Vodafone’s response to Ofcom’s consultation “Simplifying Non- Geographic Numbers ... · 2016....

Vodafone’s response to Ofcom’s consultation “Simplifying Non-Geographic Numbers” Summary and conclusions Vodafone welcomes the opportunity to respond to Ofcom’s consultation.1

• Calls of real social value are already free-to-caller from mobile;

We endorse Ofcom’s stated aim of simplification, and agree that the core proposals, namely making freephone universally free to caller and unbundling call prices to other non-geographic call (NGC) numbers, are worth considering. We recognise the superficial attraction of both propositions. However, we do not find Ofcom’s analysis compelling in either case. In particular, Ofcom’s appeal to ‘market failure’ and assertion that intervention would result in a pattern of prices that reflects ‘underlying’ consumer preferences better than the competitive outcome is not persuasive. Moreover, it is directly contradicted by Ofcom’s published evidence base. Freephone Our principal conclusions in relation to freephone are as follows:

• There is no case for extending concessionary treatment currently afforded to

charities to commercial service providers;

• There are no regulatory barriers preventing service providers who genuinely value free-to-caller calls from mobile from contracting for this commercially, as some already do;

• It is not clear, however, that all service providers value free-to-caller pricing to the same extent or that those who value it at all are prepared to pay enough to make it commercially worthwhile for mobile network operators (MNOs);

• Artificially low wholesale outpayments that erode mobile originating operators’ margin would inevitably rebound on mobile consumers through rebalancing of other prices;

• Far from better reflecting consumers ‘underlying preferences’ as Ofcom suggests,

Ofcom’s own consumer survey evidence shows that consumers specifically reject 1 “Simplifying Non-Geographic Numbers – Improving consumer confidence in 03, 08, 09, 118 and other non-geographic number ranges” Ofcom December 2010. http://stakeholders.ofcom.org.uk/binaries/consultations/nongeo/summary/non-geo.pdf

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Vodafone response to Ofcom NGC consultation – non-confidential version 2

free-to-caller pricing to freephone numbers in return for higher prices elsewhere as a good trade off;

• Therefore, unless Ofcom ensures that free-to-caller calls from mobile are fully funded by service providers, rebalancing will lead to consumer detriment not consumer benefit;

• There is also a risk of undermining competition in the mobile access and origination

market through arbitrage pitched below the competitive level of origination pricing for all call types because it free rides on MNO investment in handsets, customer care and provisioning;

• This is not a sustainable model of competition and is prone to create consumer

detriment by threatening the benefits consumers currently derive from a vibrant and competitive mobile market.

Unbundling In relation to unbundling, our provisional conclusions are as follows:

• We think Ofcom has mischaracterised and overstated the true extent of any transparency problem. However, to the extent there is a residual transparency problem to be tackled, the structural ‘unbundling’ remedy itself is a complete answer to it;

• The relative price of NGCs does not depend on a presumed lack of transparency but rather reflects the lack of importance consumers attach to these call types compared to the cost of non-NGC calls;

• In the context of this unbundled model, we see a case for regulating permissible service charges by number range but no case at all for regulating the level of access charges, which should be determined by competition;

• Ofcom cannot and should not seek to limit access charges for the same reasons that it cannot and should not regulate maximum inclusive prices;

• Any intervention that sets out to curb origination margin will result in forced rebalancing of call prices. Consumers specifically reject the notion that lower NGC call prices in return for higher prices elsewhere is a good trade off;

• In any event, there are potentially substantial implementation challenges that will need to be investigated in detail prior to any regulatory mandate in order to ensure proportionality.

Vodafone Limited March 2011


1. Introduction and overview 1. Vodafone welcomes the opportunity to respond to Ofcom’s consultation. While

Ofcom’s consultation document presents a range of options and detailed variations on those options, this response focuses principally on Ofcom’s favoured options and the analysis underpinning them.2

2. In sections 2 and 3 below we address Ofcom’s core proposals in turn: making freephone universally free-to-caller and ‘unbundling’ access and service charges in conjunction with rationalisation of the numbering plan. We begin, however, with a few more general comments.

3. We welcome the stated aim of simplification. We share Ofcom’s concern that the

current regulatory regime which has developed piecemeal over time is unnecessarily complex and confusing. We agree, therefore, that proposals for reform should strive for greater simplicity and clarity.

4. We also agree that Ofcom’s preferred policy options are worth considering and that

setting inclusive maximum retail prices is not appropriate, including for the reasons that Ofcom itself gives.3

5. However, while we endorse these high level aims and agree that the options Ofcom canvasses merit serious consideration, we do not find the supporting analysis compelling. In particular, we think Ofcom is too ready to appeal to ‘market failure’ as a catch-all justification for its preferred interventions, overlooking the fact that the descriptive analysis Ofcom presents is not well supported by the evidence base.

6. Ofcom should be careful of intervention in a mobile market that is working for

consumers; especially where such intervention may involve the rebalancing of the costs faced by consumers. Ofcom’s own annual communications market reports have consistently shown falling costs and rising usage of mobile services, combined with satisfaction levels of over 90%4

.

7. Vodafone would also remind Ofcom of the results of its Mobile Sector Assessment,5

2 Given the volume of material published by Ofcom and the limited time available in which to comment, in the interests of brevity Vodafone’s response comments selectively and should not be considered as a comprehensive critique of Ofcom’s extensive analysis. Where we do not comment specifically it should not be inferred that Vodafone necessarily agrees with Ofcom. We reserve the right to comment further in due course if appropriate. 3 We disagree, however, that regulating maximum retail prices is an appropriate ‘fall back’ option. See further analysis below and at Annex 5.

which demonstrated the effective functioning of the market (as well as falling consumer prices). The assessment talks about competition being the most important stimulus for ensuring that consumers benefit from advances in the mobile sector and its bias against intervention. Any perceived benefits of regulatory intervention should be weighed against the current consumer experience in the

4 ‘The Communications Market’ 2010 report showed 94% of consumers ‘satisfied’ or ‘very satisfied’ over Q1 2008, 2009 and 2010, figure 5.79 – http://stakeholders.ofcom.org.uk/binaries/research/cmr/753567/UK-telecoms.pdf 5 ‘Mobile Evolution’, http://stakeholders.ofcom.org.uk/binaries/consultations/msa/statement/MSA_statement.pdf

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mobile market and Ofcom should rigorously question its ability to improve on market outcomes for consumers.

8. Much of Ofcom’s commentary proceeds on the basis that the current pattern of

prices for non-geographic calls and other services does not reflect consumer preferences. Ofcom’s own consumer survey evidence casts serious doubt on that contention, however. Indeed, it appears that consumers specifically reject the proposition that an increase in other prices in return for lower prices for NGC calls is a good trade-off.6 Ofcom itself notes this point and indeed places weight on it in rejecting certain options for intrusive price regulation7

, yet neglects to test a key part of its rationale for other intervention against the available data.

9. It is also striking that while Ofcom rejects deregulation on the grounds that it would make matters worse, in the case of mobile short codes (outside the scope of this review) the market itself has provided solutions to many of the problems Ofcom is seeking to grapple with.8 Absent of formal regulation, mobile shortcodes have delivered transparency of pricing, a well-functioning self-regulatory scheme to protect consumers from spam and scam, based on ‘red’ and ‘yellow’ cards, as well as a cross-network mechanism for charity donations9

. Indeed, the unbundled transparency model Ofcom advocates is similar in some respects to the market solution developed for mobile short codes.

10. Vodafone agrees that complete de-regulation may not be realistic given the current starting point. However, it is instructive that where the market has been left to its own devices the problems encountered elsewhere do not arise. This calls into question generalised assertions that market failure justifies intervention and points instead to regulatory failure.

11. As Vodafone previously observed in response to the call for inputs, the market that

exists today is not a free market but a creature of past and current regulation.10

That includes all the detailed quirks and anomalies that have become entrenched and contribute to the confusion about which Ofcom complains.

12. Ofcom’s commentary asserts that there is substantial consumer detriment and, moreover, that the situation is becoming worse. As with the appeal to market failure, however, neither proposition can be accepted uncritically.

6 As Ofcom notes at A5.81 “The survey evidence from the 2010 Consumer research presented in Annex 2 suggests that the majority of callers are opposed to driving down non-geographic call prices if the consequence is an increase in the price of other telephony services.” See also 2010 Consumer Research, questions 39, 40 and 42. 7 See note 2 above. Ofcom’s comment is in the context of rejecting setting a regulatory maximum for the access charge. 8 A point Ofcom notes in passing at 6.25: “There is, in fact, a model of competition in the market at present, namely mobile short codes, which suggests that non-regulated competition can deliver services which are similar to that provided by non-geographic calls.” 9 The mobile operators, via the Shortcode Management Group, have shortcodes starting ‘70’ for charity donations. This range does not incur VAT and Vodafone offers a 100% outpayment to charities. For more on charity shortcodes go to: http://www.short-codes.com/pages/charity.php 10 http://stakeholders.ofcom.org.uk/binaries/consultations/ngnservices/responses/vodafone.pdf

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13. Firstly, there are good reasons to question the reliability of Ofcom’s illustrative attempt to quantify current consumer detriment and associated claim that this estimate is conservative. As we explain in Annex 2, Ofcom’s reasoning is circular and lacks compelling empirical underpinning.

14. Secondly, if things are getting worse as Ofcom asserts, it would surely be valuable

to understand why. Yet Ofcom makes little obvious attempt to do this. Vodafone respectfully notes that some of the biggest changes in recent years were in fact precipitated by regulatory interventions that Vodafone (and many others) advised at the time were ill-judged.

15. Perhaps the most notable example is Ofcom’s pursuit of its ‘geographic link’ policy

agenda for 0870. We note with considerable interest that Ofcom itself now recommends that both 0845 and 0870 be ‘delinked’ from geographic rates.11

We welcome Ofcom’s readiness to revisit the appropriateness and efficacy of recent policy initiatives as well as those dating back further in time. However, we also note that Ofcom’s account underplays its own role in fuelling consumer confusion and lack of transparency by creating a situation in which closely adjacent number ranges (0870 and 0871) are subject to wildly differing regulatory regimes.

16. In the following sections we address each of Ofcom’s core proposals in turn. Freephone free-to-caller 17. We recognise the superficial attraction of a universal free-to-caller convention but

query much of Ofcom’s underlying analysis. In particular, the available evidence does not lend strong support to Ofcom’s ‘vertical externality’ market failure hypothesis. Where service providers attach economic value to the cost to call from mobile, commercially negotiated solutions are already available (as the Department for Work and Pensions (DWP) example shows).12 More generally, commercial and voluntary self-regulatory initiatives already ensure that freephone services of real social value are zero rated to callers, meeting Ofcom’s stated objective.13

18. Wider intervention risks confronting mobile consumers with ‘rebalanced’ pricing in order to cross-subsidise commercial service providers. This is not obviously an improvement in consumer welfare.14

19. In any event, proposals to restrict mobile originating operators’ retention to some narrow view of bare cost recovery (however defined) are, Vodafone contends, fundamentally misconceived and misunderstand the nature of multi-product price setting in a competitive retail market. To the extent that Ofcom nevertheless wishes to pursue a universal free-to-caller convention, it must allow appropriate commercial

11 See, for example, 1.43: “We recommend that 0845 and 0870 should be delinked from geographic rates either through closure of one or both [of] the ranges or realignment with the principles that will apply to other 08 numbers;”. 12 http://www.dwp.gov.uk/previous-administration-news/press-releases/2010/january-2010/dwp007-150110.shtml 13 Notably through the scheme administered by the Telephone Helplines Association 14 Nor is it obviously consistent with Ofcom’s statutory duties which, among other things, require transparency and proportionality.


terms for differential mobile outpayments reflecting the economic value of free-to-caller mobile origination. This is critical in order to ensure that substituting wholesale revenue for retail revenue does not precipitate a detrimental rebalancing of consumer pricing, contrary to consumer preferences.

20. In short, Vodafone considers that Ofcom is right to recognise that competition in the

mobile market will mean any revenue or margin shortfall results in rebalancing. However, it is wrong to assert that the rebalanced pricing structure is a better reflection of consumer preferences than the competitively determined solution.

Unbundling 21. As regards unbundling, to the extent there is a transparency problem, we agree that

the structural remedy Ofcom proposes is worth exploring.15

Conceptually, we acknowledge that de-coupling access and service charges has potential to enable transparency obligations to be exercised by those best placed to do so, i.e. the service provider in respect of the service charge when advertising the number and the originating communications provider (OCP) in respect of the access charge in relation to subscription decisions.

22. However, the structural unbundling remedy itself is a complete answer to Ofcom’s stated transparency concerns and there is no case for further intervention to set the level of the access charge. There is no reason to suppose that Ofcom understands consumer preferences better than consumers themselves. The level of access charges should be competitively determined.

23. Whatever the conceptual attractions of unbundling at a high level, we see some

potentially substantial practical difficulties in implementation that will require careful evaluation and cost/benefit analysis to ensure proportionality. As explained further below in section 3 and at Annex 3, the degree of difficulty depends in part on how Ofcom intends to regulate service charges by number range.

Rationalisation 24. Vodafone welcomes Ofcom’s stated aim of simplification. A good deal of the

confusion Ofcom identifies may be attributable to the fact that numbers that look very similar turn out to be very different from one another in terms of the services they support and associated pricing models. Perhaps the most striking example is 0870 and 0871/2/3/. Ofcom’s recent interventions mean that the latter ranges are revenue share ranges regulated as premium rate services by PhonepayPlus, whereas the ‘as geographic’ pricing convention Ofcom has sought to encourage has effectively killed off revenue share on 0870 and resulted in a significant dip in call volumes as service providers migrate to other ranges.16

15 Ofcom mis-characterises and overstates the alleged transparency problem, however – see Annex 1.

16 Ofcom’s recent consultation on BT NTS retail uplift, February 2011, notes at A8.8: “It is now nearly a year and a half since these changes were implemented. It is evident from BT’s monthly volume data by number range that the use of 0870 has dropped very substantially over the period. Therefore any uncertainty about


25. From a caller perspective, it is hardly surprising that customers struggle to estimate

prices accurately simply by surveying a long string of digits.17 In fact, Ofcom’s consumer survey evidence suggests they do surprisingly well to develop rules of thumb in terms of relative pricing, despite all the confusing anomalies and quirks.18

Nevertheless, we agree that clearer branding at the leading digit level e.g. to distinguish 08 prefixed ‘business rate’ calls from 09 prefixed ‘premium rate’ may, over time, help consumers develop a clearer sense of what to expect.

