatory gaps

- Presenting most likely future scenarios and their regulatory implications

If you are interested in partecipating please contact Sumreen Rizvi, at Marcus Evans mentioning my name, you will receive a discount:

e-mail: SumreenR@marcusevansuk.com

5th Annual Next Generation Telecoms Wholesale Forum 2009
Berlin - Germany
12-14 January 2009

Download here the draft program.

www.regulation.tk

MVNO Congress Monaco: Mon 20 Oct 2008 - Thu 23 Oct 2008

2008-08-27T10:00:00.000+02:00

I have already published several posts on MVNOs business and the impact of regulation in this blog.

I will be giving an overview of the regulatory situation at the next IIR MVNO Congress, The Riviera Marriott Hotel La Porte de Monaco, Monaco in October.

My presenation focuses on the impact of regulation on MVNOs business, more precisly has as objectives:

•Introduce to relevant issues on regulation

•Explain their importance for MVNO business case, value chain and business strategy

•Evaluate the impact of recent and future regulation on the MVNO business model.

If you are interested contact Sara Bishop, event organiser sbishop@iirltd.co.uk mentioning my name and you will get a discount.

www.regulation.tk

A Regulatory Strategy that Last

2008-08-26T11:50:00.005+02:00

In the recent months more and more operators relized the importance of regulation and their impact on their business case.

It is always difficult to organise the information available in the company in a structured and logical way in order to evaluate the opportunitie, risks, treaths and impact of the regulatory agenda on the whole market.

This kind of impact analysis is important not only for operators, but also for policy makers that have to evaluate how their decisions can shape the market and whether information received from stakeholders are plausible.

We at SVP Advisors have developed a methodology and a model that is able to give decision makers the impact analysis every regulatory specialist would like to have.

The model is simple but detailed, it combine information from different sources to give an exact overview, a simulation of the internal situation of the company, the external competitive market and the company's retail market.

Interesting, isn't it?

www.regulation.tk

Reccomendation on Termination Rates 2008

2008-08-07T07:00:00.000+02:00

The commission has published for public consultation before summer their last work on termination rates. The consultation last till mid of september. You can find here the relevant documents.

It is quite long time that the commision is triying to sell their position to european stakeholders: harmonisation of termination rates in all Europe is a must for an efficient communication market.

If we look at the broad impact of this reccomendation and the forthcomming challenges of convergence of network a proactive approach of the commission in this direction makes sense.

However, if the objective of the reccomendation is noble, we can hardly say the same for the tools used to achive it.

The commission obsession on using a LRIC bottom up model as a panacea is not supported by any empirical evidence of its effectiveness and superiority against a FAC or a LRIC top down. The IRG/ERG report on regulatory in practice have demostrated several times that there is not a direct correlation between harmonisation, lower interconnect rates and the use of a LRIC model.

For example: UK, currently the country with the lower fixed termination rates in Europe, uses a audited FAC and not the so loved bottom up LRIC. As my friend Gavin was used to say, if you use the right efficiency measures and audit properly the data received you will have comparable, if not in some cases superior results.

We can reconise that the commision knows about the weakness of a LRIC bottom up model in the final words of the draft reccomendation when is mentioned the reconciliation of the data with a top-down audited model.

There are more and more critics to the reccomenation I could do, however, I leave this exercise to the people that are going to answer to the reccomendation. What is imporant is that we discuss about it and may be a new course to the use of LRIC has been taken.

We have many years to prepare ourselves to the new rules, that we will have just to follow; someone out there will have to re-allocate costs to other services and others will have to check this allocations. So just follow the rules? No not really, you have time to send your comments to the draft reccomendation!

www.regulation.tk

Regulatory Cost Accounting and Modelling Conference: Dubai

2008-08-05T10:00:00.001+02:00

SVP Advisors will partecipate as speaker, chairman and organiser of a workshop at the forthcoming IIR Cost Accounting and Modelling Conference in Dubai.

