The freephone and local rate calls battle – who’s lost?

gsm & umts mobile base station

2G and 3G masts on a mobile base station

The war between fixed network operators and mobile network operators is a central feature of most mature electronic communications markets, where few operators provide both fixed and mobile networks and services. The UK is no exception.

In the UK the most recent battle in this ongoing war has been in the freephone and local rate calls markets, known by the number prefixes used for the relevant number ranges of 080 (freephone) and 0845/0870 (local call or reduced call rate). In their bid to win customers from each other and reduce their own loss of customers, ie to reduce their churn rate, mobile network operators (MNOs) or their wholesale customers, the mobile virtual network operators (MVNOs) have developed a bewildering array of tariffs. These usually involve a range of bundles for minutes of calls, numbers of text messages and data rates for mobile broadband. A key part of these bundle offerings is the careful selection of which types of calls are included within the minutes permitted in any bundle. In most cases, the MNOs or MVNOs exclude calls to 080 or 0845/0870 numbers (the 08 Calls), perhaps because these calls are almost universally made to fixed network operators’ (FNOs) customers.

As a consequence, MNO and MVNO customers rarely know how much they are being charged to make these 08 Calls (see OFCOM’s Simplifying Non-Geographic Numbers consultation paper of 16 December 2010). The tariffs are not key differentiators or even factors customers consider when selecting an MNO or MVNO. As a result, there is little or no competitive pressure on MNOs and MVNOs for the 08 Calls. It is therefore not surprising that the tariffs charged for these calls can far exceed the network costs to the MNOs of setting up the calls (originating them) and handing them over to the FNOs to route to the called party (or to terminate them). FNOs, on the other hand, as terminating operators, have a monopoly on the market for terminating calls on their networks. Competition law can therefore ensure that the charges the FNOs make to MNOs to terminate the 08 Calls are not abusive, but are fair and non-discriminatory. Consequently, FNOs have long been aggrieved that the majority of revenue generated by for 08 Calls has been retained by the MNOs (and MVNOs).

British Telecommunications plc (BT) was the first to try to change their charges for terminating 080 Calls to get an increased share of this 080 Calls revenue. It was obvious that any change would be opposed by the MNOs. So when BT sought to change their terminating charges by use of Network Charge Change Notices (NCCN), these were disputed by the MNOs.  When these disputes could not be resolved, they were referred by the MNOs to the Office of Communications (OFCOM) for resolution using its statutory dispute resolution powers (see sections 185 to 191 of the Communications Act 2003).

OFCOM issued two determinations in respect of disputes between BT and various MNOs regarding BT’s termination charges and its relevant NCCNs:

  • the first dealing with 080 calls on 5 February 2010 – the MNOs concerned being T-Mobile UK Limited (T-Mobile), Orange Personal Communications Services Limited (Orange), Vodafone Limited (Vodafone) and Telefónica O2 UK Limited (O2); and
  • the second dealing with 0845 and 0870 calls on 10 August 2010 – the MNOs concerned being Vodafone, T-Mobile, Hutchison 3G UK Limited (H3G), O2, Orange and Everything Everywhere Limited (EE). EE is a 50%-50% joint venture between France Telecom and Deutsche Telekom, which was formed from the combination of their UK subsidiaries Orange and T-Mobile, who operated under the name of EE as a single entity from 1 July 2010.

In each determination OFCOM set out a number of near-identical principles, which it used to assess whether BT’s proposed termination charges were “fair and reasonable”. OFCOM considered that BT’s new charges were not fair and reasonable, as in each determination certain of these principles were not met.  BT was therefore not entitled to introduce the proposed tariffs.

BT appealed OFCOM’s determinations on both the 080 and the 0845/0870 disputes. BT had no fundamental dispute with the principles used by OFCOM to determine whether the proposed tariffs were fair and reasonable; it merely believed that OFCOM had misapplied its own principles.