26. For the proposed 08/09 distinction to be meaningful, however, Ofcom will need to establish some price threshold for the service charge in its unbundled model. We suggest this is set at a level that does not require immediate forced migration for service providers (SPs) currently on 08 ranges to 09. Since 0871/2/3 numbers have historically been designated as up to 10ppm from a BT line, a service charge threshold of approximately 10ppm might be appropriate. Vodafone welcomes the abandonment of the geographic link policy preference for 0845 and 0870, although we query the proportionality of forced eviction from the 0870 range. 03 numbers are already charged as geographic in practice by all OCPs and do not support revenue share so there is no need for new remedies.

27. It is not clear from the consultation document how much further Ofcom intends to

take the idea of price banding by number range. Ofcom has previously proposed a ladder of ascending price points within 08 in its strategic review of numbering although in the event the ladder was sabotaged in pursuit of the ‘geographic link’ agenda for 0845 and 0870. Since Ofcom is now signalling a retreat from that approach19

it is unclear whether the ladder concept within 08 is to be revived and if so what step increments would be appropriate.

28. Consumers can hardly be expected to discern meaning from changes in the fourth digit of a long number string (including the leading 0). Bearing this in mind, together with the separate transparency measures Ofcom proposes for service charges, it is questionable whether a long ladder is necessary. Ignoring the special case of 080 freephone, a two step ladder with a 5ppm service charge for 084X numbers and a 10 ppm service charge for 087X numbers might be a possibility. Alternatively, a single service charge for all business rate service charges may suffice.20

what will happen to the remaining 0870 volumes does not appear to be a material issue for this charge control.” 17 It is not surprising that customers fail to recognise a terminological distinction between what constitutes ‘premium rate services’ for the purposes of regulation (classed as ‘Controlled Premium Rate Services’) as distinct from other NGCs which support revenue share. What is more surprising is that Ofcom should cite consumer identification of 0845 as PRS as the leading example of ‘comprehensive evidence’ of lack of price awareness because, in Ofcom’s words, “34% of respondents believed 0845 is used to provide premium rate services even though the NTNP actually specifies 0845 as non-geographic numbers that are charged at BT’s ‘local rate’.” (See 4.14, emphasis added) The idea that consumers should have an intimate knowledge of obscure designations in the National Telephone Numbering Plan might be considered somewhat far fetched. 18 http://stakeholders.ofcom.org.uk/binaries/consultations/wmctr/annexes/transparency.pdf 19 See 1.43, as above 20 Ofcom will need to consider whether service charge designations should be expressed including or excluding VAT. There are arguments both ways. Vodafone notes that Ofcom has changed the previous VAT inclusive designations in the national telephone numbering plan to VAT exclusive equivalents in response to the recent increase in VAT to 20 per cent. This avoids a VAT induced price squeeze on SPs at the expense of non-round VAT inclusive numbers.


29. The 09 premium rate range already has a much wider potential range of price

points, currently up to a maximum of £1.5321 from a BT line but potentially higher in future if the upper threshold (which only applies to calls from BT lines) is relaxed as Ofcom suggests. While the National Telephone Numbering Plan currently has two designations (090/091 and 098) there is no difference in terms of price, only service type (098 being reserved for sexual entertainment services).22

It is not clear to what extent Ofcom intends to impose a further substructure on ceiling prices within the 09 range.

30. Vodafone agrees that it is unfortunate that not all numbers starting 07 are mobile numbers and that personal numbering and radiopaging services are on the number range. Vodafone welcomes the revised Consumer Protection Test for telephone number allocation (‘the CPT’) and believes that it, combined with PhonepayPlus enforcement action against the service provider, and continued regulatory and network vigilance, can effectively protect against revenue sharing abuse of the numbering plan.

31. It is not realistic to expect consumers to recognise consistently that 070 and 076 are

not mobile numbers, but the current framework in place to protect consumers from misuse, and stop miscreants profiting, does appear to be working. PhonepayPlus has taken action “against rogue services operating on the 070 number range when that number range is misused as a premium rate service (PRS)23 and 070 cases currently represent only three of PhonepayPlus’ open investigations24. Furthermore PhonepayPlus has identified its success in dealing with 070 scams (a 69% reduction in early 2010) and its awareness of, and readiness to deal with, any mis-use of 07625

.

32. The volume of calls to 070 and 076 numbers is not significant in the context of NGCs as a whole. However, legitimate and number-designation-appropriate services remain on these ranges. It would not be appropriate to control the retail prices of these services – or artificially link them to some other type of number – using the justification that they are misused by rogue service providers leaving consumers open to abuse. The regulatory mechanisms are in place to address this kind of abuse and that is the appropriate way with which to deal with such misuse of the number range.

21 Revisions to the numbering plan dated 20 December 2010 have changed the designations from those summarised in the consultation document at Figure 1.2. Previously round number VAT inclusive prices, 5p, 10p, £1.50 have been needed back to ex VAT equivalents at previous 17.5% rate, resulting in higher non-round VAT inclusive prices at the new 20% rate. 22 Note, however, that PhonepayPlus also allows adult entertainment services to operate on 0908 and 0909 numbers. See http://www.phonepayplus.org.uk/output/FAQ.aspx#09_numbers 23 PP+ Business Plan and Budget 2011/2, p.3, http://www.phonepayplus.org.uk/upload/2011-Business-Plan-and-Budget.pdf 24 Current open investigations, 31 January 2011 – http://www.phonepayplus.org.uk/upload/2011_Quarterly_Report_2010_2011_Q3.pdf 25 http://www.phonepayplus.org.uk/output/news/premium-rate-regulator-warns-no-tolerance-for-076-scams.aspx

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33. Finally, Vodafone does not see it as proportionate to shift these services onto the currently free 06 range, given how much resource the 06 range represents and how limited are 070 and 076 services.

34. The remainder of this response is structured as follows:

• Section 2 below reviews in further detail the proposal that freephone numbers should be universally free-to-caller, including from mobile networks

• Section 3 considers unbundling NGC call charges into separate access and

service charge elements • Annex 1 comments on Ofcom’s analysis of market failure

• Annex 2 surveys Ofcom’s analysis of consumer detriment

• Annex 3 discusses implementation issues related to unbundling

• Annex 4 analyses the legal framework within which Ofcom’s proposals need to

be assessed

• Annex 5 provides brief answers to Ofcom’s specific consultation questions

• Annex 6 shows how Vodafone currently presents NGC and other pricing information to consumers

• Annex 7 (provided in a separate file) illustrates BT’s current approach to the

same issue


2. Freephone 35. Vodafone understands the intuitive appeal of ‘freephone’ branded numbers being

free-to-caller across the board. In some cases they are already. However, the key question is whether free-to-caller calls are sufficiently valuable to service providers that they are prepared to reflect that value in payments to originating operators.

36. As Ofcom rightly recognises, in a competitive market mobile operators cannot

simply absorb reduced origination margins but need to recover lost retail revenues elsewhere.26 This mobile package tariff effect (MPTE) as Ofcom calls it is closely analogous to the so-called waterbed effect widely recognised to exist in relation to mobile termination rates.27

37. Ofcom’s own consumer survey evidence shows that there is little enthusiasm among mobile consumers for a forced rebalancing in prices.28

Freephone calls of social value are already free-to-caller

Ofcom needs to tread with care, therefore. There is a clear risk that far from better reflecting consumer preferences at it suggests, regulatory intervention in retail price setting results in distortion by driving prices away from the competitive equilibrium.

38. Ofcom suggests that freephone calls are a special case and emphasises difficulties for low income mobile only consumers. The essential problem with this line of argument, however, is that calls to freephone numbers of real social value are already free-to-caller.

39. As Vodafone noted in its response to the call for inputs, calls to particularly sensitive

services such as ChildLine and Crimestoppers have long been zero rated by all MNOs.29

Indeed, a wide range of charities benefit from the scheme administered by the Telephone Helplines Association.

40. Similarly, service providers who are concerned about the cost to their customers of calling from a mobile phone are free to pursue commercial arrangements with MNOs to ensure calls are zero rated to the caller in return for a wholesale contribution. This commercial model operates now under the current regulatory framework as the DWP benefit line example clearly demonstrates. The fact that it has not (yet) been pursued more widely by SPs is a reflection of the fact that not all 080 calls fall into the same ‘socially important’ category, and that not all service providers care to the same extent about the cost to the caller.

26 See, for example, 6.53, in the context of rejecting maximum retail prices: “In addition, to the extent that OCP’s revenue retention is lower due to the new regulations, OCP’s retail prices are likely to be rebalanced. The tariff package effect is likely to be particularly significant for mobile OCPs.” 27 The conceptual difference in this case is that the rebalancing is not between related markets but within a single mobile access and origination market. However, there is no reason to suppose the effect is any less real. 28 Ofcom Research Document, October 2010. See especially responses to Q39. 29 http://stakeholders.ofcom.org.uk/binaries/consultations/ngnservices/responses/vodafone.pdf


41. This is not, as Ofcom seems to suggest, evidence of market failure, however. Where service providers are willing and able to pay to have calls to them zero rated, MNOs have taken this into account and responded accordingly. The fact that MNOs do not spontaneously extend the voluntary THA scheme generally to all public and private sector commercial organisations for free is not a market failure in any recognised economic sense.

42. Vodafone has no objection in principle to commercial initiatives by service providers

who wish to explore the possibility of zero rating mobile calls in return for an appropriate (commercially determined) wholesale payment. To date, initiatives of this kind have been limited in number. In the past, Oftel judged that service providers were not willing to fund zero rating from mobiles and relied on this to reject mandating a differential outpayment, noting instead that MNOs were free to charge callers (subject to a pre-call announcement). 30

43. Of course, it may be that this picture has changed since 2001. We note Analysys Mason’s (AM) survey of service providers suggests that at least some SPs might be prepared to pay something.31 The critical questions, though, remain how many SPs are indeed prepared to contribute, how much, and whether this is enough to make it commercially worthwhile for MNOs to substitute retail revenue for wholesale revenue.32

44. Insofar as it sheds light on current SP preferences (bearing in mind the limited nature of the survey) the AM study suggests that different SPs have different preferences, which immediately causes problems for a one-size-fits-all regulatory intervention. It is not obvious that Ofcom is better placed than commercial operators to judge economic value to SPs or opportunity costs to mobile OCPs.

‘Cost-based’ origination linked to termination rates is not appropriate 45. Vodafone sees no principled case for limiting MNO originating operators to ‘bare’

cost recovery, however defined. In fact, we show in the following paragraphs how artificially low regulated outpayments below the market determined level are prone to compound rather than correct consumer detriment, contrary to Ofcom’s stated aim.

30 http://www.ofcom.org.uk/static/archive/oftel/publications/mobile/oran0901.pdf See in particular 3.15 “Higher mobile origination costs for freephone calls are currently covered by mobile operators in either policies of charging customers for dialling freephone numbers, recovery of aggregated call use in line rental charges, or by accepting losses on such calls. Lacking evidence that consumers are disadvantaged by charges levied on mobile freephone calls, or that service providers are willing to pay higher charges to cover the cost of mobile originated calls, there is little justification for the Director to make a decision to shift the cost burden onto BT, thereafter to be recovered from other TNOs and ultimately service providers.” (emphasis added) 31 http://stakeholders.ofcom.org.uk/binaries/consultations/nongeo/annexes/use-of-nongeo.pdf 32 Transaction costs are a potentially important consideration. While SPs who wish to procure free-to-caller mobile origination have several MNOs to deal with, MNOs face a potentially much larger number of SPs. However, if there are economies of scale in negotiation and maintenance of contractual agreements we would expect to see the emergence of an aggregator function similar to that which has arisen commercially for mobile shortcodes. Fundamentally, however, market opportunity for aggregators depends on the degree of underlying demand from SPs.

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46. Ofcom moots a mobile outpayment of as little as 0.5ppm based on Ofcom’s view of the ‘pure incremental’ cost of call termination.33

While it may be the case that termination costs on a long run incremental cost (LRIC) plus equi-proportionate mark-up (EPMU) basis provide a reasonable proxy for the network costs of call origination, such use of termination costs as a proxy for origination costs does not hold in a world where Ofcom proposes to use pure LRIC for termination.

47. Pure LRIC by definition fails to cover common network costs. Indeed, such common network costs cannot be recovered from inbound calls if Ofcom persists with the pure LRIC approach for MTRs. It follows that common network costs have to be recovered elsewhere, including from outbound calls. There is no reason in principle why freephone origination should not make a contribution to recovery of common network costs.

48. Moreover, in a competitive market it would be surprising to discover such common

costs being recovered evenly across all outbound call types. As Ofcom notes, freephone calls (and NGCs generally) are a lower priority for most customers than the cost of calls to mobiles and calls to geographic numbers – the type of calls they make more often and which consequently have a greater bearing on their monthly expenditure. Given this pattern of consumer preferences, it is most unlikely to be efficient to require equi-proportionate contributions to common costs from all call types. It is even less likely to be economically efficient to prohibit common cost recovery on relatively inelastic call types, thus requiring higher common cost recovery on relatively elastic call types.

49. Such a pattern of cost recovery would be the opposite of Ramsey pricing, which

Ofcom and its predecessors have long recognised is a potentially efficient and welfare maximising method of cost recovery, theoretically superior to EPMU.34

The principal reason Ofcom has not, in practice, adopted a Ramsey approach in the context of termination rate setting is the perceived difficulty of accurately measuring price elasticities. While that may be a pragmatic justification for sticking with EPMU in the context of setting termination rate charge controls, it provides no justification at all for second guessing the competitively determined pattern of cost recovery in the context of this review.

50. Ofcom has stated that it generally believes communications providers operating in a competitive market should be free to determine the most appropriate pattern of retail pricing.35

33 See for example A7.72

Vodafone wholeheartedly agrees. However, Ofcom then proceeds

34 As Ofcom puts in a recent (January 2011) consultation on WBA price control: “Under Ramsey pricing, elasticities of demand are used to allocate common costs. Services with higher elasticities of demand (demand is more sensitive to price) attract lower mark-ups than services with lower demand elasticities. Relative to spreading common cost recovery more evenly, this form of pricing rule can enhance consumer welfare as it can help increase demand from customers with a relatively lower willingness to pay. On the other hand, if charges were set so that common costs were recovered more evenly then these customers may be priced out of the market. Therefore, as the costs of providing services would more closely match customers willingness to pay, on allocative efficiency grounds, there are possible benefits to Ramsey pricing.” http://stakeholders.ofcom.org.uk/binaries/consultations/823069/summary/condoc.pdf p.54 35 See, for example, Ofcom’s recent 0845/0870 determination at 4.31 http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/761146/Final_Determination.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/823069/summary/condoc.pdf�

http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/761146/Final_Determination.pdf�



to suggest freephone is a special case on the grounds that the current pattern of prices does not reflect consumer preferences. The empirical basis for this claim is very weak, however.36

51. In fact, the available evidence supports the contrary view that current patterns of pricing do reflect consumer preferences – if not perfectly then to a large extent. As noted above, the majority of consumers specifically reject the idea of rebalancing other prices to offset free-to-caller freephone pricing, casting doubt on Ofcom’s claim that this would better reflect ‘underlying’ preferences. There is clearly a risk that forcing a departure from the current pattern in the opposite direction from that suggested by an efficient Ramsey approach results in consumer detriment not consumer benefit as Ofcom contends.