Interested?

I will post some update in this blog in September.

Sun 26 Oct 2008 - Thu 30 Oct 2008
Al Murooj Rotana Hotel & Suites, Dubai, United Arab Emirates

www.regulation.tk

Regulation and MVNOs: a Happy End?‎

2008-07-02T13:31:00.004+02:00

MVNOs are becoming in some European countries a real alternative to mobile ‎operators in overcrowded markets. Operators identified as SMP in market 15 ‎‎(Rec. 2003/311/EC) or market 7 (Rec. 2007/879/EC), can be imposed as remedy ‎to open their networks to MVNOs. In this case regulator should help MVNOs to ‎develop their own strategic proposition. ‎

In April 2008, Malta Communications Authority (MCA) issued guidelines to MVNOs, ‎Enhanced Service Providers (ESP) and Service Providers (SP), following a November 2005 ‎decision on market 15. For the first time in the small holiday island with less than 400.000 ‎mobile users, competition in mobile services is becoming reality and alternative service ‎providers are coming to the market. Vodafone Malta already announced several new ‎agreements for hosting ESPs, and it is the evidence that even small markets can sustain ‎diverse and innovative service providers.‎

MVNOs has been often used in mature markets by MNOs for several reasons:‎

‎-‎ to reduce regulatory pressures or to comply with market’s review decisions;‎
‎-‎ voluntarily to have a ready way to enter in new markets and win new customers;‎
‎-‎ reduce spare voice capacity, mainly for small network providers;‎
‎-‎ as pre-emptive move to reduce overall attractiveness of the market and increase ‎barriers to entry;‎
‎-‎ increase market power in international roaming (e.g. united-mobile).‎

The main reason for being anti-MVNO is the treat of cannibalization of current business and ‎increase of competition. However, when operators realized that in saturated market achieving ‎growth is very difficult and that their brand could not achieve all nice markets (e.g. ethnic ‎groups) or could be active in all segments some operators realized the positive potential effect ‎on their cash flow of MVNOs alternative business model. Some of them in very developed ‎markets also realized that the future of their business model were less focused on low-end and ‎prepaid customers, but on more post-paid and business customers. A similar concept is also ‎argued by Chriss Zook in a recent article on the Harward Business Review (04/07), he ‎emphasis on the research of the core business and to reconfigure orphan products.‎

Regulation should help MVNOs to develop their own strategic proposition and not just re-sell ‎pre packaged services. It is important for MVNOs to have a clear and stable harmonized ‎European framework where they can replicate their business model and invest in innovative ‎Pan-European services. For example, try to access SIMYO webpage in Germany and Spain, ‎they have a strong brand identity with tariffs that are almost identical (€9c for voice in all ‎networks and for SMS).‎

However, we should not limit competition to price. Another key issue is service ‎differentiation. Regulation should also promote differentiation in business models.‎

Some examples of MVNOs and their main business strategy:‎

Country MVNO Hosting ‎ MNO Strategy
Belgium Mobisud Belgacom Etcnic group
Belgium Aldi Base Price
Italy Tiscali Telecom Italia Bundling
Italy Postemobile Vodafone Service
Poland Aster City ‎Cable PTK ‎Centertel Bundling
Spain Jazztel Orange Bundling

World Lycambobile Many Etcnic group and price

World United-Mobile Many price and differentiation

There are some issues that should be discussed and analyzed from a regulatory point of view, ‎these are:‎

‎-‎ rights and obligations of MVNOs;‎
‎-‎ interconnection rights of MVNOs;‎
‎-‎ termination rates, impact on business case;‎
‎-‎ wholesale prices for MVNOs (bundle of minutes and volume discounts);‎
‎-‎ numbering range and routing;‎
‎-‎ legal interception;‎
‎-‎ number portability.‎

