Confidential to BT and Ofcom

Mobile Call Termination Market Review 2015-2018 BT Response to

presentation to industry at a workshop on 23 October 2013

Executive Summary
We are at a point where new customer demands and technological capability are about to
profoundly change the nature of communications over the period of the next control and the setting
of Mobile Termination Rates must be considered in the broader context, alongside development of
the correct cost model.
The ubiquity of devices such as Smartphones has led to explosive demand for mobile bandwidth and
a move by both mobile and fixed operators away from voice dominated circuit switching to
networks built to deliver cost effective broadband. The widespread adoption of WiFi and the
availability of Femtocells mean it is becoming impossible to strictly define operators as either Fixed
or Mobile. They are converging and we believe Ofcom needs to recognise this in the approach to
regulation and modelling in the interest of consumers, as we expand later.
A proper convergence of the approach to modelling would eliminate the competitive distortion
arising from different MTR and FTRs. Under the rates in force at the end of the current MTR control,
fixed operators will be paying mobile operators around 60 times the amount in termination
payments than they receive.
Part of the wide difference between FTRs and MTRs can be explained by the modelling assumptions
used. The MTR model is based on existing 2G/3G networks dominated by voice. The assumption
used for FTRs was a hypothetical network delivering a national Broadband service with voice as an
incremental facility.
Ofcom should adopt the same approach to MTRs. An efficient network operator today would not
build any 2G/3G network but go straight to 4G LTE broadband. The data capacity required to deliver
off net call termination would be an insignificant driver of cost, removing any need for fixed
customers to subsidise the Radio Access Networks of mobile.
Interestingly, a 4G LTE broadband network is also likely to be the most efficient choice for a fixed
operator. Ofcom should recognise the convergence and consider a shorter period for the MTR
control to allow a combined review in 2019.

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The benefits of convergence to consumers

As backdrop to this charge control, we consider it helpful to note the recent statement made by
Ofcom on telecommunications in the UK1 :
James Thickett, Ofcoms Director of Research, said: The report confirms that consumers in
the UK are benefiting from one of the worlds most price competitive marketplaces for
communications services.
Telecoms bills have been falling in real terms in the UK for the past ten years. However,
consumers are not just benefiting from cheaper deals they are also getting much more for
less, as the quality and range of telecoms services has expanded hugely in that time.
Our position is that the twin drivers of technical progress permitting convergence in the supply and
demand of telecommunication services (defined broadly), and the strong pro-competitive stance
which Ofcom has adopted, have facilitated this favourable outcome.
Further we consider that the move to lower termination rates on both fixed and mobile networks is
one of the main reasons behind these two drivers. The economic literature and reviews, for example
undertaken by BEREC, suggests that the twin drivers are actually mutually reinforcing, as more
contestable revenue is exposed to competitive pressures at the retail rather than wholesale levels,
e.g. there is more innovation in consumer packaging of convergent services. We set out below in a
little more detail some of the evidence to support the above view.

The Sources of supply side convergence

We see there are three principal sources of supply-side convergence:

The fall in the cost of transport. Prior to optical transmission, core transmission was
the dominant cost and roughly proportional to both bandwidth and distance. Yet, bandwidth
and distance are not the predominant cost of NGNs in the way they were in historic
networks.

The fall in the cost of and packet switching. Whilst there are still technical issues to
resolve around QoS to IP networks, packet routing/switching is the key technology which
enables NGNs to be multiservice. The BEREC 2012 review of NGNs and Interconnection
provides the following illustration:

http://consumers.ofcom.org.uk/2013/12/uk-communications-deals-cheaper-than-in-other-major-countries/

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(Source BEREC 2012 BoR (12) 130)

Software Enterprise Architecture and Web Services. These enable applications

such as internet shopping, social networking applications, business order gateways and
business process automation.
These three trends have all profoundly changed the underlying cost structure of providing network
services and the retail application services across the networks themselves. Consequently:

Core transmission is no longer a dominant cost of the network and the access and
backhaul parts of the network assume a much higher proportion of total network cost.

Access and backhaul costs are increasingly dominated by the fixed cost
infrastructure of ducts and cables, which are strongly dependent on customer density
(roughly inversely proportional to the square root of customer density).