52. The above discussion has focused only on one aspect of common cost recovery –

the recovery of common network costs. However, the same arguments of principle apply equally to recovery of common costs other than network costs.

53. Recalling that Ofcom proposes to disallow common network cost recovery on

inbound calls, it follows that confining recovery to outbound calls would result in a value for network costs significantly in excess of that implied by even a LRIC plus EPMU termination proxy on the old termination charge model. The same dynamic applies to non-network costs known as Customer Acquisition Retention and Service costs (CARS) too. Since regulation prohibits recovery of these costs on inbound calls, they must be recovered from outbound calls and access.

54. There is no reason in principle why freephone or other NGCs should not contribute

to CARS. In the model Ofcom proposes for freephone where service providers rather than callers fund the service, service providers clearly benefit from customer acquisition since if there were no mobile customers there would be no possibility of mobile originated calls. Artificially preventing recovery of particular heads of

“In general, we do not have a stated preference on the balance of MNOs‘ retail prices between the different services that they offer. This is a matter to be determined through competition between MNOs and other players in the retail mobile market, such as MVNOs.” 36 Ofcom’s position is set out at 4.51 and 4.52 and reproduced below for reference: “4.51 Perfect competition between firms to supply a bundle of services to well-informed consumers is likely to produce a structure of prices that reflects consumers’ preferences. Suppliers’ margins will be higher for those elements which consumers are price insensitive towards and vice-versa. Such a price structure is likely to benefit consumers.

4.52 However, we consider that callers’ poor awareness of non-geographic call prices makes consumers more insensitive to these prices in selecting a bundle. Prices for these calls can be raised in a way that reflects the extent of callers’ ignorance, rather than their underlying preferences. Non-geographic call prices are high relative to other services, reducing the demand for these calls to a level which may not reflect consumer preferences under greater price transparency.” The tentative nature of Ofcom’s final statement betrays the fact that Ofcom has no compelling evidence to support its claim that what it terms ‘underlying’ preferences are significantly different from revealed preferences. Clearly, observing that NGC prices are ‘high’ relative to other services is insufficient to demonstrate consumer detriment given the acknowledgement in 4.51 that higher margins on price insensitive services are likely to be efficient.


common cost from freephone calls would in effect allow service providers to free ride. Ironically, in view of Ofcom’s purported market failure rationale for intervention, such free riding can be considered to represent a form of vertical externality. Arbitrarily disallowing recovery of CARS from freephone or other NGCs would thus create, rather than correct a vertical externality problem, contrary to Ofcom’s stated rationale.

55. This is, however, by no means the only problem with the suggestion that mobile

outpayments for freephone calls should be restricted to a peculiar view of cost recovery. Regardless of the methodology and reasoning used to arrive at a particular view of a supposedly ‘cost oriented’ origination charge, it is important to consider the quantum.

56. While the 0.5ppm figure Ofcom mentions is apparently based on a (conceptually

flawed) pure LRIC termination proxy, the alternative 2ppm figure Ofcom mentions appears to have been plucked from thin air. The only reference source in Ofcom’s evidence base seems to be AM’s survey of SPs in which it apparently sounded out views on willingness to pay a differential mobile outpayment to support free-to-caller pricing. In summary, AM reports that there were no takers for a 10ppm outpayment, some takers for a 5ppm outpayment, and a greater number of takers at 2ppm, although a proportion of those surveyed appeared unwilling to pay anything at all. These results are interesting so far as they go, but hardly amount to a rigorous analysis of market value.

57. The problem with very low wholesale outpayments is not merely that no common

cost recovery would be allowed on a particular class of call, but that the price distortions this would create could open up significant arbitrage opportunities undermining common cost recovery to a much greater extent. If the wholesale cost to SPs of free-to-caller mobile call origination were anything like as low as the 0.5-2ppm Ofcom suggests, this could become a magnet for SPs offering call-back or indirect access services with the freephone number as a front-end gateway.37

Whether regulated or unregulated, artificially low wholesale origination charges coupled with low regulated termination rates (whether pure LRIC or LRIC plus EPMU) would create an artificially low cost base for such SPs who, without bearing the costs of handset subsidy, provisioning, customer support and so on, could potentially undercut MNO OCPs’ competitively determined call charges substantially and still make supernormal returns.

58. Such returns would not be a reward for efficiency, however. They would be due entirely to the ‘free rider’ opportunity opened up by distorted pricing. In the worst case scenario, this would force market-wide retail call costs of scarcely more than the sum of the mobile origination outpayment on the ‘access’ leg and termination charge on the ‘delivery’ leg. However, call prices well below the competitive level would be commercially unsustainable because common cost recovery would be virtually impossible on any call type, inbound or outbound. The unintended adverse

37 There are various possible implementations. At the most basic level, the customer would call the freephone gateway number and then be prompted to enter the destination number manually (as some international bypass operators do today). More advanced implementations using smartphone applications could potentially offer a more seamless customer experience, automatically dialling the freephone gateway number and perhaps taking the destination number from stored contact details on the handset.


consequences of below cost pricing for mobile consumers, and for wider social inclusion, could be profound.38

Commercial free-to-caller arrangements are possible now

59. As noted above, there is nothing in the current regulatory framework to prevent service providers who genuinely value free-to-caller mobile call origination from negotiating commercially with mobile OCPs. Commercially derived outpayments afford flexibility to reflect different commercial circumstances. MNOs are entitled to take into account the nature of the service in question. Crisis lines provided by charitable bodies are in a different category from public services such as the DWP benefit claim line, which are different again from fully commercial private sector sales or customer enquiry numbers.

60. How the service provider intends to promote its service is also relevant to

establishing market value. Ofcom suggests that substituting retail revenue from callers for wholesale revenue from service providers may be revenue neutral39 or even beneficial to MNOs because it will stimulate call volumes. The DWP evidence does indeed provide some support for the intuition that zero rating previously chargeable calls may well stimulate an increase in mobile originated call volumes. Ofcom reports that the DWP saw the proportion of mobile originated calls to its helpline increase from around 15% before zero rating to around 50% after.40

61. How far the particular experience of the DWP helpline can be generalised to calibrate a call volume response to free-to-caller pricing is uncertain. However, in principle it is possible that unit wholesale outpayments below the level of pre-existing retail call prices could be consistent with revenue neutrality providing the level of outpayment is pitched appropriately in relation to the volume uplift.

62. By the same token, however, it should be quickly apparent that artificially low

regulated outpayments at the levels Ofcom suggests would require implausibly large volume uplift to be revenue neutral for MNOs, let alone margin neutral.41

38 Ofcom could potentially mitigate this risk by prohibiting such services from running behind freephone numbers, though it would have to be vigilant in enforcing such a restriction. Otherwise, MNOs might be forced to withdraw freephone call origination altogether. 39 Revenue neutrality is not necessarily the appropriate test, however, since OCPs will need to look for ways to restore margin as well as revenue. Revenue neutrality does not imply margin neutrality, which is a tougher test. 40 See table A2.9. While the published figures do not reveal total call volumes and the effect, if any, on fixed originated calls, the summary before and after proportions appear to be consistent with a 3.3 to 5.6 fold increase in mobile call volumes. 41 These worked examples use revenue purely for simplicity of illustration. As noted above, in practice, MNOs will also be concerned with margin. Margin neutrality is clearly harder to achieve than revenue neutrality and may not be achievable at all if regulated outpayments are set too low, whatever the volume response.

For the sake of example only, assuming the ex VAT retail price to callers was previously 20ppm, an outpayment of 2ppm would require a ten fold increase in call volumes to deliver the same gross revenue while an outpayment of 0.5ppm would require an astonishing forty fold increase in call volumes. This is roughly ten times the mid-range estimate suggested by the DWP experience.


‘Rebalanced’ pricing does not reflect consumer preferences 63. Vodafone understands that some stakeholders may be indifferent to the impact on

MNO revenues and margins. But Ofcom itself should not be. The reason for this is simple. As Ofcom acknowledges, in a competitive mobile retail market, external shocks that affect all operators will inevitably rebound on mobile consumers through a forced rebalancing of other prices to restore margin. As already noted, Ofcom’s claim that rebalancing is not of concern because rebalanced prices will better reflect consumer preferences is not supported by its consumer survey evidence (which, in fact, suggests the opposite).

64. Consumers currently have the opportunity to chose whether they do, or do not, wish

to pay extra for 08 NGCs to be free on Vodafone with an ’08 bolt-on’, as previously observed in our response to the call for inputs. The effect of Ofcom regulation could be removing this market-led solution that offers consumer choice and potentially making consumers pay more for the generality of calls, so they get cheaper non-geographic calls, whether they value them or not. Ofcom should not lightly intervene in such a way that drives out this sort of consumer choice, and impinges on commercially-driven market developments.

65. Ofcom attempts to play down rebalancing by suggesting it would be spread across

all call types and thus be barely perceptible. However, this is at odds with Ofcom’s conclusion in recent determinations which considered the adverse effect on consumers of rebalancing would be significant.42

It is the absolute quantum of the effect that matters in terms of competitive distortion and the adverse impact on consumer welfare. Secondly, there is no reason to suppose rebalancing would be thinly spread across larger volume call groups such as calls to mobile and calls to geographic numbers. In fact, this suggestion is at odds with Ofcom’s analysis elsewhere in the consultation, which recognises that competition drives MNOs to focus their keenest pricing on the majority call types that matter most to consumers.

66. This is a straightforward response to consumer preferences driven by competition and does not depend on any presumed lack of transparency around NGC pricing. Even with ‘perfect’ price transparency, you would expect consumers to focus on majority call types more than NGCs and unit margins to vary across call types in response to these consumer preferences. There is no reason to suppose that fundamentally different dynamics would apply to rebalancing to restore margin following an exogenous shock. Any further regulatory intervention to force departure from this pattern runs the risk of compounding consumer detriment by driving prices further from competitively determined equilibrium.

67. For all these reasons, Ofcom’s claim that rebalancing following intervention is not a

concern because post-intervention prices will better reflect consumer preferences is not persuasive. If it were really the case that most consumers preferred free-to-caller freephone calls with other prices higher, that is what you would expect the

42 See, for example, Ofcom’s recent determination in relation to 0845 and 0870 numbers at paragraph 8.126 http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/761146/Final_Determination.pdf




competitive market to offer. However, Ofcom’s consumer survey makes clear that rebalancing is not seen as a good trade off by consumers.

68. Vodafone sees a rather better case for saying that if SPs genuinely value free-to-

caller freephone calls from mobile, they should fund it on a commercial basis. As noted, this is possible at the moment, without further intervention. If Ofcom chooses to intervene, however, SPs will lose the option to decide for themselves whether or not they value free-to-caller from mobile sufficiently to pay for it. If they remain on a freephone number, they will have no choice. The only way they could avoid funding mobile free-to-caller is by migrating to a different number range. However, if they did so they would also lose free-to-caller calls from fixed lines.43

69. Should Ofcom nevertheless intervene and seek to impose a universal free-to-caller requirement in return for a regulated mobile outpayment it can (and should) minimise the adverse impact on mobile consumers by ensuring that free-to-caller pricing is fully funded by SPs and does not rely on cross subsidy from other mobile services.

Implementation 70. Ofcom suggests six months for implementation of its proposed universal free-to-

caller policy. This timescale is unlikely to be achievable by spontaneous bilateral commercial negotiation between OCPs and SPs given the number of parties potentially involved. In any case, negotiation is only meaningful if both parties have a free hand.

71. Realistically, therefore, to stand any chance of meeting such an ambitious timescale

and avoid becoming overwhelmed by the need to determine individual disputes case by case, Ofcom would probably have to mandate an appropriate differential mobile outpayment at wholesale level. While a one-size-fits-all approach will not be able to take full account of different SP preferences, Ofcom could at least minimise the adverse impact on mobile consumers by pitching the level of the outpayment at an appropriate market level.

72. A uniform mobile outpayment would mean MNOs get the same payment

irrespective of the identity of the terminating host or ultimate SP, and SPs pay the same irrespective of identity of the mobile OCP. It would also be sensible to have a consistent convention for transit. The principle of SP funding strongly suggests that SPs should pay for transit. There are two methods by which this could be achieved. Either outpayments are supplemented to allow for transit costs paid by MNO OCPs, or hosting terminating communications providers (TCPs) pay for transit directly. Vodafone suggests the latter method is more straightforward and would minimise accounting and reconciliation issues for originating MNOs.

43 This assumes that SPs are not able to block freephone calls from mobile, as this would run counter to the whole Ofcom rationale of universal freephone branding without exceptions. Not being able to make freephone calls from mobile is arguably worse for consumers than the current situation where they have a choice whether to call (and pay) or not. We note from table 6.2 that service limitations apply for a variety of reasons in other jurisdictions where freephone calls are free to caller from mobile.


73. SPs will presumably have to agree with transit operators how they can verify mobile originated traffic volumes. However, assuming a uniform outpayment to all MNOs, visibility of inbound mobile CLI may be sufficient to enable random audit checks.

Summary 74. In summary, therefore:

• Freephone calls of real social value are already free-to-caller; • There is no case for extending concessionary schemes for charities to

commercial SPs; • To the extent SPs genuinely value free-to-caller calls from mobile they can

pursue this commercially without any change in regulation; • The available evidence suggests consumers do not see freephone free-to-caller

in exchange for higher prices elsewhere as a good trade off; • Any move to universal free-to-caller must be fully funded by SPs to avoid

adverse consumer impact through rebalancing.


3. Unbundling 75. Ofcom’s proposed ‘unbundling’ remedy is an interesting idea that deserves serious

consideration. It has some potential advantages and also some limitations. Whether the advantages ultimately outweigh the disadvantages or vice versa is hard to determine in abstract. Much depends upon the detail of how any eventual remedy is applied and practicalities of implementation which will require further detailed investigation prior to any decision. Before turning to the unbundled remedy itself, however, it is useful to examine the claimed transparency problem it is intended to address.

Is there a real transparency problem? 76. Vodafone recognises part of the problem Ofcom describes but in general believes

Ofcom’s analysis and commentary misunderstands the nature of the problem and consequently overstates the real extent of consumer detriment.

