Regulatory Accounting Roundtable 2008

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

Relevant Markets: A New Hope?

The commission is investing a considerable political capital in the deregulation of the communication market. In particular there are a main issues in the draft recommendation on relevant markets I like to highlight.

The exclusion of markets in the forthcoming commission recommendation represents a clear political signal of success to European stakeholders. In other words it means that competition works, regulation has been effective and it was just temporary devil. However, commission's arguments to justify the exclusion of retail markets do not fully satisfy and could be dangerous for policymakers and competition in the future.

The inclusion of the old markets will be still possible, but NRAs will face a significant burden of proof to demonstrate those market can be again regulated. Can you imagine the commission, after having invested considerable resources in deregulation, agreeing with NRAs that the devil is back?

NGN Interconnection: far from an agreement

There is no agreement or even a consensus on how NGN interconnection in UK will look like. The current debate is so far from reality that many operators (someone says also BT) do not know even what the problems are. Part of the challenges arises from a general lack of experience in interconnection of a so large and extended set of products and services.

Consultants, regulators and academics have different and divergent views on how to set interconnect rates for NGN. Views essentially spread from bill&keep innovative models to old-fashioned per minute or per service charging.

A possible solution might be to charge per 'contended capacity' and per 'quality of service'. However, even here there is no agreement whether voice needs more or less priority.

Some observers argue that voice do not need more quality as it can be accepted and priced at low quality (see Skype). Therefore regulated voice services will be almost free of charge and priced according to capacity. Others instead argue that voice needs a high prioritisation and should cost more than other services. What is clear from the above discussion is that there is still lot to say and argue about this topic in the future.

Interconnection of NGN can remain billed per minute for quite some time during the transitional phase, even if minutes are not a cost driver for NGN. However, prices probably should be adapted to the costs of an efficient operator (e.g. overcapacity should be reduced) in order to avoid irrelevant costs.

Simplicity and continuity in pricing models (for retail customers at least) are and should remain a must in the near future in order to reduce cases of anti-competitive behaviors and the effect of bottlenecks. Operators should look for a solution that combine the need for stable rates and the request of innovation and profitability from shareholders. Two kings for the same throne!

Openreach & Co: the network separtion

BT Openreach has solved many of the old-time competition problems and promoted the deepest level of infrastructure competition possible. In Sweden and Italy, both Telia Sonera and Telecom Italia have started the process of creating clones of Openreach in an attempt to satisfy upcoming regulatory pressures and EU attempt to increase NRAs powers with functional separation.

However, the approach of the two clones is different. While in Sweden PTS has announced lighter regulatory pressures on Telia-Sonera in case of voluntary network separation, in Italy AGCOM is struggling to convince Telecom Italia that network separation does not mean a complete relief from all obligations in all markets. Telecom Italia proposed to have all retail caps levied.

Network separation can be the solution for some competition problem, but it is not a panacea or a one-size fits all incumbent strategy. It a tool that should be adapted to the environment it wishes to regulate. In some cases, I believe that a sound cost separation system can give similar results to a fraction of the costs and time of a separation.

Moreover, we should not underestimate the cultural factor. Something that worked in UK and Sweden, can be very dangerous in other organizations and cultures. Process and procedures should be therefore carefully adapted and alternatives evaluated before taking any decision. A network separation is a radical change that can take years to recover in case of very complex or old-fashioned organizations structures, therefore, distortion effects on competition can be unpredictable.

Vodafone ultra low handset strategy: let's see

VODAFONE Group offer of ultra-low 2G handsets is a move to follow further developments in the mobile market. Vodafone UK latest information on subscribers net addition shows that almost 500,000 new customers, out of 700,000, were pre-paid, however, with very low ARPU. With this move Vodafone is clearly targeting low budget segments and people that are not confident with high-tech technological and complex phones. In Switzerland a similar move of Swisscom Mobile two years ago has been not as successfully as expected. No frills and virtual operators are offering old models of Nokia mobile phones at less than €10 with €10 pre-paid credit. Swisscom mobile handsets were too expensive (€120) and able to offer only basic functions, such as, voice and SMS.

However, the GSM association forecasts that this segment could be a incredible opportunity for acquiring new customers. It has been demonstrated that voice become a commodity for many customer segments in Europe, however, low wage customers have higher then the average price elasticity for making calls as they still think that the benefit of 'mobility' is higher that its relative cost. Let's see the Q1 2008 for a critical analysis of this move.

iPlayer and the net

BBC is offerring a new Internet download and broadcasting service for a wide range of BBC television programmes (currently in Beta Phase) and ISPs are already complaining that this new service will use a large amount of bandwidth and places an intolerable strain on networks. Some ISPs want to sniff traffic and limit download speed for IPlayer traffic. BBC download service is potentially less dangerous that Joost, that offers P2P TV, because it tolerates higher delay of traffic and can for the moment be run at flexible quality of service (for example, at peak or off-peak network times). BBC tries in this way to redesign its value-chain and deliver its services via Internet, cable and other platforms. Digitisation permits, therefore, to rewrite the rules of production and distribution of content. However, BBC plans do crash with network's operators own plans of convergence. In this case, it can be suggested to include in the strategy a collaborative approach and include the largest number of potential value-chain participant in the project.

United Mobile and Roaming Regulation

The Erotariff is available or will be soon available in Europe after one of the fastest legislation processes in the history of the European Parliament. It is a clear example on how regulation can be positive for consumers and competition.

Let me explain you, I do not mean that consumers will pay less, operators are already re balancing tariffs and packages and re-negotiating wholesale charges to cope with the reduction of international roaming revenues.

It is just a start! Let wait and see how the industry evolves. For example united-mobile have launched a new virtual roaming services from the Isle of Jersey with incredible good rates (http://www.united-mobile.com/)