Competitive distortions between fixed and mobile markets

The practice of excessive termination rates which are well above the level of efficient costs leads to distortions in consumer choices. If the price of a fixed-mobile call is too high, as a result of excessive prices charged for termination on mobile networks, and if mobile operators use this excess revenue to reduce the price of their own retail calls (including on-net calls), this change in relative prices will lead to an excessive use of the asset whose price is subsidized - mobile service - at the expense of the asset whose relative price has increased - fixed service.

This change in relative prices does not reflect changes in the real marginal cost of the two services, whereby the distortion in consumer choice generates a static inefficiency. Since the termination price is about 10 times higher than the fixed termination price, this distortion is certainly one explanation for the greater use of mobile services compared to fixed services in Portugal (see section 5.2.2. of the Market Analysis Decision document).

As already noted in previous decisions, ICP-ANACOM considers that there is no justification for such a significant price difference between termination on the mobile networks and on the national fixed networks, the negative impact of which difference is further exacerbated by increasing take-up of the fixed products introduced by mobile operators, using their GSM and UMTS networks (Homezone products).

Assuming that fixed and mobile termination rates remain at the values currently in force, ICP-ANACOM estimates that, over a one year period, a net transfer would take place between the fixed and mobile operators totalling about 67 million euros.

By reducing mobile termination rates, bringing them closer into line with the level of efficient costs, the prices of both types of termination will gradually converge, thereby reducing the net transfer mentioned above and helping to eliminate the competitive distortions that have occurred and intensified between the two markets. This objective is of crucial importance given the growing trend towards convergence across networks and services which exists in today's electronic communications markets. The incentives of these convergent products will only be in line with the interests of the end-consumer when termination rates are more closely aligned and, as a result, there is a level playing field in terms of competition.

In this respect reference is made to the following passages in the Explanatory Note accompanying the Recommendation on Terminations:

''Furthermore, with the evolution of fixed-mobile hybrid services and a move towards convergence, a different regulatory treatment of fixed and mobile termination rates raises a possible inconsistency issue. The regulatory model underlying the FTR regulation assumes that operators will recover the cost of the local loop via retail subscription charges, and that these costs are not included in the FTR paid by other operators, including mobile operators. This is not the case in mobile networks where the access network costs are largely recovered via the termination rate. This needs to be considered in order to ensure that competitive distortions do not arise and that allocative-efficiency concerns as described above are addressed.''


''In an environment of increasing convergence between fixed and mobile networks and with a view to promoting sustainable competition and investment within and across all telecoms markets, it is important that regulation is, as far as is practicable, technology neutral and ensures that there is no distortion or restriction of competition and that efficient investment and innovation is encouraged. These principles are enshrined in Article 8 of the Framework Directive and include the development of the internal market through consistent regulatory practice and consistent application of the regulatory framework. The above considerations imply that in similar circumstances and where similar market failures have been identified, similar costing principles should be applied.''

It is estimated that, by introducing a new reduction in mobile termination rates as referred to in section 6 of this document, the present decision will have an impact totalling about EUR 30 million in transfers between fixed and mobile operators, which will revert to the benefit of end-consumers, given that the retail prices of PT Comunicações (which still has a significant market share) are regulated by this Authority.

It is noted that the reduction in termination rates achieved in 2008 resulted in a significant reduction in the fixed-mobile retail tariff, which saw a cumulative decline of 26 percent in the period after the 2008 Price Control Decision, constituting a transfer of approximately 64 million euros to the end-consumer.