77. The part of the problem that Vodafone recognises is that premium rate SPs are

required to provide pricing information to consumers but can only do so currently with significant caveats. Unbundling access and service charges neatly sidesteps this particular problem by enabling service providers to clearly state that part of the price that they are responsible for, facilitating simpler communication. That is its main conceptual attraction.

78. This is by no means the end of Ofcom’s transparency narrative, however. Ofcom

ventures to suggest that there is a major problem resulting in significant consumer detriment, either through bill shock or call deterrence44

and, moreover, that lack of transparency is responsible for a pattern of prices that does not reflect consumer preferences. It characterises these problems as market failures, suggests that they are not only enduring but getting worse, and implies that regulatory intervention to ‘correct’ them will result in substantial consumer benefits. We explain below why most of this narrative is significantly overstated and/or misconceived.

79. Ofcom makes much of the fact that consumers typically overestimate the price of calling NGCs. This may well be so, but it does not automatically follow that this in itself is a major source of consumer detriment. There are a number of points that need to be borne in mind to keep the practical significance of the results Ofcom reports in perspective.

80. Firstly, the methodology used to calculate this overestimation is open to question.

One has to question how relevant it is to ask a consumer to guess how much it would cost to call a certain number completely out of context. This information only becomes relevant where the consumer is actually contemplating making a call. Although consumers may overestimate the absolute price of NGCs, they actually do

44 Clearly ‘bill shock’ and call deterrence cannot occur simultaneously. If you are deterred from calling there is no risk of bill shock. In fact, Ofcom provides little evidence that bill shock is a significant problem and while there is some evidence that customers are wary of calling some NGCs the reasons for this are varied. This evidence does not support Ofcom’s strong inferences that there would be significant elasticity if the gap between estimated and actual prices narrowed.


reasonably well understanding the relative prices of different call types, which call types were within/outside call packages, and differences between fixed line and pre/post pay mobile.4546

This may, in fact, indicate that the current pricing advice required by PhonepayPlus achieves part of its consumer protection purpose by sensitising consumers to the higher costs of calling a premium rate service.

81. Secondly, Ofcom highlights the overestimation of NGC charges but scarcely mentions that inability to accurately estimate call charges applies to all call types and not just NGCs. Research commissioned for previous rounds of number translation service (NTS) reviews reveals that consumers overestimate the price of calling geographic numbers by almost five times47 yet Ofcom does not signal any general transparency concern, let alone suggest that lack of transparency inhibits price competition.48

82. Thirdly, as noted above, there is no need to resort to a presumed lack of transparency to explain differential pricing for NGC and non-NGC calls. As Ofcom itself notes there are extra costs involved for originating operators where termination charges embody an uplift to fund revenue share with SPs.49

But beyond that, it is rational for consumers to attach less weight to the cost of minority call types they make infrequently than majority call types they make more often and which are more important in budgetary terms. Higher unit margins on NGCs are thus consistent with the expected pattern of consumer preferences in a competitive market.

83. Fourthly, this expected pattern of consumer preferences is corroborated by Ofcom’s own consumer survey evidence.50

45 For further detail see Consumer Transparency in Telephone Numbering Research, published with the consultation.

NGCs are confirmed as a low engagement area for consumers, who express no enthusiasm for forced rebalancing of prices. Ofcom makes no attempt to reconcile this evidence with its assertion that there is significant consumer detriment and that rebalanced pricing would better reflect consumer preferences. Appeals to complaint volumes do not assist Ofcom in this regard as the numbers Ofcom reports are tiny compared to the top complaints

46 These recent findings echo those in previous rounds of consumer research. See, for example, report of research findings commissioned for Ofcom’s strategic numbering review, February 2006: http://stakeholders.ofcom.org.uk/binaries/consultations/numberingreview/annexes/marketresearch.pdf The executive summary notes: “Consumers tend to over-estimate the costs of calling all number types, but broadly understand the cost hierarchy.” 47 Ibid, see in particular Figure 4.4 which notes that the mean estimated price for calling a ‘normal landline’ from a landline is 14ppm compared with an ‘actual’ price of 3ppm. 48 Ofcom’s answer to this is to suggest that overestimation of geographic prices doesn’t matter because geographic calls are often part of inclusive minute bundles. However, this attempt to rationalise inconsistency of approach as between geographic and non-geographic price information sits uncomfortably with Ofcom’s professed concern about mobile only customers. Mobile only customers are predominantly prepay customers where the typical pricing model is ‘pay as you go’ for all call types. For these customers at least, Ofcom cannot explain why overestimation is a problem for NGCs when it is not apparently a problem for other calls. 49 See A2.49: “However, it is perhaps unsurprising that NGCs have a higher retail price than other call types given that several non-geographic number ranges support a degree of revenue sharing with the SP (e.g. 0845, 0844, 0871/2/3 and 09).” 50 See Research Document published with the consultation, especially questions 39, 40 and 42.

http://stakeholders.ofcom.org.uk/binaries/consultations/numberingreview/annexes/marketresearch.pdf�


reported in the Ofcom draft annual plan.51 As explained further at Annex 2, Ofcom’s only attempt to quantify consumer detriment is based more on speculative assumption than solid empirical underpinning. As such it does not support the weight of the strong claims Ofcom seeks to make for it.52

84. Finally, Ofcom’s analysis implicitly assumes that price transparency and

spontaneous price awareness are the same thing when in reality they are not the same thing at all. Prices are transparent if they are published and reasonably easy to discover when the need arises, but this does not require consumers to carry an accurate view of the price of calling many different types of NGC number around in their heads. Ofcom’s consumer survey evidence reveals that most consumers call NGCs infrequently if at all, and many abstain from calling certain types of NGC number (e.g. PRS) altogether. One should no more expect consumers to have an accurate view on the precise cost of call types in which they have little interest than for an occasional traveller to be able to recite train or rail fares to multiple destinations from memory. Vodafone submits that the ability to discover pricing

51 Ofcom states at A2.118 that “Consumer confusion . . . . has led to a large number of complaints about NGCs to the OAT.” (emphasis added) However, the actual numbers are recorded at Table A2.14. For Q1 2010, the most recent period for which data are presented, the total number of complaints recorded to any NGC range is between 121 and 149 depending on whether 070 personal numbers are included or excluded. This implies a monthly average of approximately 40 to 50 complaints, which is barely perceptible relative to the chief causes of complaint to Ofcom’s advisory team – see Figure 5 from Ofcom’s latest draft annual plan, reproduced here for reference. 52 One implication of Ofcom’s analysis that Ofcom itself appears to overlook, however, is that reducing price mis-perceptions is likely to have a greater payoff than actually changing underlying prices. See further discussion at Annex 2.


information when and where relevant is more important (and more realistic) than spontaneous ability to estimate price based on the number alone.

The unbundling ‘solution’ 85. The above observations are important qualifiers on Ofcom’s stated concerns.

However, to the extent there is a residual transparency problem, the structural unbundling remedy itself directly addresses it. Transparency over the access charge will be provided at the point of subscription while service charge transparency will be provided wherever a revenue share NGC is advertised. The case for further ‘transparency’ measures such as pre-call announcements is open to question, therefore. As the AM study shows, there are substantial technical challenges that would need to be overcome if the aim is for customised announcements that itemise customer-specific access and service charges on a call by call basis. The costs of such development would need to be set against the extent of any benefit, which may be marginal at best if the bulk of the ‘transparency’ benefit Ofcom seeks to realise has already been achieved by other means.

Access charge 86. As noted above, evidence of higher unit retentions on NGCs than non NGCs is not

in itself evidence of a transparency problem. Even with ‘perfect’ transparency one would expect prices to reflect the revealed pattern of consumer preferences in a competitive market (relatively lower prices on majority call types and relatively higher prices on minority call types). There is thus no prima facie case for regulating the level of a competitively determined access charge, and we welcome the fact that Ofcom is not proposing to regulate the level. We largely agree with Ofcom’s analysis of why setting regulatory caps would not be appropriate, including the acknowledgement that the ‘transparency’ powers Ofcom invokes for this structural remedy do not extend to regulating prices in competitive markets for other unspecified ‘competition’ reasons.53

87. Ofcom is proposing some restriction on the structure of the access charge through requiring a single access charge across all eligible NGC call types. We understand that the very concept of a standard access charge in itself implies some restriction as a large number of differentiated access charges for different types of NGC would defeat the underling simplicity objective.54

53 See annex 4 for a fuller discussion of the legal analysis. 54 Arguably the simplicity objective could be retained without serious compromise by allowing a small number of standard access charges e.g. one for business rate and another for premium rate. However, the point of principle remains that standardisation across groups of NGC calls is a restriction on commercial freedom, even if the average level of each access charge is not specifically capped.

It is an open question whether Ofcom needs to go as far as to specify a single access charge per tariff for all NGCs subject to the unbundled remedy. In other contexts, Ofcom has noted that higher rated PRS calls have a different risk profile than lower rated NGCs and suggested that allowing recovery of bad debt driven predominantly by PRS across all NTS call


types would not be appropriate.55

However, whether Ofcom sticks with its current preference for a single standard access charge per tariff or modifies this to allow a small number of standardised access charges, it is right not to impose further restrictions. In particular, we agree that prescribing a ‘standard’ access charge should not restrict OCPs to setting a single access charge for all customers across all tariffs.

88. Providing the customer can establish what the standard access charge is for their particular tariff, we see no case for any further restriction. This freedom is needed not only to accommodate different approaches to consumer and enterprise customers, or different approaches as between pay monthly contract and pay as you go prepay segments, but also to allow a choice of alternative tariff options for consumers within such broad segment categories. We see no good reason to prevent communications providers from offering differentiated ‘standard’ access charges on different tariffs to reflect varying customer needs and preferences. For example, some customers may prefer a lower access charge in return for a higher committed monthly spend. Others may prefer a lower committed spend and a relatively higher access charge.

89. We note that Ofcom proposes that access charges should be limited to a simple flat

ppm structure. While we agree that some standardisation may be needed, we query how Ofcom’s vision of a pure ppm access charge sits with its view that SPs should have wide discretion to determine their own charging structures and unitisation as well as price levels. As discussed further below and at Annex 3, we are concerned that a free for all in service charge setting will substantially complicate implementation and may also erode the main transparency benefit of rationalisation.

Service charge 90. As Vodafone understands it, Ofcom’s service charge proposition has two essential

components. Firstly, the service charge should be separately identifiable from the access charge, with responsibility for communicating it resting clearly with service providers whenever a number is advertised. Secondly, the maximum permitted level of the service charge will depend on the number range. At a high level, the permitted maximum for 08 prefixed business rate numbers will be below that for 09 prefixed premium rate numbers.

55 See, for example, 6.1 of Ofcom’s February 2011 consultation on BT’s NTS retail uplift which states: “Costing up to £1.50 per minute or per call from a BT line, PRS calls are more expensive than other NTS calls and tend to be associated with a higher incidence of bad debt. If BT were not able to target the recovery of this higher incidence of bad debt experienced on PRS calls it would need to recover these extra costs via some other mechanism. One means of achieving this would be to average the recovery for bad debt across both PRS and other NTS calls, effectively setting a common recovery for bad debt within the NTS Retail Uplift regardless of the retail price of the call. The level of this recovery would be such that the cost for originating more lowly priced NTS calls would in part reflect the cost of the higher bad debt experienced on PRS calls. However, given the higher incidence of bad debt in respect of PRS calls, we consider that it is economically more efficient that BT recovers PRS bad debt via a charge targeted at PRS calls, namely the PRS Bad Debt Surcharge, rather than via an averaged bad debt recovery in the NTS Retail Uplift.”


91. The basic idea of setting limits on the service charge by number range is similar in some respects to Vodafone’s suggestion in response to the call for inputs, albeit that Vodafone’s call for wholesale regulation by number range was not specifically tied to Ofcom’s wider conception of unbundling.

92. At this stage, it is not clear how much of a substructure Ofcom wishes to impose on

service charges beyond a broad lower/higher price cut-off between 08 and 09. Although this may seem like a detail, it is potentially quite important in terms of the model of possible price competition on service charges and ease of implementation.

93. At one extreme, it is possible to imagine a regime in which individual number blocks

are assigned fixed service charges (not maximum service charges) with a stable and durable one for one link between number and service charge. In this model, if service providers wanted to offer a higher/lower price, they could do so by picking a number at the corresponding price point.

94. At the other extreme, service providers would have additional freedom to vary the

service charge on the same number within any broad maximum (and possibly minimum) parameters laid down by regulation. However, whilst this full ‘service provider sovereignty’ pricing model may have some superficial attraction for service providers, it is important to recognise that unfettered ability by SPs to change the price for calls to the same number causes some potential difficulties for the Ofcom transparency agenda, and also for practical implementation of unbundling in a full pass through model.

95. To the extent transparency of the underlying service charge is important, either

flavour of unbundled charge enables the basic distinction between service charge and access charge to be made. However, the core transparency requirement extends beyond simply saying that there should be a separately identifiable service charge.

96. Ofcom clearly intends that the service charge be clearly communicated to

customers wherever the number is advertised.56 This is straightforward in the first model where the service charge associated with the number is stable. It is problematic, however, if service providers vary the service charge against the same number because pricing information can exist in long-life durable media (e.g. hard copy directories, stationery, printed marketing literature). The pricing information available to callers could easily become misleading as prices change, defeating the transparency objective.57

Published prices higher than prevailing prices run the risk of call deterrence, while published prices lower than prevailing prices run the opposite risk that calls are made but the customer incurs unexpectedly high charges.

56 See discussion of likely price disclosure on service providers/information providers at A5.187 to A5.191. 57 In some cases, where customers have a need to call the same number periodically (as may be the case for certain ‘locked in’ calls) they will only be presented with pricing information the first time they see the number. If they then write it down (or store on their phone) they will not have any further pricing information to hand for subsequent calls and will have no reason to expect the price has changed. Of course, if the price has not in fact changed this does not matter. However, it is potentially of more concern if SPs have wide discretion to vary pricing on the same number.


97. While it is understandable that Ofcom would not want to preclude price competition between SPs, it is important to recognise that price competition between SPs is very limited currently.58

Service providers come in many different shapes and sizes. They include charitable and public sector bodies alongside commercial enterprises. Commercial SPs come from many different industries that do not compete directly within one another. In many cases even where more than one firm from the same sector uses an NGC number, it is a marginal part of their customer proposition and not a key dimension of competition between them. High street mortgage lenders, for example, are unlikely to compete with one another principally on the pence per minute cost of calling their customer support number.