Conclusions
In many countries the regulatory framework has been neutral to MVNOs and their life has ‎been very difficult; in other markets the threat of more strength regulatory intervention (e.g. in ‎Switzerland, Italy and Spain) has been enough to open up networks and to promote price ‎competition. ‎

What MVNOs ask is certainty and transparent offering from MNOs and a clear regulatory ‎framework. MVNOs find themselves as second class operator, no rights and no control over ‎customers. ‎

Moreover, it is often the case that there’s no effective competition between MNOs and when ‎you are in the deal with one MNO you have to remain with it: sunk costs and number ‎portability problems, are likely to override all benefits in migrating to another MNO.‎

Finally, in some markets the so called Service Providers or light MVNOs struggle in ‎becoming full MVNOs. I can see a MNO wholesale service portfolio for MNOs as the limit to ‎MVNOs’ business case and innovation.‎

ww.regulation.tk

"II European MVNO Summit" Economist Conferences

2008-05-28T09:04:00.002+02:00

I have been invited to partecipate to a panel discussion at the next European MVNO Summit in Rome this June organised by Economist Conferences. I will be partecipating to the first round table: "European regulation framework, perspectives and proposals" with Agcom's commissioner Enzo Savarese and my friend of Ovum Stefano Nicoletti.

MVNOs have been very important in the european market for many reasons:

1) can radically change the market's conditions.
2) appeal to nice market's segments: for example, ethnic groups that use their mobile phone for call abroad.
3) give a fresh and innovative look to an old and static market: for example, with new price plans and services.
4) open to completely new business cases: for example United Mobile (a roaming operator) and Blyk (the free mobile network in UK).
5) increase efficiency of the network (especially for UMTS players that have large capacity) and reduce costs.

Time to hear from leading experts on the subject, don't hesitate come to Rome with me!

www.regulation.tk

Regulatory Accounting Roundtable 2008

2008-05-22T09:29:00.011+02:00

Cost recovery, transparency and consistency, cost model auditing and simplification in cost accounting are the priorities for the industry and main challenges for the years to come, according to participants to the Regulatory Accounting Roundtable 2008 (RAR08), a high level meeting organized by OFCOM last week.

Last week I had the pleasure of chairing the RAR08, European experts and a delegation from NTC Thailand actively participated to the discussion on the future trends in regulatory accounting policy.

Delegates agreed that a priority for NRAs was to promote transparency and confidence with stakeholders and reduce the incentives of SMP operators to have subnormal cost recovery from regulatory activities.

An interesting presentation came from GSMA, they believe, as I wrote in this blog some time ago, that pricing mechanisms for interconnection should be tailor made for the situation product and market. A standardized pricing mechanism is one solution, but certainly not the best in log term.

Another issue emerged, may be just a trend, many operators agreed that a solution for all our problems in cost accounting and interconnection might be introducing in Europe a regulatory environment that promotes a pricing mechanism similar to Bill & Keep. However, nobody could answer in full to my questions regarding drawbacks of the system:

1) is it possible to have an open market with Bill & Keep? Bill & Keep might promote competition within existing players with same traffic volume, but might reduce competition from new entrants that will face (at least in the short term) much higher termination costs that current players.

2) how should unbalances in traffic volumes be handled? Can small operator ‘profit’ from Bill & Keep or is it (as it is in the internet world) a system advantage only for large players?

3) One operator argued that it will be happy to introduce Bill & Keep on a bilateral basis with the incumbent, but that probably smaller operators will be not able to have the same conditions as the others in the market.

I believe that Bill & Keep might become new barrier to entry in the market, what do you think?

I think that if we introduce Bill & Keep as it is, we might end up with a cost based termination rate valid for small players, that will not be able to ‘play’ a role or enter the market, while existing mid and large operators will be able to have a cost advantage and may-be a sustainable competitive advantage.

Julio Villalobos from SVP Advisors, gave us an open minding presentation on the complexity of the auditing process for regulatory cost modeling. I believe that auditing will be one of the most important activities in the future to come (with the new commission’s recommendation on interconnection due to see the light very soon) and that the importance to validate regulatory cost modeling will arise very soon when interconnection price will collapse. We have time to think about this issue!