EE also appealed OFCOM’s 0845/0870 determination.  It’s primary appeal ground was that OFCOM’s principles had failed to address an even more fundamental principle, that BT’s proposed tariffs should be cost-orientated or “cost reflective”. As they were not, they were unlawful. EE’s secondary position was that if OFCOM’s principles for determining the fairness and reasonableness of BT’s tariffs were upheld on appeal, then they had been correctly applied and OFCOM’s conclusions ought also to be upheld.

The Competition Appeal Tribunal (CAT) has recently published its decision in the joined appeals ([2011] CAT 24, 1 August 2011). The CAT had to decide if BT was entitled to impose its proposed tariffs. To do so, the CAT:

  • reviewed OFCOM’s approach to resolve the tariff disputes, including OFCOM’s setting of its three cumulative principles according to which the fairness and reasonableness of BT’s tariffs were to be judged and their application to the facts;
  • considered whether OFCOM correctly complied with its dispute resolution powers and the process set out in the Communications Act 2003; and
  • considered what criteria the CAT must itself apply when hearing appeals of OFCOM’s determinations of disputes.

In a lengthy but well-structured judgement, the CAT had no argument with the principles adopted by OFCOM to resolve the 080 Calls’ tariffs disputes.  It found that Principle 1 (that MNOs should not be denied the opportunity in any tariff structure to recover their efficient originating costs for the calls) was satisfied. The CAT also considered that Principle 3 (that the proposed tariff structure was reasonably practical to implement) was also satisfied.

This left Principle 2, which was made up of several parts.  Principle 2(i) concerned whether the proposed tariffs had benefits to consumers. Principle 2(ii) concerned whether the tariffs avoided material distortion of competition. The CAT did not see how these were cumulative principles so that if either one failed, a new tariff could not take effect. Most importantly for future developments in the electronic communications market and its regulation, the CAT considered that OFCOM had failed to take into account a third factor: the contractual rights of BT.

The CAT believed that Principle 2(ii) concerning distortion of competition was satisfied; the imposition of a “stringent test for the introduction of price changes” by BT itself had the effect of distorting competition by placing a restraint on BT and other operators who wishes to impose similar laddered pricing structures. On Principle 2(i), the CAT did not say that it found the proposed tariffs to be beneficial to consumers; it considered that the outcome was inconclusive. However, it did criticise OFCOM for failing to take into account BT’s relevant market share in the call-hosting market, which, being limited, would dilute the impact of BT’s proposed tariffs. The CAT did not consider that the correct test was that the new tariffs had to be shown to benefit consumers, as this placed undue importance upon OFCOM’s own policy preference over Principle 2(i) and BT’s contractual rights. Instead, this policy preference could only have overridden the other factors OFCOM considered if it could have been clearly and distinctly demonstrated that the new tariffs would act as a material disbenefit to consumers.  An inconclusive finding by OFCOM was not enough to override BT’s contractual rights.

The CAT has therefore recognised the importance of freedom of contract in the promotion of competition. As an aside, this is exactly the argument put forward by Cable & Wireless, as an intervener and FNO in support of BT (see the closing arguments of Daniel Beard QC).

So who lost? This is a difficult question, but on one level the losers may be mobile phone customers. Clearly the MNOs were making healthy profits on their 080 Calls, using this additional revenue to cross-subsidise their bundle packages. These bundles may now reflect more their underlying costs, or in EE’s words, be “cost-reflective”, as more of the 080 Calls revenue is shared with FNOs.

As an aside, it became clear during the dispute from OFCOM’s draft determinations that a retail price of 12.5ppm was a rate that permitted MNOs on average to recover their efficient costs of originating calls to FNOs, both for 080 Calls and to geographic numbers. This rate is therefore is a useful benchmark with which consumers can check the tariffs being offered to them by MNOs and MVNOs.

[Disclaimer: I led the Charles Russell LLP team that acted for Cable & Wireless in the CAT. All information in this post is, as far as I am aware, available in the public domain. Any views expressed here are strictly my own and not those of Charles Russell LLP or Cable & Wireless.]
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