98. According to Analysys Mason’s survey of SPs, the price presented to the end-user customer is less important to SPs than revenue/cost stability and certainty.59

To the extent there is competition between terminating operators to host SPs, the cost/revenue implications for SPs are something to be negotiated commercially between SPs and their terminating CP hosts. This would remain the case under any unbundled model. Even if SP and TCP jointly agree the advertised service charge/termination rate, the private revenue/cost arrangements between them would be commercially determined rather than prescribed by regulation.

99. The fact that SPs can only set service charges in co-operation with TCP hosts represents a potentially important practical qualification on the unilateral ability of an SP to vary price on a given number. At minimum, the service provider must agree this with the respective TCP host. However, individual negotiation of this kind may only be possible where an entire number block belongs to a single SP. So long as the level of the termination rate/service charge is restricted to the minimum block allocation, if there is more than one SP operating within that number block, any change in the service charge will automatically affect all SPs simultaneously (whether or not it alters their commercial terms with the TCP host).

100. Vodafone recognises that forced migration from one number range to another could

impose significant costs on SPs, principally through the need to communicate and advertise numbers afresh, sunk advertising spend and the fact that some numbers are more valuable than others, by virtue of their memorability or relevance to service being promoted. Equally, however, some SPs have a need to communicate numbers in any event as part of their normal operating model for reasons other than any wish to change the price to callers. TV voting lines, for instance, typically

58 See, for example, A7.445 where Ofcom notes in the context of DQ services that “price competition is currently low”. Ofcom ascribes this to lack of price transparency, but then notes that although greater transparency may put downward pressure on prices, “there is a risk also that setting a maximum price will simply coordinate prices to that level or that a (regulated) maximum price point will not be available at a lower enough level for those SPs that wish to set low retail prices.” 59 See Analysys Mason ‘The use of non-geographic numbers by service providers’, August 2010, which notes at page 2 of the executive summary that “For most number ranges, the most important factors when selecting a TCP were cost, with a fixed monthly charge being the most favourable pricing mechanism.” AM also notes that “The reasons for selecting specific number ranges focus mainly on the perception of the IP (size, physical location, national reach etc.) that is created by using a specific number range, rather than any specific cost implications. These reasons were different for IPs that use the 09 and 0871/2/3 number ranges, which stated that their main purpose in selecting these number ranges was to generate revenue. Further, on page 15 AM notes: “Interestingly, for the 080 range having an appropriate price is not cited as the most important reason, which could have been expected given that calls can (usually) by made free of charge in this range.”


require a different number for each competitor, with numbers advertised frequently during each broadcast. For this type of application at least, picking a new set of numbers for a new price point would be entirely voluntary and can hardly be considered onerous.

Implementing the pass through model 101. The model of price competition for service providers under unbundling has some

potentially important practical implications for ease/difficulty of industry-wide implementation.

102. While we see some merit in the concept of unbundling, we also see some

potentially substantial practical difficulties in implementation that will require careful evaluation and cost/benefit analysis to ensure proportionality. The degree of difficulty depends in part on how Ofcom intends to regulate service charges by number range.

103. We note Analysys Mason’s initial review of feasibility.60

While the focus of that piece of work was on pre-call announcements and billing itemisation, we believe those specific issues are actually somewhat peripheral and secondary to the central challenge implied by a 100% pass through model for the service charge which the AM study also exposes and which it is important that Ofcom itself appreciates.

104. Put simply, the fundamental technical and administrative challenge is how to guarantee correct retail and wholesale pass through of the service charge. This requires co-ordination and possibly technical integration of distinct retail and interconnection billing systems which existing systems were not designed to handle.

105. Costs are thus hard to estimate but likely to depend on the time horizon for

implementation. While detailed feasibility study will be needed, short timescales that make adaptation of existing/legacy systems unavoidable are likely to add substantially to lifetime costs, especially for systems nearing the end of the economic life where the risk of creating stranded assets is most acute.

106. Ofcom will, therefore, need to develop an appropriately informed view on likely

outturn costs, and the key drivers of those costs, in order to assess proportionality in relation to expected benefits before making firm decisions. At a high level, however, Ofcom should be alert to the extent to which it can ease or compound the technical difficulty and cost required to implement by how it specifies requirements and constrains (or not) commercial freedom to alter service charges. See also further discussion at Annex 3.

60 http://stakeholders.ofcom.org.uk/binaries/consultations/nongeo/annexes/tariff-billing.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/nongeo/annexes/tariff-billing.pdf�


Summary 107. In summary, therefore:

• Unbundling is an interesting idea, worth considering; • The ‘transparency problem’ is overstated, however, and to the extent there is a

residual problem, the unbundling remedy itself is a complete answer; • Limiting OCPs to a single access charge per tariff of itself involves some

rebalancing within NGCs; • There is no case (and no legal power) to regulate the level of access charges; • There is a better case for regulating service charges in terms of level and

structure to provide stability and transparency; • There are potentially substantial implementation issues, which Ofcom can

potentially ease by regulating service charges for ease of communication and transparency;

• Confining regulation to service charges by number range is real opportunity for

simplification consistent with retail competition for callers and SPs;

• Detailed cost benefit analysis will be required to evaluate proportionality prior to decision, however.


Annex 1: Market failure 108. This annex comments briefly on Ofcom’s analysis of ‘market failure’ as outlined in

Chapter 4 and further at Annex 2 of the consultation. 109. Ofcom states that its main concerns stem from the way retail markets currently

operate, and that consumer detriment results from ‘three interrelated market failures’:

• “Lack of price awareness” • “Vertical externality” • “Horizontal externality”

110. Ofcom then proceeds to group the outcomes of these supposed market failures into

five categories, as follows:

• Direct impact of poor consumer price awareness • Level of non-geographic prices relative to other telephony services • Consumer exposure to fraud • Diminished service availability and innovation for consumers • Distributional concerns

111. For brevity, Ofcom’s own analysis is not reproduced in full here. However, we set

out below a few high level comments in relation to Ofcom’s analysis under each heading.

‘Market failures’ 112. The general query in relation to each of the ‘market failures’ Ofcom purports to

identify is whether they actually constitute market failures in any conventionally understood economic sense.

Lack of price awareness 113. It is not clear that ‘lack of price awareness’ in itself constitutes a serious market

failure. Textbook models of perfect competition assume perfect information. However, they also make numerous other strong assumptions that, in practice, are unlikely all to hold in any real world environment.61

If Ofcom is asserting that lack of perfect information is a market failure it is using the term in a very narrow technical sense that is not particularly informative in gauging the real extent of any consumer detriment in real world markets where, among other things, products are differentiated and information is not costless to provide or seek out.

61 Besides perfect information, text book models of perfect competition assume the following: infinite number of buyers and sellers, zero entry and exit barriers, perfect factor mobility, zero transactions costs, profit maximisation, homogeneous products, and constant returns to scale.


114. Ofcom presents some evidence to suggest that consumers cannot perfectly predict NGC call prices based on the number dialled. This is wholly unsurprising, however. Even if numbering designations were easier to understand, the idea that not being able to predict call prices spontaneously from viewing a string of digits represents a serious failing seems somewhat far fetched. As Ofcom notes, most customers call non-geographic numbers infrequently and are more concerned with the cost of majority call types that they make more frequently.

115. On the face of it, this is rational consumer behaviour rather than serious market

failure leading to consumer detriment. It would surely be more surprising (and more worrying) if Ofcom discovered that consumers spent disproportionate time and energy understanding intricate NGC price differentials that make little or no difference to their subscription decisions or calling patterns. Consumers themselves do not appear to be greatly concerned about NGCs, for good reasons. Ofcom’s consumer survey evidence confirms the results of previous surveys: NGCs are a low engagement area for consumers. To treat lack of engagement with relatively unimportant matters as ‘market failure’ seems to be straining language beyond its natural meaning.

Vertical externality 116. Ofcom’s hypothesis is that economic actors operating at different levels of the value

chain do not take account of the preferences of others. In particular, Ofcom suggests that OCPs do not take into account the preferences of SPs – for example in relation to freephone origination.

117. However, anecdotal evidence of SPs ‘expressing a preference’ for lower rather than

higher call costs is not the same as economic demand expressed as willingness and ability to pay. Where SPs genuinely place value on the price faced by the caller one would expect OCPs to take this into account, as mobile OCPs have done in relation to DWP.

118. Freephone calls have never been universally free-to-caller as any SP who had done

their homework would know. Unless they are ill-informed (or have been mis-sold by TCP hosts) it seems unlikely SPs choosing 080 numbers can have believed that mobile originated calls would be free-to-caller, without contracting with MNOs to secure that they were, only to be disappointed.

119. The available empirical evidence does not lend strong support to the vertical

externality thesis, therefore. Horizontal externality 120. As with the vertical externality above, Ofcom’s account of the horizontal externality

is largely descriptive and speculative.


121. Essentially, Ofcom seems to be saying there is a ‘free rider’ problem with either SPs or OCPs, or both, taking advantage of a pre-existing ‘brand’ for a particular number range without contributing to its maintenance.

122. The main problem with this analysis is that it presupposes some departure from

universal branding conventions that, in reality, never existed in the first place. 123. As noted, freephone calls have never been universally free-to-caller. If SPs choose

such numbers in the hope that mobile customers will mistakenly assume they are free-to-caller from mobile, in spite of pre-call announcements specifically advising otherwise, they are likely to be disappointed. Ofcom’s evidence suggests that consumers do generally realise that 080 calls are not free-to-caller from mobile and take this into account in deciding whether or not to call from a mobile phone.

124. Similarly, the idea that MNO OCPs can free ride on a freephone brand by charging

callers ignores the fact that any prospective caller who did not already know they will be charged will be specifically advised of this, free of charge, through the pre-call announcement.

125. These freephone examples cast substantial doubt on the empirical importance of

Ofcom’s presumed horizontal externality.

126. We now turn to the five categories of impact Ofcom claims to identify. Direct impact of poor consumer price awareness 127. As noted above, categorising limited spontaneous price awareness as a market

failure is itself open to question. Ofcom’s further comments under this heading amount to little more than unsubstantiated assertion.

Level of non-geographic prices relative to other telephony services 128. Ofcom’s analysis of NGC prices relative to other telephony services is entirely

predicated on presumed lack of transparency in NGC pricing. Critically, however, Ofcom fails to consider what pattern of prices would be expected to result if transparency were ‘improved’. This is a significant omission because there are good reasons to expect NGCs to be relatively more expensive than geographic calls, for example, that have nothing to do with transparency.

129. At the most basic level, the cost base for NGCs is generally significantly above that

of geographic calls because interconnect outpayments reflect the funding of revenue share outpayments by TCPs to SPs. It is hardly surprising, therefore, to see wholesale cost differentials reflected at retail level.

130. However, while wholesale cost differentials are significant, there is no reason to

expect a one for one relationship between wholesale costs and retail prices. It is not just incremental costs that OCPs need to recover through retail charges but also common costs. Common cost recovery is driven by competition and consumer


preferences, so it is no surprise that OCPs focus their keenest pricing on majority call types that matter most to customers.

131. Ofcom acknowledges these points in passing62

, yet chooses to ignore them when asserting that relative prices are somehow ‘distorted’ by lack of transparency and can thus be ‘corrected’ by regulatory intervention. Ofcom advances no compelling empirical evidence to support this theory, however. In fact, the available evidence points in the opposite direction. When asked if they would prefer lower NGC prices with compensating price rises elsewhere, consumers roundly reject such rebalancing. This is consistent with the view that current patterns of consumer pricing do indeed reflect consumer preferences and provides no support for Ofcom’s alternative theory.

132. Vodafone notes that NGC pricing already has extensive regulation attached to its presentation and transparency, notably via General Condition 14, specifically 14.1 and 14.2 and their respective guidance63

. These discuss at length transparency requirements for premium rate services, number translation services and personal numbering services. Ofcom should not impose new transparency requirements on NGCs without reviewing the effect of existing regulation.

133. Vodafone would add that its NGC pricing is clear and easy-to-find, with 08 call costs grouped immediately under geographic call costs, a list of free-to-caller charity numbers, a call-cost checking facility for 09 numbers (illustrated below) and directory enquiry (DQ) services listed in a simple table.64

If customers do want to find out the cost of an NGCS call, it is simple to do this at present without new and onerous regulation.

Check the cost of a premium rate 090 number You only need to enter the first 7 numbers:

09067577189 Check rate

The rate for this number is £1.00 a minute

62 See for example A2.166: “Firstly, if consumers had different preferences for the various elements of voice telephony services this may result in common costs being recovered proportionately more from some services than others. For example, if consumers were less sensitive to prices of NGCs than those for GCs we would expect that more common costs would be recovered from the former than the latter. As a result NGC charges may be higher relative to GCs. We would not be concerned if high NGC charges reflected some consumers’ preference for such a tariff structure, indeed this will be an efficient outcome.” (Emphasis added) 63 Guidelines for codes of practice for handling customer enquiries and complaints about Premium Rate Services and Guidelines for codes of practice for the publication of prices to calls to Number Translation Services, 0870 calls and Personal Numbers. 64 Screenshots illustrating Vodafone’s presentation of pricing information to consumers are provided at Annex 6. Vodafone submits that its approach is considerably more accessible to consumers than that adopted by some other operators. For comparison, please see BT’s March 2011 tariff guide at Annex 7 (attached as a separate file). This guide is not only voluminous but does not appear to provide meaningful call price information on a stand alone basis.


Consumer exposure to fraud 134. Fraud is inherently about trickery and deception. While it might be possible to

characterise this euphemistically as a ‘lack of transparency’, Ofcom’s simple equation between lack of price transparency and fraud overlooks where in the value chain the opportunity for fraud arises.

135. While there are many varieties of possible fraudulent activity, the principal

opportunity for fraud associated with NGCs stems from revenue share outpayments at the TCP/SP end of the value chain. This is not fundamentally a product of lack of price transparency but of termination charges pitched at a level that allows a substantial surplus over the underlying cost of call termination. In simple terms, the opportunity for fraud arises from ‘money out’ at a wholesale level rather than ‘money in’ at a retail level. The most effective way to tackle such fraud is by stopping the flow of funds to the fraudster.

136. It is hard to see how unbundling really helps consumer exposure to fraud. The

fraud that occurs, be it wan-giri / one ring scams, PRS dialler scams or the range of PRS scams that offer near-worthless prizes to rigged or bogus competitions, are not about price transparency. Consumers are not being lulled into these scams because of lack of pricing; it is because they intend to deceive and the claim that unbundling is somehow a solution is simply misguided.

137. Those who intentionally go out to rip people off are dealt with by rules such as

Ofcom’s CPT, which ensures that there is control on the allocation of numbers as well as by rules from PhonepayPlus. The 30 day rule ensures that the consumer’s network holds PRS retail revenue for 30 days, during which time any scam can be noticed and a stop put to the money flowing to the scammer. PhonepayPlus also has an emergency procedure, which means it can act nearly immediately, on a prima facie basis, against perceived PRS scams. PhonepayPlus also has the serious deterrent to scammers of a fine level of £250,000 per breach of its Code of Practice – a fine level it has used in the past. These are recognised and accepted ways of dealing with those out to commit fraud.