Finally, I have to speak about the change in trend from small mobile operators. I wrote about this issue in this blog before. My friend John Blackmore from H3G explained that mobile termination rates based on LRIC and large common costs give suboptimal results now, in time of full coverage and small growth of the market.

I fully agree with him, that usually too many irrelevant costs are included, under full competition firms can only recover their marginal costs of producing the extra output. Common and joint costs should be therefore not recovered by this ‘monopoly’ product.

Why should we subsidize mobile operators, usually large and very rich, with fat-cat termination rates? We can if there is a long-term regulatory objective (e.g. coverage or low retail rate), but sometime at cost distorting the market.

Good point John, did you speak with the commission recently?

Presentations files can be found here

www.regulation.tk

Setting the Course.

2008-05-21T09:20:00.004+02:00

I will be joining SVP Advisors in August as responsible of the regulatory department.

SVP Advisors is a boutique consultancy firm specialised in regulation and financial analysis based in Madrid, Spain.

SVP Advisors won the bid for auditing Telefonica's Regulatory Accounts for 2007.

Plans on Termination Rates: No Good News

2008-03-27T16:07:00.004+01:00

The commission presented yesterday, to a selected number of representatives of NRAs, a plan for a new recommendation on Termination Rates.

Commission's objective is to achieve a coherent harmonized approach to ex-ante regulation of termination rates. They realized that, despite a common approach (LRIC) there is still 'inconsistent application of remedies' and that there are 'different levels of termination rates across Europe'.

The good news is that the commission is supported by ERG experts on this matter and that they plan to have a transitional period to achieve symmetrical termination rates.

I believe that symmetrical termination rates should be the objective of each NRAs, if we consider an efficient operator there's only one 'efficient' termination rates. Ideally one per country, but potentially, as expected by the commission in the long run, one per the entire European continent.

The bad news is that the commission is still in trouble defining the 'ideal' parameter and approach. At this stage of the process, I would argue that no recommendation is better that a bad 'recommendation" and that the fasted and less painful solution would be a kind of Bill & Keep solution with a level of cap, a trash hold, of about 10-15% above where symmetrical (ideally low) termination rates are charged.

The reason is simple, to prevent destructive retail tariffs, "Free calls to operator's A customers", so that I gain new customers and the costs of these customers are burden by the largest operators that have to increase capacity to its network.

What do you think on this issue? And what about fixed to mobile termination rates? Will it be the old / new problem of next year?

Lower Termination Rates for All: A New Hope

2008-03-20T14:36:00.008+01:00

European smaller mobile operators have changed their strategies on regulated mobile termination rates.

In the last ten years smaller operators have always argued that size and market's entry matters when speaking about termination rates. Smaller operators due to lack of economies of scale and scope and the market's situation would have the right to ask for premium rates for terminating calls on their networks.

The Mobile Challengers Group (Italy's Wind, Poland's Play, Turkey's Avea, Bouygues Telecom, E-Plus, Base and 3 Europe) is promoting a change of course. They argue that, since termination rates based on LRIC are way above costs, Regulators imposing these pricing methodologies are promoting the position of a handful of large operators to the detriment of new entrants.

The Mobile Challengers Groups realized that "network economy matters", they terminate less calls that they send. They are net payers to large operators. For example, 3 has large outflows of cash due to terminations.

Their solution looks 'simple', reducing termination rates at 'marginal' costs.

They did not present, however, solid evidences on the level of reductions necessary to solve the problem and, as support, a cost model reproducing an efficient marginal cost for termination. The lack of evidences and weak/faulty arguments do not facilitate the regulator's work.

Picture Source: http://www.flickr.com/photos/63878179@N00/956430203/

International Roaming and Switzerland: bad taste

2008-01-31T18:00:00.000+01:00

European tourists using their mobile phones in the French Guiana are paying less than when they are in Switzerland.

