Price Regulation of Mobile Termination: Promoting Competition and Investment in Telecommunications A Report on behalf of Hutchison Telecommunications

The analysis here represents the views of CoRE Research Pty Ltd (ACN 096 869 760) and should not be construed as those of Hutchison Telecommunications. In April 2003, the ACCC released an information paper Mobile Services Review, 2003 and announced its intention to review the pricing methodology for mobile phone termination charges. As part of its current inquiry into mobile services regulation, the ACCC is considering: (a) the need for regulation of mobile services including domestic GSM and CDMA terminating and originating services; and (b) the form that any regulation should take. In this report, we consider the need for regulation of mobile termination charges, the relationship between mobile termination charging and the regulation of fixed-to-mobile calls, and appropriate forms of regulation. A consistent message from the academic research is that there are potential problems with market power in mobile termination services and regulation to lower the price of these services is desirable. These potential problems stem from two related sources. First, subscribers to mobile services generally care less about the price of fixed-to-mobile calls than about the price of retail mobile services. The reason for this is simple – the mobile subscriber in Australia does not pay for fixed-to-mobile calls but does pay for retail mobile services. Second, when a person makes a fixed-to-mobile call, they are often unaware of the exact mobile carrier who will terminate the call. This reduces competition between mobile carriers for call termination and provides incentives for mobile carriers to raise termination charges significantly above cost. At the same time, competition between mobile carriers means that termination revenues are often dispersed through lower prices for retail mobile services. While mobile termination raises market power problems, issues of market power may also be relevant for the fixed-line services provided for fixed-to-mobile calls. If there is a dominant fixed line carrier then any reduction of mobile termination rates will not, by itself, lead to economically desirable fixed-to-mobile call prices. Rather, prices will remain inflated due to the ability of the fixed-line carriers to price above cost. Thus the regulation of fixed-to-mobile termination charges alone may be inadequate to guarantee economically appropriate pricing of fixed-to-mobile calls. Insufficient competition in the retail market for fixed-to-mobile calls means that fixed-line carriers may effectively short-circuit any regulatory attempts to improve fixed-to-mobile retail prices. As the regulator reduces fixed-to-mobile charges to better reflect cost, fixed line carriers may increase their 'share' …