138. Ofcom should remain alert to opportunities for fraud using NGCs and we are always

willing to look for new ways to work together in this area of shared interest and concern. However, Ofcom needs to consider how any regulatory remedies it proposes would actually help in practice, bearing in mind that fraudsters are unlikely to respect regulatory obligations that make their activity prone to detection.

Diminished service availability and innovation for consumers 139. This aspect of Ofcom’s analysis appears to be based on pure assertion. It is not

enough to assert that prices are ‘too high’. It is also necessary, at minimum, to assume that there is significant price elasticity such that any reduction in price stimulates demand to such an extent that the volume increase more than offsets the reduced unit price. Ofcom provides no empirical evidence to suggest this is the case, however.


140. In fact, the consumer survey evidence suggests perceived price is not necessarily

the most important factor determining calling patterns. A significant proportion of NGC calls are ‘locked in’ in that the caller has no meaningful opportunity to choose a different SP (if you need to call your bank, you need to call your bank). Even in the realm of premium rate services, there is often only one supplier for desirable content - e.g. only one number to call to vote for contestant X - and it is not clear that propensity to call (or not) would be significantly altered by marginal changes in price, however transparent. In the arena of DQ, it seems most likely that consumer preference is determined more by advertising spend than the cost of the service.

141. Finally, the idea that lower prices and higher call volumes would actually result in

significant investment and innovation for the benefit of consumers is, at best, a matter of conjecture. While Ofcom implies that lack of price transparency is a worsening problem, it provides no direct evidence to this effect. The regulatory model under which BT is the only OCP to have its retention regulated (by virtue of its dominant position in fixed wholesale call origination) has not altered fundamentally over the period in which NGC call volumes have declined. This strongly suggests that the main drivers of declining call volumes lie elsewhere, including internet substitution.65

142. If Ofcom conceives of innovation meaning services at a higher rate it must remember the risk that operators take in opening up higher rate services to their consumers. It is a risk that must yield a reasonable return or such services will not be carried.

Distributional concerns 143. Ofcom’s appeal to distributional concerns appears to centre on mobile only

households who are predominantly pre-pay users. 144. There is a certain irony in this, given Ofcom’s apparent lack of concern for the effect

on these same customers of changing the method for calculating mobile termination rates so as to exclude common cost recovery. Put simply, loss of inbound revenue makes such customers less economic to serve, forcing a rebalancing onto outbound call and access charges which threatens marginal consumers.

145. Attempting to limit OCP retention on NGCs will do nothing to help customers who

have been priced out of the market altogether, while disallowing common cost recovery on particular classes of outbound calls as well as inbound calls will simply add to the rebalancing required elsewhere.

146. Where there is a social policy concern about the cost of accessing public services,

there are already models that allow the public body responsible to contain the cost to callers if appropriate. One simple way of limiting cost to callers is to offer to call

65 See, for example, Ofcom’s February 2011 consultation on NTS retail uplift and PRS bad debt surcharge pages 136-137: http://stakeholders.ofcom.org.uk/binaries/consultations/nts-retail-uplift/summary/nts-retail-uplift.pdf.

http://stakeholders.ofcom.org.uk/binaries/consultations/nts-retail-uplift/summary/nts-retail-uplift.pdf�

http://stakeholders.ofcom.org.uk/binaries/consultations/nts-retail-uplift/summary/nts-retail-uplift.pdf�


them back.66

More recently, commercial arrangements to support zero rating to DWPs benefit claim line provide a working model which other public bodies could follow.

147. In the case of utilities, similar options are potentially available within the current framework. However, the broader issue of social responsibility towards vulnerable groups of utility customers is one for the respective utility companies and their regulators in the first instance. It would not be appropriate for Ofcom to require mobile OCPs to cross-subsidise customer service in the utilities.

66 The then Permanent Secretary to the DWP told the Public Accounts Committee of the House of Commons in October 2008 that: “Our standing instructions are that if anyone asks us to call back then we call back. We are going further than that. We are going to experiment in one of our districts with an automatic call-back system in which we will automatically ask whether they would like us to call them back and see what the impact of that is for both customers and us.”


Annex 2: Consumer detriment 148. Ofcom sets out a summary of five areas of consumer detriment at Table A2.20.

These all stem ultimately from the prior analysis of market failure and consequent consumer impacts discussed at Annex 1 above. Vodafone’s general reservations about Ofcom’s analysis and the empirical basis for it thus apply also to Ofcom’s high level taxonomy of detriments.

149. Ofcom then notes that some of the detriments it identifies are easier to quantify than

others. It therefore focuses on a single aspect of detriment to produce an indicative estimate of value, suggesting that this must be a conservative estimate because it only accounts for part of the detriment Ofcom has identified.

150. The aspect of detriment Ofcom seeks to quantify is the impact on consumer welfare

due to overestimation of NGC prices. The intuition behind Ofcom’s modelling approach is simple enough. Consumers think NGC prices are higher than they really are. If they understood the true price, they would realise they are less expensive than they think and make more or longer calls to them as a result, expanding output. The amount by which output is expanded, times the difference between perceived price and that actually prevailing, represents the welfare gain potentially available if price mis-perception is fully corrected.

151. Ofcom suggests at A2.232 that this estimation is likely to be conservative because it

assumes that pre-existing prices are optimal, whereas Ofcom suggests they may in fact be ‘too high’. The force of this point clearly depends on the extent to which prevailing prices do not reflect consumer preferences. As noted in Annex 1 above, Ofcom fails to demonstrate that this is the case. Merely noting that NGC prices are above geographic call prices does not, in itself, establish that they are ‘too high’.

152. Clearly, unless Ofcom can say by how much observed prices exceed optimal

prices, the extent of any alleged conservatism cannot be measured. However, given that Ofcom estimates that consumers overestimate NGC prices by approximately five times, it may be reasonable to assume that correcting (or indeed merely reducing) price misperception is likely to have a bigger effect than any marginal change in the underlying pricing itself. For example, if the prevailing price for a particular NGC call is 20ppm and the perceived price £1ppm, correcting the 80ppm difference between perception and reality might be expected to make more difference than a marginal change in the actual price, from 20ppm to 18ppm, say.

153. Ofcom also notes an important qualification on its general assertion that its estimate

is conservative. Ofcom’s methodology implicitly assumes that the price misperception is completely eliminated. This may not be realistic in practice, however. Earlier Ofcom evidence confirms that consumers typically overestimate call prices for all call types. Even if the degree of misperception is assumed to be greater for NGCs than for other call types, it is not clear that it is realistic to completely eliminate call price misperception, whatever transparency measures are employed. This is further supported by the fact that price misperception can only be completely eliminated in a situation where there is widespread interest in what the price is; whereas Ofcom’s research seems to demonstrate that, whilst many


consumers do not appear to know what NGCs prices are, many seem not to care67

. To this extent, Ofcom’s estimation cannot be said to be conservative.

154. It is important also to note that although Ofcom has some empirical basis for its estimates of price over-estimation, it does not appear to have any empirical basis for the modelled demand function used to derive the welfare impact estimate. Rather, this is based on pure assumption.68

155. This is a potentially significant limitation, and Ofcom concedes that any estimate derived on this basis is unlikely to be precise. Nevertheless, Ofcom states that its estimate is likely to be conservative and that its analysis provides support for its view that the current consumer detriment is likely to be substantial.

156. Accepting that estimation inevitably results in figures which are not ‘precise’, it is still

legitimate to note the extent to which estimates are dependent on untested assumptions. This must bear on the degree of confidence that resulting estimates are ‘in the right ball park’.

157. In this particular case, there is an element of circularity in Ofcom’s reasoning. If it is

the case that callers respond by consuming more NGC calls as their perception of NGC prices falls, output will expand. But the extent of this putative expansion in output is clearly sensitive to the modelled demand function. Put simply, if there is a big demand response to a change in price perceptions, the welfare increase will be big. If there is only a small increase, however, the welfare increase will be small. If there is no demand response, customers will have a more accurate perception of prices but do not change their behaviour so there is no calculable increase in welfare within this methodology.

158. These are ultimately empirical matters, and may be difficult to calibrate precisely.69

However, Ofcom does have some qualitative evidence on consumer propensity to call NGCs which suggests consumer decisions about whether or not to call particular NGCs is influenced by other factors than perceived price, and may therefore be relatively insensitive to price variation (in this case perceived price variation) within quite a wide range. To the extent price plays a part, it may be that price perceptions simply serve to segregate customers into price sensitive and price insensitive in relation to particular types of call. Those who are price insensitive may not change their calling behaviour within quite wide variations in price. Similarly, price sensitive customers may also not change their behaviour in response to a lower perceived price unless/until the price reaches a certain de minimis threshold (e.g. ‘free-to-caller’ in the case of freephone calls).

159. These health warnings are clearly significant; all the more so given that this modelling approach is Ofcom’s only attempt to quantify the extent of consumer

67 For example at flow-chart 3.7 in annex 4 ‘Non-Geographic Call Services Review – Research Document’ 68 For further detail on Ofcom’s numerous modelling assumptions see footnote 305 on page 189 of the consultation document. 69 Economists sometimes employ linear or constant elasticity assumptions for ease of mathematical tractability but this does not imply anything about how well such assumptions represent real world elasticitiy for the product or service in question. Even where empirical observation is used to estimate elasticity, this is only valid within the range of price movement for which there is empirical experience and cannot safely be extrapolated outside the previously observed range.


detriment. Other informal measures tell a different story. For instance, the complaint volumes Ofcom reports to its advisory team (OAT) are tiny in comparative terms relative to the top sources of complaint reported on in Ofcom’s draft annual plan.

160. Other Ofcom measures show the impact of Ofcom not interfering with retail prices

and not imposing transparency solutions which fundamentally affect market dynamics, most notably its annual communications market reports showing falling prices, rising usage and high satisfaction levels in the mobile sector. Any perceived benefits of regulatory intervention should be weighed against the current consumer experience in the mobile market and Ofcom should question its ability to improve on market outcomes for consumers.

161. One intriguing feature of Ofcom’s calculation, however, is that the current consumer

detriment Ofcom estimates is overwhelmingly concentrated in the fixed sector which contributes £497m to the £563m total compared to a mere £66m for mobile. It follows that the maximum potential benefit available to mobile consumers, even if intervention completely eliminated any gap between actual and perceived prices, is far less than that potentially available to fixed consumers.

162. This is a rather different picture from that painted elsewhere in the consultation

document which seeks to suggest that mobile consumers in particular suffer detriment because of prices that are ‘too high’ and do not reflect consumer preferences. We note that Ofcom attempts to rationalise this by suggesting that it is higher actual mobile prices that are responsible for ‘polluting’ price perceptions on the fixed side. In particular Ofcom suggests that the fact that 080 calls are not generally free from mobile must be behind the fact that fixed line customers are unsure about the cost of 080 calls from fixed lines “even though such calls are and have always been free”.

163. Ofcom provides no evidence to support this conjecture, however, and fails to

consider other more plausible explanations. Perhaps the most obvious explanation is that 080 prefixed numbers look superficially similar to other (chargeable) 08 prefixed numbers in the same way that 070 personal numbers are easily confused with 07 prefixed mobile numbers.

164. Another intriguing feature of Ofcom’s analysis here is that to the extent there is

indeed a welfare gain to be had from correcting price misperceptions (overestimation) it does not require any change to actual prices at all, only to price perceptions. Indeed, as noted, given the magnitude of overestimation Ofcom assumes, correcting price misperceptions may have a bigger payoff in terms of demand response than any (smaller) change in actual prices.


Annex 3: Implementation issues 165. This annex briefly considers some of the practical implementation issues connected

with unbundling. 166. Unbundling – i.e. disaggregating call prices into separate access and service

charge elements – would represent a major change to current practice which current billing systems are not set up to accommodate. There are numerous challenges, but the main one critical to any version of unbundling is accurate pass through of the service charge together with the overlay of the correct access charge through all relevant wholesale and retail billing systems.

167. The practical options for meeting this requirement will require detailed investigation

and scoping prior to any formal regulatory mandate in order to establish likely costs and timescales. Such an exercise is simply not possible at this stage. However, at a high level it is apparent that costs and timescales will be a function of the degree of complexity that needs to be supported.

168. Complexity has a number of dimensions. We consider three of the principal

dimensions below:

• Number of price points • Unitisation and charging models • Price changes – method, frequency and extent of permissible revision

Number of price points 169. Currently there are many more wholesale price points than retail price points. For

example, there are around 80 wholesale price bands for 09 prefixed PRS which Vodafone collapses to just 8 at retail level.70

Similarly, with 08 prefixed numbers there are around 80 wholesale price points which Vodafone generally simplifies considerably at retail level. For 118 DQ services there over one hundred different wholesale charge bands, which Vodafone simplifies to just two retail price points.

170. As previously explained in response to Ofcom’s call for inputs, Vodafone has adopted this approach partly in order to be able to present a simple and easily comprehensible structure of prices to customers.71 However, contrary to AM’s comments, there is also a technical constraint on the number of different retail price points that can be supported for NGC numbers.72

70 For consumer tariffs these are 50p, £1, £1.50 and £2, either on a pence per minute or a pence per call basis. 71 http://stakeholders.ofcom.org.uk/binaries/consultations/ngnservices/responses/vodafone.pdf 72 AM states on page 2 of its October 2010 feasibility study that: “Where operators choose to bundle non-geographic number ranges together under a single retail price point, as is common in the mobile sector, this is not the result of any technical constraint on the part of the respective billing systems.” As explained further below, while it is true that retail pricing decisions are partly a matter of commercial choice it is not the case that there are no technical constraints.


171. ********************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************

172. ********************************************************************************************

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Unitisation and charging models

******************************************.

173. There are currently many different unitisation models in operation on NGC number ranges.74 At the most basic level is the distinction between time based and event based charging. However, not all time based charging is on a linear per second basis. Furthermore pence per minute (ppm) call charging is often coupled with minimum call charges or call set-up charges. Directory Enquiry (DQ) wholesale charging structures are often more complex with ‘thru connect’ calls or other add-on services charged at a premium to the basic DQ service, but not necessarily at the same rate as the initial request for the number.75

174. Complex charging structures of this kind do not enable easy reconciliation using metered call volumes alone and may, in effect, require a wholesale interconnect billing capability to identify accurately the interconnect cost of an operator, decomposed into the service charge per unit and the number of units of charge. It is not clear to what extent such a capability exists universally today, particularly among smaller operators who may not require such capability currently.