How is it possible? Thanks to the Eurotariff, the European regulated tariff for European roamers.

The French Guiana, despite far far away from Europe, is part of the French Overseas Departments and Territories and therefore legally France. As consequence of the new regulation Swiss mobile operators negotiating wholesale roaming rates (IOTs) with European will be considered 'rest of the world' and will have to pay much more that their Neighbors for the right to roam.

What are the implications for the Swiss mobile market? is the wholesale market now competitive? and what can we do to solve this problem?

In April I will be part of a panel discussion on this topic at the next IIR "Roaming World Congress" in Vienna.

more to come...

NGN Regulatory and Commercial Aspects

2008-01-23T12:34:00.000+01:00

Commercial aspects of NGN interconnection should be not underestimated when setting wholesale rates.

We know that in wholesale there are two main groups of services that will be interconnected: regulated and not regulated. We can include also two other categories more common in the retail market, services that are perfectly homogeneous and 'status' goods.

What I intend with this?

Perfectly homogeneous a.k.a. commodities: The firm in this case is a passive actor with absolutely no power over the market for its products. This is a key feature of the ‘perfect competition’ model of the market place, in which the individual firm is a price-taker (e.g. voice services).

Premium (Veblen goods): The firm has a power on the market of this product. Elasticity for these products can be positive or neutral.(e.g. Euro2008).

We should consider all these elements when we decide the pricing mechanism we want to choose for our wholesale product.

Analyzing the issue I realized that there are a multitude of pricing mechanisms that are not always compatibles with retail. If we run a compatibility test between pricing and charging principles we see that they are almost always only directly compatible (for example, QoS at wholesale with QoS at retail).

In my study I have identified the implications at retail level of applying indirect relashionships. It might seems absurd but the less destructive methodology remains the per minute charging. I am not saying that it should be always used, but that there should be a direct relationships between wholesale charging and retail if we want to reduce market's distortion.

This would suggest that ….

1- there isn’t a best way to price products where there are a multitude of diverse services, but there’s a multitude of options.
2- Therefore it depends on several environmental factors e.g. product, market and regulation.
3- However combinations of models are not infinite or without constrains.
4- the importance of costs of wholesale products to assure innovation, fair competition and flexibility in the market.

Intrafirm collaboration Myth or Reality?

2008-01-04T08:58:00.001+01:00

Can competitive firms have a collaborative relationship in a fast changing and competitive market? I tried to address this question in this short essay on collaborative strategy I developed for a client last year. I post here a short extract.

An extensive literature review reveals how Intrafirm collaboration is often the result of an egoistical behavior, a wish of disproportionate collaborative rents and advantages, expected long-term externalities and sometimes irrational trust on alliance partners.
We can observe that there is asymmetry of expected pay-off depending on the size of the firm, the invested resources and the kind of private and common benefits that arise in collaborating in a project in particular or in the organisation in general.
We also note how trust and cultural fit are important for a successful alliance. Change in the external environment and distance from the buyer can become a powerful stimulus and interest aggregator for alliances. We argue that when a fast-changing market is not under control, even strong partners’ private interests can have more chances to overlap with common interests, consequently alliances are more likely to be successful.

From the above discussion and in particular from Khanna et al (1998) ‘relative scope’ concept we propose a conceptual framework (figure 1).

We identified four archetypes of partners in alliances according to the ‘relative scope’ and the interest to collaborate (‘collaboration factor’). The ‘relative scope’ values are from zero to one, a firm that scores zero will have no interests in participating in the alliance.

If the value is closer to ‘one’ the firm will have interests only in markets or areas of strategic interests covered by the alliance.

The ‘collaborative factor’ represents the collaborative effort of a firm in the organisation, its values are from high (H) to low (L).