The marginal cost of bandwidth means that the cost of tromboning traffic to a
consolidated switching structure is frequently cost effective. The marginal cost of the added
bandwidth is less than the marginal cost of the routing/switching ports saved through
consolidation.
In turn, the retail packaging associated with the supply of multi-services across an NGN with this new
cost structure has a strong underlying link to the multiplicity of flat all you can eat tariffs which
exist under a huge range of options across both fixed and mobile networks. These tariff structures
are effectively indistinguishable even if the precise components may vary.
This wider interpretation of convergence (supply and demand side interlinking) associated with
NGNs is set out clearly in a recent BEREC Paper2 :

BEREC BoR (10) 65 BEREC Report on convergent services December 2010

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Critically, the BEREC Paper also draws an important conclusion that convergence itself allows
significant new entry by players both in and historically outside the telecommunications sector:

The debate over termination and the link to convergence and NGNs
In parallel to the debate over the role of NGNs in the sector, there has been a long discussion within
industry over three key items regarding termination:

The level of the charges associated with termination on the Calling Parties Network
Pays (CPNP) principle and specifically LRIC+ versus pLRIC.

The merits in general of alternative systems of commercial relationships effectively

on the alternatives of CPNP and Bill and Keep (B&K) albeit largely considered in a limited
world of voice only.

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The implications of convergence and NGNs especially in the context of the debate
over alternative regimes of CPNP and B&K, in which data services are added to traditional
voice.
We now set out below our understanding of where these sit in terms of the widely accepted move
of industry to an NGN environment, where NGNs form the basis for setting charges for example in
the fixed sector for call origination and call termination.
The issue of setting termination rates has a long history of being a technically complex economic
issue which was recently reviewed in depth by the Competition Commission3 . The current debate is
not around the general principle of recovering bottleneck costs at the retail and not the wholesale
level (which is accepted by most commentators). It is rather about how far it is appropriate to
extend that principle and move from a pLRIC to a B&K regime.
At the recent industry workshop, Ofcom4 presented the following factual historic position showing
the decline in mobile termination rates:

We note that the CC has consistently advocated lower mobile termination rates /and or faster
reductions than Ofcom when there have been challenges, and the protestations by certain MNOs of
dire consequences from falls in termination rates has been shown to be wholly without foundation.
The net benefits of sharp reductions in termination charges was strongly promoted by the European
Commission5 which emphasised in 2009 that:

Termination is a zero sum game for the industry as it implies income transfers across
sectors and an especially large transfer from fixed to mobile of about 4bn. The move to
LRIC leads to a rise in consumer surplus which is expected to exceed any loss in the mobile
sector.

The February 2012 Determination.

Industry workshop of 23rd October 2013.
5
Commission Recommendation on Termination Rates Staff Working Paper May 2009.
4

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A sharp reduction in termination charges also produces significant dynamic benefits

which could be even higher than those foreseen by the European Commission as the
Commissions 2009 calculations were only static and for example did not take account of
the developments associated with convergence discussed above.

Aligning termination rates to efficient costs and ending the fixed-mobile

subsidisation will bring about a strong competitive dynamic. This in turn can be expected to
generate end-user benefits through lower prices and greater service innovation.
In essence the European Commission argued that the case was overwhelming for reductions in
termination rates and the main issues (also in the fixed sector) have been around specific
calculations and appropriate periods of adjustment6 .
On the issue of the relevance of convergence to alternative pricing regimes, we focus on the
following conclusions from the BEREC review on NGN Future Charging Mechanisms / long term
termination issues of June 20107 :

The transition to NGN will imply technological convergence of fixed and mobile.

Shifting the termination bottleneck to the retail end reduces uncertainty and costs.

As termination rates move to pLRIC it will be the system effect rather than a level
effect which will dominate the impact ie the pro-competition considerations.

B&K is intrinsically better at internalising call and network externalities.

B&K leads to better consumption patterns from incentivising flat-rate offers driving
higher usage.

It is hard to predict effects on operators other than the removal of the subsidy from
fixed to mobile.
The Statement suggests that the most important factors linked with alternative regimes are
associated with competition effects and specifically with respect to moving to low termination rates
of which B&K is the extreme example.

In large measure we consider that the BEREC Report of 2012 An assessment of IP interconnection in
the context of Net Neutrality supports these conclusions8. In particular, when looking at services in a
converged IP world, BEREC notes the following:
6

The parallel findings of the CC 2012 Determination are as follows. The pro-competition effects from adopting
pLRIC were very largely accepted [2.518] [2.929 (a)]. It is possible to construct a model of pLRIC [2.937]
[3.986][4.399]. It is appropriate to have a shorter glide path of three years [5.76]. The CC accept profitability of
investment is not affected by MTR [5.70] and investment is driven by data [5.34]. It is not correct that tariffs
cannot be adjusted quickly within two years [5.59].
7
BoR (10) 24 Rev 1 June 2010.

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The importance of data in NGNs

The growth in demand for mobile data services has vastly exceeded expectations as is well shown in
the Chart presented by Ofcom at the industry workshop:

The decline in mobile voice minutes is modest (especially compared to the fixed network) but even if
mobile voice minutes showed no decline or growth, it is evident that data will dominate the use of
capacity as illustrated by Analysys Massons industry forecast of October 2013.