73 ************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************** 74 Of the 81 wholesale price points for 09 prefixed numbers, 42 are ppm, 22ppc and 17 some combination of the two. While the majority of 08 prefixed numbers are ppm based, 9 are hybrid ppm/ppc. DQ structures are generally more diverse. The two largest providers combine ppc and ppm pricing elements. 75 There is a general question about how complex charging structures of this kind sit with Ofcom’s recommendation that access charges should only ever be time based. Further complexity would also arise in the event of any requirement for pre-call announcements giving charging advice to be played to the caller free of charge in terms of both access and service charge. These issues are not considered further here, however.


175. While Ofcom seems to favour some very high level limits on maximum service charges for business rate and premium rate services, if service providers otherwise have complete discretion to alter both the level and the structure of charges within those limits, the practical effect is to create potential for an almost unlimited number of price points and unitisation combinations.

176. Whereas at present retail billing systems do not necessarily need to take account of

this variability, in order for the pass-through methodology to function, every retail billing system of every operator would need to be able to mirror the charging variation offered by every SP/TCP. At the extreme therefore each individual NGC number might require its own unique tariff category in all billing systems.

177. Even assuming the capability to recognise this proliferation of rates and structures

exists or could be developed, allowing SP/TCPs unfettered scope to set the structure as well as the level of any service charge would cause substantial implementation difficulties and scope for billing error. Yet accuracy in implementation is surely critical to the success of Ofcom’s unbundled remedy, as well as being required in order to maintain the necessary billing accreditation under GC11.

Price changes – method, frequency and extent 178. It is thus potentially a major undertaking simply to map and disaggregate the

possible range of call charges into separate access and service charge elements on a one-off basis in each operators’ retail billing systems. But this difficulty can only be magnified if the service charge rate or structure for a given number is then allowed to change over time.

179. This is of serious concern because any change by any SP would need to be

cascaded through all relevant wholesale and retail billing systems industry-wide. This would either create an enormous monitoring overhead for all OCPs (wholesale and retail) or require an industry wide automated solution (potentially similar in scope and complexity to the ill-fated decision to mandate use of an all call query central database approach for number portability).

180. The risk of billing error would grow exponentially, as would the cost of billing system

maintenance if the unbundled world envisaged by Ofcom resulted in the service charge of every NGC number being capable, at minimal notice, of being amended in rate and charging methodology.

181. Before concluding that SPs should be afforded wide discretion to design and modify

pricing levels and structures, therefore, it is necessary to consider the likely incremental costs and benefits of such an approach. While the costs are likely to be considerable, it is not clear that the same can be said of the incremental benefits to consumers.

182. Ofcom could, however, potentially simplify matters (in keeping with the title of the

consultation) by establishing a smaller number of stable price points and structures for use on particular number ranges. Service providers who wished to vary the


price of their service would be able to do so in this model by moving to a different number corresponding to their preferred pricing. However, the AM survey of SPs suggests that many SPs value cost/revenue stability and certainty above the ability to control retail charges exactly. This simplified model would provide both certainty and control. While it would, by definition, not provide the same degree of flexibility as in the alternative model where service charges are infinitely variable, it is not clear that this loss of flexibility would result in significant consumer detriment.76

One size may not fit all

183. Vodafone recognises that this model of price competition may not be attractive to all SPs, some of whom may value the freedom to vary their service charges substantially without changing number. In some cases, number migration may be limited by scarcity as well as sunk investment in promotion, particularly in the case of DQ. However, it is not clear that the particular features of DQ are typical of all NGC ranges and SPs. Nor is it clear to what extent DQ providers would actively compete on price for the benefit of consumers even if they had the freedom to do so.

184. Competition in DQ services seems to be driven to a large extent by advertising

promotion with pricing information relegated to ‘small print’. Moreover, while DQ providers do not have complete control over retail pricing, those with influence have used that influence to increase their charges substantially in the face of a market that is in long term decline due, among other things, to competition from other platforms.77

In fact, leading DQ service providers themselves offer on-line services. On line alternatives to voice DQ are increasingly accessible with the expansion of smartphone penetration, so this trend seems likely to continue.

185. Ofcom should take care, therefore, not to let the tail wag the dog, by designing an entire regulatory regime for NGCs purely to suit the interests of a small and unrepresentative subset of SPs. It may be that different approaches are needed to accommodate the particular characteristics of DQ, but this should not distort the overall approach to implementing an unbundled remedy.

76 Especially bearing in mind the scope for abuse of flexibility by unscrupulous SPs, advertising a number on one basis and then changing that basis substantially without alerting callers. 77 Although there is a large number of 118 prefixed DQ numbers allocated to SPs (437 are listed as active on BT’s Carrier Price list), the market is highly concentrated. The top four numbers between them account for roughly 90 percent of all call volumes. Of this, the top two together account for nearly 80 per cent and the top one alone for 60 per cent.


Annex 4: Legal analysis 1. Introduction and summary 1.1 This annex seeks to examine the extent to which the provisions of the harmonised

pan-European regulatory framework governing the communications sector (the Common Regulatory Framework or “CRF”) provides authority for some of the regulatory options under consideration in Ofcom’s consultation document. Specifically, we consider below the extent to which it is possible for Ofcom to consider the imposition of retail price caps for calls to non-geographic numbers where there is no evidence that a retail market is not competitive.

1.2 Vodafone has previously provided a submission to the consultation issued by the

Department for Business, Innovation and Skills (“DBIS”) in relation to the transposition of amendments to the CRF. In that submission, we expressed our reservations about the claim of DBIS that the amendments to the CRF provided National Regulatory Authorities (“NRAs”) with the ability to impose retail price controls in relation to calls to certain number ranges. This is because obligations may only be attached to the “use” of the number range. In this case, originating operators are not “users” of non-geographic number ranges. Accordingly, undertakings operating at the wholesale level78

1.5 Ofcom’s powers in respect of consumer transparency are therefore limited to those prescribed by the provisions of the Universal Service Directive in the CRF (specifically relating to publication of tariffs).

may be subject to obligations where Ofcom is able to demonstrate that such measures are objectively justifiable and consistent with the principle of proportionality. We continue to maintain this position for the purposes of our response to Ofcom’s consultation.

1.3 Accordingly, we would query whether Ofcom is indeed in a position to impose retail

price controls for calls to non-geographic number ranges (whether in the form of an absolute price cap or regulation of the level of ‘access’ charge levied by an originating operator) absent a finding that the retail access market is not effectively competitive.

1.4 An alternative interpretation of the CRF (in its current or revised form) would

potentially provide Ofcom with a general power of price regulation, which clearly was not intended by the Community legislature. In the unlikely event that this were the case, Ofcom would still be constrained by existing obligations in the CRF requiring that any exercise of this power be objectively justifiable and proportionate. In this case, for reasons discussed further below, Ofcom has been unable to demonstrate that it would be able to satisfy these requirements if it were to mandate a retail price control.

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78 In this case, the undertakings operating at the wholesale level would be those terminating and hosting non-geographic number ranges or service providers contracting with undertakings hosting the number ranges. 79 In the UK, these are currently given effect via the General Conditions and principally General Conditions 10 and 14.

Measures that potentially promote transparency, whilst leaving operators with the ability to set their pricing freely in response to market conditions would therefore be more likely to be consistent with


the ethos and objectives of the CRF. However, such measures should still be compatible with the principle of proportionality.

2. No authority for the imposition of retail price controls where retail markets are

competitive 2.1 We note that Ofcom considers, in its consultation, the possibility of retail price

controls in the following circumstances:

(i) the imposition of a maximum retail price for calls to non-geographic number ranges (which is a maximum price that includes the charge levied by the terminating operator or service provider); and

(ii) regulation of the level of the ‘access’ charge in the scenario where Ofcom

requires the charges for calls to non-geographic numbers to be ‘unbundled’. Under this proposed policy option, the originating operator and the service provider are to levy separately an ‘access’ and a ‘service’ charge.

Our analysis of the legal basis below for the imposition of retail price controls applies to both of the above scenarios. Both courses of action would involve a regulator effectively constraining the ability of an undertaking to determine its retail charges.

2.2 Ofcom notes at Annex 4 that the provisions of the CRF, and in particular, the

Authorisation Directive, have been revised to enable NRAs to specify tariff principles and maximum prices in connection with the designation for which a particular number may be used. DBIS has, as Ofcom further notes, recently consulted about how these amendments are to be transposed into UK law.

2.3 The approach previously articulated by DBIS is predicated on the assumption that

the revised version of the Authorisation Directive empowers NRAs to impose maximum retail prices on originating operators for calls to non-geographic number ranges. Ofcom also contends at the outset of its consultation document that the revised CRF empowers it to impose “price limits” for calls to “particular number ranges”.80

2.4 Moreover, we note that Ofcom itself appears to be uncertain about its ability to impose retail price controls when considering whether it is able to regulate the level of the access charge levied by originating operators (in the context of its proposed unbundling solution).

With respect, and as we have previously outlined in our response to the DBIS consultation, this line of argument flows from a misinterpretation of the revised Authorisation Directive and a failure to take into account the wider objectives and approach of the CRF.

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80 Ofcom, Simplifying Non-Geographic Numbers, Consultation Document (“NGN Consultation”), 16 December 2010, paragraph 1.25 81 NGN Consultation, Annex A.5.78

We would agree with the doubts that Ofcom expresses. However, there is no substantive difference between a regulated access charge and a maximum (inclusive) retail price: both involve Ofcom prescribing the level of a retail charge that would otherwise be freely determined in a competitive market. Consequently, Ofcom’s doubts its ability to regulate the level of an access charge


levied by originating operators are equally relevant to any claim that Ofcom is able to impose a maximum retail price (inclusive of the service charge) for calls to non-geographic number ranges.

2.5 It is therefore useful to set out the legal framework governing the regulation of

numbering in the first instance: Article 6(1) of the Authorisation Directive stipulates:

“The general authorisation for the provision of electronic communications networks or services and the rights of use for radio frequencies and rights of use for numbers [emphasis added] may be subject only to the conditions listed respectively in parts A, B and C of the Annex. Such conditions shall be objectively justified in relation to the network or service concerned, non-discriminatory, proportionate and transparent.” The current version of Annex C to the Authorisation Directive, which specifies the conditions that may be attached to the use of numbers, states that one of the conditions may be: “1. Designation of service for which the number shall be used, including any requirements linked to the provision of that service.” This provision is to be revised by the revised Annex C in the amended CRF as set out below. It is the contention of DBIS that this new text would enable NRAs to impose retail price controls: “Designation of service for which the number shall be used, including any requirements linked to the provision of that service and, for the avoidance of doubt, tariff principles and maximum prices that can apply in the specific number range for the purposes of ensuring consumer protection in accordance with Article 8(4)(b) of Directive 2002/21/EC (Framework Directive).”

2.6 Reviewing the above text, what is consistent across both the existing and the new

provisions of the Authorisation Directive is that NRAs are only able to impose conditions to the “rights of use” of numbers. Furthermore, where conditions are to be imposed by an NRA, these conditions must be capable of objective justification, be non-discriminatory and satisfy the well-established test of proportionality.

2.7 In the case of non-geographic numbers, these numbers are allocated by Ofcom to

undertakings that wish to host them for third party service providers and terminate calls destined for these number ranges. It is also arguable that the service provider customers of terminating operators use non-geographic number ranges for the purposes of the Authorisation Directive. Accordingly, these are the undertakings that have been granted “a right of use” for the purposes of the Authorisation Directive. Plainly, originating operators do not have a right of use of the number range in this instance (unless they also host numbers for third parties and terminate calls to these number ranges). Rather, originating operators are in the position of accepting the terms of interconnection with terminating and hosting operators where they wish to enable their subscribers to call these number ranges.


2.8 To the extent that the revised Authorisation Directive extends (or clarifies) the range

of conditions that may be attached to the rights of use of numbers, it is clear that any new conditions can only be imposed at a wholesale and not the retail level of trade. Interpreting the provisions of the revised Authorisation Directive in this way means that in the case of non-geographic numbers NRAs are able to apply tariff principles and maximum prices at the wholesale level i.e. the charging arrangements put in place by undertakings engaged in hosting ranges and terminating calls and/or their service provider customers. In Ofcom’s ‘unbundling scenario’, it would therefore potentially be open to Ofcom, pursuant to the provisions of the Authorisation Directive, to consider regulation of the level of ‘service charge’82

“…the national regulatory authority concludes that obligations imposed under Directive 2002/19/EC (Access Directive), or Article 19 of this Directive would not result in the achievement of the objectives set out in Article 8 of Directive 2002/21/EC (Framework Directive)…”

, subject to the requirements of objective justification, non-discrimination and proportionality.

2.9 Such an interpretation is also consistent with the wider objectives and ethos of the

CRF. The pan-European harmonised framework makes clear that NRAs are only able to intervene in markets following a review of a defined relevant market and a finding that the market concerned is not functioning effectively. In practice, this means that the NRA must identify that one (or more) undertakings is in a position of Significant Market Power (“SMP”) (a concept equivalent to dominance in competition law). For retail price controls to be imposed, the NRA must therefore find that the retail access market is not effectively competitive:

“…as a result of a market analysis carried out in accordance with Article 16(3) a national regulatory authority determines that a given retail market identified in accordance with Article 15 of Directive 2002/21/EC (Framework Directive) is not effectively competitive…national regulatory authorities shall impose appropriate regulatory obligations on undertakings identified as having significant market power on a given retail market in accordance with Article 14 of Directive 2002/21/EC (Framework Directive).” Moreover, even when such a finding is established, retail price controls are to be imposed only where wholesale measures are found to be ineffective in promoting retail competition. In essence, retail price controls are a remedy of the last resort. The CRF provides that such controls are to be imposed where:

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2.10 Indeed, Ofcom itself expresses its doubts about the scope of the powers conferred upon it by the Authorisation Directive when considering whether to regulate the level of access charge (for calls to non-geographic number ranges other than those with the prefix 080) levied by originating operator. It appears to concede that the

82 We note that in the NGN Consultation Document, Ofcom defines the service charge as being equivalent to the wholesale termination charge. (Annex A5.202) 83 Furthermore Recital 26 of the Universal Service Directive declares that: “…national regulatory authorities should have powers to impose, as a last resort [emphasis added] and after due consideration, retail regulation on an undertaking with significant market power.”


revised Authorisation Directive cannot be read in a way to enable it to intervene simply where it objects to the way in which prices have been freely determined by undertakings operating in a competitive market:

“…it is not clear whether there is a general concern about the level of telephony

prices overall – rather a major concern is the balance of prices…in short, it is arguable whether the revised EU Framework provides an adequate legal basis for Option 6 [the imposition of a maximum retail price for the access charge].”84

2.11 Vodafone would concur with Ofcom’s reservations about the scope of the powers contained in the Authorisation Directive. Indeed, were the contrary view to be adopted, this would mean that Ofcom would be able to arrogate to itself a general free ranging power of price regulation. Taken to its logical extreme, an NRA could theoretically argue that where a mobile operator had been granted the “right to use” any number range, the NRA would be able to attach retail pricing obligations to the use of that number range (subject only to the provisions of Article 6(1) of the Authorisation Directive set out above). Had this been intended by the legislature, it would have been clear on the face of the Authorisation Directive.