The proposed archetypes are:

• Philanthropic: these are firms that do not have high interests in the organisation but still continue to be active in everyday works, for example, for strategic or political reasons. A philanthropic company should evaluate whether to continue or not the collaboration or, alternatively, reduce its activities (blue arrow).

• Blasé: firms in this quadrant of the model should be leaving the organisation soon, they probably do not fit anymore with the alliance, for example, for changed market conditions.

• Hyperactive: They are the fostering members and have strong interests and commitments in the organisation.

• Selfish: the decision of these firms to collaborate is strong only when their private interests overlap with current activities. Some of them were ‘Hyperactive’ members (red arrow) that have fulfilled their urgent interests.

Companies can sit everywhere in the face of the cube and will tend to follow the path described by the arrows in the direction of an alliance’s self extinction.

Figure 1: The cube of collaborative alliance

Source: own analysis.

We identified in this section a number of structural conditions and internal and eternal factors able to facilitate companies to act and behave as collaborators instead of as rivals.

We believe that is worth now to select and summarize them. We found that alliances are likely to be effective and succeed when there are number of conditions (not necessary all together):

• the cost of developing and working in the alliance is lower than future benefits;

• common and private benefits overlaps or are expected to overlap;

• there is no zero-sum game, where the benefit of one member entails a corresponding loss for others;

• organisations are diverse and belongs to a variety of complementing and competing industries;

• there is strategic and cultural fit;

• members of the alliance compete in some but not in all markets;

• there is distance to buyer’s interests,

• absorptive capacity and

• redistribution of knowledge among business units.

How to overcome resistance to change

2007-12-11T13:02:00.000+01:00

I spoke last week with a director of Human Resources of a large Italian organization, we discussed about structural changes. I report here some thoughts.

There is closed relationship between theory and practice in change management. Practitioners and academics jointly recognise that there is not a unique or best way to confront with change, they prefer to identify favourite modus operandi and frameworks (Burns, 1999; Hughes, 2007) than standardised tools.

I propose consequently a number of change tasks an organisation should perform to reduce resistance. I believe that organisations are far from equilibrium systems and that Lewin’s field force field is impossible to be completely overcome.

Making the transformation meaningful

The first task I would suggest to reduce resistance is to plan. Readiness has been often described as a necessary precursor to implementation of change initiatives (Armenakis et. al., 1993; Eby et. al., 2000). I propose to develop and communicate a convincing transformation story. The story should include urgency, description of the crisis, a comprehensive list of alternatives and a clear vision of the future. The story can increase the readiness of individuals to accept the change and the consequences of not changing. Planning can, also, help change agents to prepare resources and anticipate what the future might be.

Build the power to change

The second task is to understand and manage power. The practical matter of overcoming resistance is not limited to the selection of a change strategy or change agent. It is a complex and dynamic process that involves politics.
A strong and committed managing team should make the transformation personal to engage resistance and to reward successful changes personally. Leaders should be considered accountable for failure or success in implementing changes as planned.
The change agent should evaluate how conflicting interests work together and how the new structure, process or strategy change and react to constrains of the organisation.
Political behaviour of change agents can be used, also, to overcome resistance (Buchanan and Badham, 1999).

In my experience, we have noticed that very often change agents tend not to exercise power or, even worst, do not have coercive power to contrast resistance.

Strebel (1994) notes that rolling back change forces is possible, therefore, it is necessary to choose the right change path. From the above observation we can conclude that change agents should reduce the power of Status Quo Agents to avoid failure. I realize that it is not an easy task because even when transition is effectively choreographed from the centre leadership it is a cascade process in which each round engages new and old powers.

Readiness to pursuit impact

Finally, I propose a number of additional tasks change agents can use to reduce resistance to change. Kotter and Shlesinger (1979) recommend six actions managers can perform to reduce resistance to change. These tasks are not exclusive and can be grouped in conflicting (manipulation and coercion) or cooperative (negotiation, education, communication, participation and support). Kotter and Schlesinger tasks are supplement to a careful preparation and the management of power.