BoR (12) 130 6 December 2012.

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Wireless network traffic worldwide: forecasts and analysis 20132018

UK ratio of total cellular data traffic to

voice traffic (Analysys Mason)
180
160
140
120
100
80

UK ratio of total
cellular data traffic to
voice traffic

60
40
20
0
2012 2013 2014 2015 2016 2017 2018

(Source: Analysys Mason October 2013)

The growth of data traffic has important implications for interconnection. Since the ERG
Consultation of October 2009, there have been a number of positive changes which hitherto would
have cast some doubt on the feasibility of the move to an NGN environment in which B&K would be
the logical commercial model.
BTs view in 2009 was that in the short to medium term the primary requirement was to move to
lower more symmetric termination rates between fixed and mobile operators, with only the
possibility of evolution to B&K in the longer term.
However, the barriers to a simpler charging mechanism are falling away as NGN implementation
progresses and VoIP usage grows. IP interconnect at a small number of locations will inevitably
become more common in the years to come with the potential for commercially negotiated
arrangements absent regulation. The NTS charging mechanism will no longer be wholly dependent
on regulated charges for termination or origination from June 2015 in the UK. CPS usage is withering
away.
Since the 2009 consultation, bundled products have come to dominate the market, and fixed and
mobile services have continued to converge. Critically, there is no relationship between the
structure of termination costs (whether related to volume of minutes of voice, capacity or per
customer) and the retail tariff structures of fixed and mobile services which are largely identical in
the sector as a whole9 . Symmetry has to imply an absolute value for termination as proposed by the
FCC.

See in particular Section 4.1 of BoR (10) 24 Rev 1

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Market Definition
Increasingly Consumers want to receive their communications and entertainment over a single
device. Outgoing calls are directed either to individuals or entities, such as organisations. Callers
have little interest in whether the called party is mobile or fixed.
Ofcoms preliminary view appears to be that there is no need to revise the relevant market
definition. However, by 2018 it will be increasingly difficult to determine if a call to a mobile number
has been delivered over the fixed or the mobile network.
We can expect mobile operators to prefer to use Wi-Fi or Femto cells connected to the fixed
network if possible, avoiding the spectrum constraints and capacity limitations and cost of Macro
cells. By 2018, we believe the most efficient network for either a fixed or mobile operator will be
an IP based network utilising a range of delivery options. It will be extremely difficult to predict the
correct ratio of small-cell/WiFi to Macro cell usage necessary to set some sort of blended rate for
mobile termination. The receiving party determines the technology used to terminate calls as well as
make calls and should recover this from its own retail customers. This would create the appropriate
competitive market where the consumer chooses whether to purchase cheaper or more expensive
access and the facilities that come with it.
The pragmatic solution is to set the same rate for termination, regardless of the technology used.
Any significant difference between FTRs and MTRs will provide arbitrage opportunities that will
drive out usage of lower value Fixed numbers.

Network and technology choices for the model

Three already say that 98% of their network traffic is data rather than voice. Given the increasing
dominance of mobile data over voice, as a result of the dramatic growth in devices such as Tablets
and Smartphones, BT considers that the best available technology for an efficient operator entering
the market now is LTE, with voice to be provided either as an Over The Top service, or as VoLTE
should the operator determine that high quality voice is a viable business proposition. Indeed LTE
has been the technology adopted by operators in China, USA, Korea and a number of other
countries.

Modelling of Costs
In a LTE model, voice is incremental on a network purchased mainly for the delivery of mobile data.
An efficient new entrant would not build a national 2G/3G network and then progressively close it as
4G was rolled out any more than an entrant to the fixed voice market would build a TDM PSTN
network. Ofcom did not allow dual running costs in the fixed market and should not do so for
MTRs. Consistent with the policy adopted in the NCC, the model should be forward looking and not
based on the legacy deployments of existing networks. Costs should be decremental based on the
pure LRIC of external call termination on an exclusive 4G network.

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Conclusion
BEREC noted the following in 2010:

The widespread adoption of WiFi and the availability of Femtocells mean it is becoming impossible
to strictly define operators as either Fixed or Mobile . They are converging and we believe Ofcom
needs to recognise this in the approach to regulation and modelling in the interest of consumers.
A converged approach to modelling would eliminate the competitive distortion arising from
different MTR and FTRs. In our view, divergent wholesale termination rates at the wholesale level
are barriers to the progression of alternative pricing schemes, in particular with mobile rates likely to
be some 20 times fixed rates in 2014. There is no reason for any cross subsidy from fixed to mobile
call termination to persist any longer.

END

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