Mobile Sector Assessment:Mobile citizens, mobile consumers

David Stewart16 October 2008

2

What did we look at

Primary questions

Principal question

Should Ofcom revise its approach to regulation of the mobile sector, in order to respond to the changing market environment?

What are the implications of market change for mobile and

wireless services?

How are consumers and citizens affected by developments

in the mobile sector?

What is the scope for deregulation, competition and innovation in the mobile sector?

What are the purposes of

mobile regulation, and where should

its focus lie?

Our consultation focuses on these three questions

3

Our vision for the UK mobile and wireless sector

• A wide choice of networks and a wide choice of services on those networks • Easy and safe switching • A mobile internet that is as open and flexible as technology allows • Diverse content and applications (including protection from harmful content) • Coverage

• Consumer protection from mis-selling, scams and new risks including personal information

4

165 167 164 160 151 148

14 15 15 17 21 27

39 44 49 54 61 72

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007

Cal

l min

utes

(bi

llions

) a

Fixed Mobile pre-pay Mobile contract

13.7%

14.3%

CAGR

-2.2%

We have “gone mobile”

Fixed and mobile call volumes

Source: Ofcom / operators. Note: Includes estimates where Ofcom does not receive data from operators

5

17.6 22.1 26.2 33.443.3

58.8

67

82

0

20

40

60

80

100

2002 2003 2004 2005 2006 2007

Out

boun

d S

MS

(m

illio

ns)

SMS volumes(billions)

Monthlyoutbound SMSper connection

Monthlyoutbound SMSper capita

Outbound SMS volumes

Source: Ofcom / operatorsNote: Includes estimates where Ofcom does not receive data from operators; excludes H3G; figures have been restated from the 2007 Communications Market Report to reflect more accurate data

SMS usage is soaring and data continues to grow

6

Mobile broadband growth is accelerating

6377 88 96 101

910

28 3298

125133

6

86

69

0

50

100

150

Feb-08 Mar-08 Apr-08 May-08 Jun-08

New

mon

thly

con

nect

ions

(00

0s) a

Pre-pay

Contract

New mobile broadband connections

Source: GFK

7

11.7 11.2 10.6 9.8 9.4 9.3

9.0 10.5 12.0 13.1 13.8 15.1

1.8 2.2 2.5 2.5 2.8 2.82.2 2.3 2.5 2.6 2.7 2.824.7

26.2 27.5 28.0 28.8 29.9

0

10

20

30

2002 2003 2004 2005 2006 2007

Re

tail

reve

nu

e (

£b

n)

Corporate dataservices

Internet &broadband

Mobile voice &data

Fixed calls &access

As a result, the mobile sector has grown

UK telecoms industry retail revenue

7.3

9.9

Source: Ofcom / operators

8

91%

77%

92%

81%

93%88%

94%86%

0%

20%

40%

60%

80%

100%

Overall satisfaction VfM

Per

cent

age

satis

fied

Q2 2005 Q2 2006 Q2 2007 Q1 2008

Mobile overall satisfaction and VfM, over time

Most consumers are content with their mobile service, but a sizable minority, 1.4m, are not

Source: Ofcom research

• Ofcom OAT data:

– Rising complaints (as witnessed by other agencies)

– Respond to persistent

consumer issues as appropriate

• Consumers’ main areas of concern are:

– Tariffs, – Poor customer service, and

– Bill errors.

9

Not all citizens benefit from mobile to the same degree

2G and 3G Mobile coverage

Citizen issues for consideration include:

– ‘not spots’

– involuntary exclusion:

– privacy and security;

– access to mobile phones by children.

Four operators

Three operators

Two operators

One operator

No operators

2G 3G

Four operators

Three operators

Two operators

One operator

No operators

2G 3G2G 3G

10

Examples of entrants across the mobile value chain

Network Equipment

Vendor

Tower & Backhaul

Mobile Network Operator

Mobile Service Provider

Device Vendor

Content Provider

Distributor

Geo

11

New technologies may change market dynamics

User

Traditional ‘Mobile’

Femtocell ‘Mobile’

UMA phone (at home)

UMA phone (out of home)

VoIP (at home)

Traditional ‘fixed’

Fixed

Mobile

Mobile phone

Dual mode Mobile phone

PC

POTS handset

GSM / 3G

WiFi

DECT/Analogue

Mobile Network Operator radio access network

DSL network

Twisted Copper

Mobile Network operator core network

IP backbone and internet

BT exchange network

PSTN / internet

Conventional ‘mobile’

Conventional ‘fixed’

User Equipment

Carrier Type

Access Network

Core Network

How might the mobile termination rate regime need to evolve?

Examples of different voice transmission methods

12

The context and case for change

The context

• Debate within European

• Mobile termination rates are a key aspect of the MSA. Ofcom is also looking at other termination rates - fixed line network charge controls, NGN interconnection

The case for change

• We see increasing pressure on the termination rate regime after 2011 from:

– Fixed mobile convergence

– Competition in a more diverse and complex mobile market

– Regulatory burden and growing risks of regulatory failure

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What might the future regime look like?• Options include:

– Incremental costs only (e.g. the European Commission’s draft Recommendation)

– Reciprocity between fixed and mobile (similar to the US model)

– Bill and keep: set termination charges to zero by regulation

– Deregulate mobile termination: no regulation of mobile termination rates after 2011

– Deregulate all termination: full deregulation would allow both fixed and mobile networks to freely negotiate two-way traffic exchange.

• All these approaches carry important risks and transitional challenges

• A non-exhaustive list of options is in the consultation: “Mobile citizens, mobile consumers” http://www.ofcom.org.uk/consult/condocs/msa08/msa.pdf

14

Next steps

Consultation period

• Stakeholder meetings September to November

• MSA Conference at Westminster Media Forum 25 September

• Other external events (speaking events, conferences) September to November

• Consultation Close 6 November

• Ofcom International Conference 21 and 22 November

• MSA Phase II

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Strategic approach to mobile

Formulation of Ofcom’s strategic priorities for the mobile sector

MSA II aims to address five key issuesStakeholder responses to MSA I may add additional issues

Consumer protection

Creation of a principles-based approach to consumer protection in the mobile sector based on existing Consumer Policy work

Coverage

Formulation of a potential policy approach to be taken address coverage issues that are acting as a barrier to usage

FoTPAs

Analysis of the options for the future of termination rates and participation in the EU level debate on this issue

Adapting regulation

Examination of what regulation can be simplified or removed

Setting criteria under what circumstances could regulation be removed

Competition issues

Conclusion of our analysis of the competitive nature of the market

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• Consultation document:http://www.ofcom.org.uk/consult/condocs/msa08/

• Interactive Executive Summary:http://comment.ofcom.org.uk/msa_summary/

• Blog: http://comment.ofcom.org.uk/mobileblog/