In almost all cases it can be recommended to use a balanced carrot and stick approach with the prevalence of context based, either cooperative or resolute, tactics.

Nothing Changes with Sunrise New Face and Strategy

2007-10-29T06:30:00.000+01:00

Sunrise, the integrated Swiss alternative operator, recently changed its logo and strategy in an attempt to re position itself as the real and only alternative to Swisscom.

It's not the first time, in the last 8 years Sunrise had tried everything to increase its market share and become a real threat to Swisscom and Orange and a major player in the market.

With alternative successes and failures Sunrise has modified several times its prices, services and position in the market achieving only confusion and lack of trust from its customers.

First: Sunrise, do what you do best and don't confuse with different and conflicting messages your customers!

Sunrise's customers are unaware of the differences between the new and the old Sunrise.

Prices models changed, yes, but why?

At the end of the day nothing really changed!

The same basic price plans that diAx introduced 8 years ago, with some variations but - at the end of the day - the same. There is a lack of innovation.

Second: Decide! What is your business like?

Accessing your homepage a mobile phone welcome me. Almost immediately I realize that your strategy is focused only on the mobile market.

I do not see any information on your fixed and broadband businesses; and it takes some time, several clicks, to find them.

I understand that you are not doing lots of money with them, but if you want to be an alternative to Swisscom you should actively bundle, pack and supply your products as communication services. Not as separated products.

Are you shifting the attention of your customers to your core business?

Clever, business-school type strategy, however, in doing this you are now very similar to Orange. Why should customer choose you instead?

Third: Learn from your mistakes and take the best from other markets.

You have the unique opportunity of becoming the 'only' real alternative to Swisscom.

Don't miss it with 'cleaver' top-down strategies, instead try hard to be different, unique!

And actively communicate, every time, your uniqueness.
:-)

Net Neutrality: Who Pays for it?

2007-10-26T15:34:00.001+02:00

In the last two days I had the pleasure to meet and discuss with Martin Cave, Director of the Centre for Management under Regulation, Warwick Business School, Coventry. He came to Switzerland to present his views on the economics of the ICT market at the annual Comdays. A must be event of the Swiss ICT industry.

Martin highlighted a contradiction of the Net Neutrality principle. Capacity doesn't come for free. Someone has to pay for extra capacity used for new services and the investments operators do for providing a good QOS.

I personally agree with the basic concept of any-to-any communication of the bit and net neutrality. I also respect the decision of some governments to block inappropriate content, such as porn and offensive material. I personally disagree that providers can decide what kind of services I - customer - can have (e.g. block my Skype or Zatoo packets).

As Martin said, someone has to pay for the 'neutrality'.

I agree with this principle, let's look together what the options are:

- operators, can recover investments from the monthly broadband subscription or from advertising: a mix of paid and advertised support model might be the solution.

- Operators, can charge a premium for valued content (efficient pricing) to recover these costs.

- Service providers (e.g. google) can support the extra costs with a revenue sharing model.

- Finally, governments, communities and philanthropic associations.

I know, it's not so easy to pick the best option. However, we should be aware that we will be confronted with this dilemma soon.

As already argued in this Blog there is another risk, the formation of new bottlenecks from network / content to distribution. The distributor of the 'information' (everything that can be digitized) might be the next real monopolist. See for example, the rights for sport events, such as Euro08!.

More Info:

6. Biel-Bienne Kommunikationstage, 25. / 26.10.2007, im Kongresshaus, Biel

ICT Industry strategic landscape

2007-10-20T15:34:00.000+02:00

In the last years in the ICT industry many firms had a strategy focussed on implementing technology, rather than effectively managing resources.

I believe that the industry is now at a new, so-called, transformation point, where the environmental pressures to transform and adapt to the context are not sustainable.

In this case, to evolve and mature I would suggests to integrate all systems and successively manage the resources.