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2.12 In the case of the UK, there is no finding that the retail access and call origination market is not effectively competitive, nor is there any evidence indicating that this is the case. Recent reviews of the retail mobile market by both Ofcom (in its Mobile Sector Assessment)

86 and the European Commission (in the context of the recent merger between T-Mobile UK and Orange UK)87 have found this market to be characterised by strong competition. In light of the above analysis and Ofcom’s own acknowledgment that its ability to impose price controls is clearly constrained absent a finding of SMP, any proposal to regulate retail charges for calls to non-geographic charges is in breach of the CRF.88

2.13 Accordingly, any measures that Ofcom contemplates in respect of the wholesale arrangements (i.e. the service charge in Ofcom’s unbundling scenario) for non-geographic numbers could be within the scope of the Authorisation Directive subject to the requirements of proportionality. As noted in the introductory section, Ofcom’s ability to act in respect of the retail market is clearly confined by the provisions of the Universal Service Directive.

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84 NGN Consultation, Annex A.5.78 85 The European Commission’s regulation governing the levels of retail and wholesale international roaming charges levied clearly contravened the principles of the CRF in that retail price controls were imposed where there was no analysis of retail markets or finding of market failure in these markets. The European Commission was forced to admit on the face of the Regulation that its intervention constituted a clear departure from the CRF: “…in particular the Framework Directive, should therefore be amended to allow for a departure from the rules [emphasis added] otherwise applicable, namely that prices for service offerings should be determined by commercial agreement in the absence of significant market power…” EC Regulation No 717/2007, Recital 12 86 See Ofcom, Mobile Evolution: Ofcom’s mobile sector assessment, 17 December 2009, paragraph 3.23 87 Case no. COMP/M.5650 T-Mobile/Orange [2010] paragraph 53 88 It should be noted that Ofcom’s current proposal that originating operators will be required to zero-rate calls to 080 numbers is an effective retail price control as Ofcom concedes at paragraph 6.116 of the NGN Consultation. 89 For example, under Directive 2002/22/EC, on universal service and users' rights relating to electronic communications networks and Services Article 21(1) and (2), Member States can act to ensure that consumers are provided with up-to-date and transparent information on retail tariffs.

Once again, any measures under consideration


in relation to retail tariff transparency must still be capable of satisfying the principle of proportionality, as we discuss in further detail below.

3. Any intervention must be objectively justifiable and proportionate Legal framework 3.1 Even if the revised Authorisation Directive were capable of some other construction,

any imposition of a price control on originating operators would, in any event, need to be capable of objective justification and consistent with the principle of proportionality.

As noted earlier, these obligations are stipulated by Article 6(1) of the Framework Directive and have been given effect by section 60(2) of the Communications Act 2003 (the “Act”) relating to modifications of the National Telephone Numbering Plan by Ofcom. More generally, Ofcom has a duty under section 3(3) of the Act to ensure that its actions are transparent, proportionate and consistent with the principles of best regulatory practice. The requirement to promote the interests of consumers, in particular through competition, is also a primary objective in section 3 of the Act that should guide Ofcom when undertaking its duties.

3.2 In practice, this would mean that a decision to impose a price control in respect of

calls to any non-geographic number range would:

(i) need to be clearly reasoned and reinforced by clear evidence; (ii) demonstrate that the course of action is consistent with the primary duties of

the NRA; and (iii) explain why a less intrusive or burdensome course of action would not

realise the objective of the NRA. 3.3 We consider each of these limbs of the statutory test below and apply them to the

facts of this case. In brief, our conclusion is that any proposal to impose retail price caps – whether as an inclusive maximum retail price or a maximum access charge – would be highly unlikely to satisfy the above criteria for the reasons that are discussed below.

A. Objective justification 3.4 For the purposes of this consultation, there appear to be three salient issues that

need to be examined to determine whether prescriptive retail pricing obligations can be objectively justified for the purposes of the Authorisation Directive and Ofcom’s wider obligations under the Act. These are:

(i) the identification of a clear market failure; (ii) the consequences of dictating consumer preferences in terms of a

rebalancing of retail tariffs; and (iii) the extent to which price controls are likely to be distortive of competition.


Consideration of each of these heads reveals that there is no evidence in existence that would support an argument in favour of retail price controls.90

No evidence of market failure

3.5 Ofcom appears to suggest that the way in which calls to non-geographic number

ranges are currently priced is indicative of a market failure. This is based on the assertion that call charges currently do not reflect consumer preferences. This is a surprising finding given that undertakings operating in a competitive market would be seeking to structure their tariffs in a way that reflected demand conditions and consumer preferences. Indeed, Ofcom’s claim is expressly contradicted by its own market research which reveals that:

“the majority of callers would place little emphasis on the price of these calls when

switching supplier.”91

“The survey evidence from the 2010 Consumer research presented in Annex 2 suggests that the majority of callers are opposed to driving down non-geographic call prices if the consequence is an increase in the price of other telephony services.”

3.6 Ofcom also recognises the relative lack of weight attached to prices for calls to non-

geographic numbers when it considers the scenario where existing tariffs are rebalanced (i.e. call charges to non-geographic numbers are reduced and whilst tariffs for other voice and data services are increased):

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3.7 Moreover, as Vodafone has noted in the context of its intervention in BT’s appeal

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against Ofcom’s determination of a series of disputes between BT and a number of mobile operators about BT’s non-geographic termination charges, some mobile operators have recently developed new tariff propositions for calls to non-geographic number ranges to the minority of consumers who attach greater importance to the level of non geographic call charges. In Vodafone’s case, a “bolt-on” proposition was launched in June 2010 enabling postpay subscribers to include calls to 080/0845/0870 numbers within their contractual bundle for an additional monthly fee of £5. Vodafone notes that Ofcom has failed to highlight this development in its summary of charges levied by mobile operators for calls to 080 numbers (described at paragraph 6.110).

3.8 Further, as we discuss at section 2 of our response, in the specific case of number ranges that are of social importance - such as helplines on the 080 number range - it is important to note that mobile operators already voluntarily zero-rate calls to particular 080 number ranges.

3.9 Additionally, the vertical externality to which Ofcom refers where originating

operators do not appear to take into account the interests of service providers when

90 We therefore consider that the current proposal to require that calls to 080 number ranges are to be free-to-caller would be incompatible with the CRF. 91 NGN Consultation, Annex A2.146 92 NGN Consultation, Annex A.5.81 93 BT v Ofcom Case number 1151/3/3/10 and linked cases


setting prices is not borne out by commercial reality. As Ofcom will be aware, and as is noted in paragraph 17 of our response, service providers have recently negotiated directly with originating operators to secure zero-rated calls to 080 numbers. Ofcom will also be aware of the recent discussions regarding a pilot scheme with the Telephone Helplines Association, pursuant to which calls to some helplines and call centres will be zero-rated in return for a commercially negotiated outpayment from the service providers. It would, of course, be open to other service providers entering into similar negotiations if they attach particular importance to the level of the retail charge levied by an originating operator.

Retail price controls will lead to a rebalancing of other retail tariffs that will not be welfare enhancing 3.10 Additionally, as we examine in section 2 of our response, a retail price control would

potentially lead to a rebalancing of tariffs since originating operators may well be forced to increase other elements of the basket of services supplied to consumers to recover lost revenues and margins flowing from a regulatory intervention. It is doubtful, given the evidence that Ofcom has obtained about consumer preferences in the course of its review of non-geographic number ranges, that a solution resulting in consumer preferences being dictated or influenced by the regulator is consistent with Ofcom’s primary duty to promote the interests of consumers.

Retail price controls create the risk of distortions to competition 3.11 The imposition of price caps may well lead to a distortion in competition.

Theoretically, originating operators would be able to compete under price ceilings imposed by Ofcom. However, price caps of this kind are, as Ofcom recognises in the consultation document94 in reality likely to act as a focal point around which originating operators would be likely to cluster.95 As the European Commission has found in the case of international roaming charges, the imposition of price caps distorts the way in which prices are set and serves to invite pressures for further intrusive and prescriptive price regulation.96 Additionally, as Ofcom rightly notes97

94 NGN Consultation, paragraph 1.27

, it is also duty-bound to take account of its over-arching primary duties in section 3 of the Act when considering a particular course of action. It is difficult to conceive of how an outcome that distorts pricing decisions previously freely made in a competitive market and inhibits competition could be deemed to be consistent with Ofcom’s statutory duties.

B. Proportionality

95 See Office of Fair Trading, Completing Competition Assessments in Impact Assessments: Guidance for Policy Makers, August 2007, OFT876, which also notes the potentially distortive effects on competition resulting from price caps. 96 When the European Commission proposed the extension of the regulation governing international roaming charges, its first draft of the second roaming regulation noted: “…data indicates that retail and wholesale prices are clustering at or close to the limits set by Regulation (EC) No 717/2007, with only limited competition below those limits.” See Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 717/2007 on roaming on public mobile telephone networks within the Community and Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services, Recital 5 97 NGN Consultation, paragraph 2.34


3.12 Moreover, an approach involving the setting of price controls for calls to non-

geographic number ranges would be at odds with the principle of proportionality on the facts of this case. The principle of proportionality is enshrined in both EC and English law. In considering how this principle is to be interpreted for the purposes of section 3 of the Act, the Competition Appeal Tribunal (the “CAT”) has explained:

“The principle of proportionality requires that any action by OFCOM shall not go beyond what is appropriate and reasonably necessary to achieve their stated objectives. Also, where a choice exists between equally effective measures that might be adopted to address a problem, recourse should be had to the least onerous measure that will achieve the stated aims.”98

Price controls at the retail level would be disproportionate

3.13 Applying the test of the CAT in this case, Ofcom’s most discernible objective in the

consultation document appears to be the need to address a perceived lack of transparency of the levels of charges for calls to non-geographic number ranges. As has been discussed above, Ofcom has not discharged the evidential burden upon it in respect of its claim that current retail prices are indicative of a market failure that justifies any form of regulatory intervention.

3.14 To the extent that Ofcom’s stated objective is to improve transparency of charges

for calls to non-geographic number ranges, the use of price controls would, on any reasonable analysis, clearly go far beyond what is necessary to realise that objective. The least onerous and prescriptive course of action would be to leave originating operators to continue to determine their origination charges freely, subject to an appropriate transparency obligation.99

3.15 However, as discussed in section 3 of the main body of our response (and further at Annex 3), the specific measures currently being contemplated by Ofcom to enhance transparency in this case (i.e. the de-coupling of the ‘access’ charge from the charge levied by service providers) may still raise material technical challenges

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4. Concluding remarks

; it would appear that Ofcom needs to investigate further, through a cost-benefit analysis, whether its proposed approach to transparency would be compatible with the principle of proportionality.

4.1 We therefore consider that measures at the retail level that simply require

originating operators to provide their subscribers with information about their 98 Vodafone v Ofcom [2008] CAT 22, paragraph 51 99 For example, in the case of 080 numbers, originating operators would be left free to zero-rate those socially important 080 numbers and service providers offering commercial services to consumers would retain the flexibility to negotiate directly with originating operators where they attach importance to the level of the charge. Where originating operators had freely agreed to zero-rate calls or where calls were to be zero-rated pursuant to a commercial agreement, service providers would be able to advertise clearly to consumers the level of the charge that would be payable for originating a call to their individual number. 100 Section 3 also discusses how the implementation of the ‘service’ charge is likely to create challenges from the perspective of technical implementation. Again, these are issues that will require further investigation before Ofcom is able to proceed.


charges for calls to non-geographic number ranges and do not seek to inhibit the ability of originating operators to determine the level of their charges should be less likely to be inconsistent with the CRF and Ofcom’s duties under the Act. Nevertheless, we would urge Ofcom to ensure that a thorough examination of the costs and benefits of its unbundling approach is undertaken and is subsequently the subject of consultation. Both Ofcom and industry stakeholders will need to be satisfied that the measures being proposed are in accordance with the principle of proportionality.

4.2 However, and for the avoidance of doubt, any notion that retail price controls could

be regarded as a ‘fall-back’ or alternative policy option is not sustainable for all the reasons set out above. There is accordingly no legal basis for any claim that Ofcom could impose such controls if it were to conclude subsequently that its current ‘unbundling’ solution for calls to non-geographic number ranges proved to be ineffective in promoting increased transparency.


Annex 5: Consultation questions Questions on the scope, rationale for the review and framework for analysis These questions relate to the analysis set out in Section 2 and Annex 1: Q2.1 Do you consider that the scope for this review, set out above, is appropriate? If not how would you suggest that it should be modified and why?

Vodafone agrees that it is sensible to include all NGCs within the scope of the review, given the problems that have been created by previous piecemeal interventions focussing narrowly on individual number ranges (in particular, 0870). However, we underline our previous comment in the call for inputs that the range of services supported behind various NGCs are very different from one another and that a single ‘one-size-fits-all’ approach to all NGCs may not be appropriate. We also note that mobile short codes do not exhibit the problems Ofcom claims to identify with interconnected voice services using NGCs. It is appropriate, therefore, to exclude these from the scope of the present review. While we presume this question is mainly directed at which number ranges should be within scope, we note more generally that despite the extraordinary volume of material published in the consultation document it does not contain any formal competition analysis. Whether or not this is a strict requirement, the rigour of an established formal framework for analysis can be useful and allows casual assertions e.g. about market failure to be tested against the available evidence.

Q2.2 Do the summary of the history of NGC services and the rationale for this review capture all the essential concerns which this review should be seeking to address? If not, please set out those issues which you consider are not being considered and why these should be included in the review at this stage.

We do not entirely agree with Ofcom’s characterisation of history of NGCs or the presentation of concerns. For example, we do not recognise Ofcom’s description of ‘voluntary agreements by OCPs’ to follow the regulated pricing model mandated for BT (by virtue of its dominant position in fixed wholesale call origination). Ofcom’s own evidence suggests that fixed as well as mobile OCPs to not mirror BT pricing exactly. Even to the extent that fixed OCPs do mimic BT pricing, we suggest this has more to do with their need to compete with the former monopoly incumbent in the fixed retail market and/or their own position as NGC terminating hosts than ‘voluntary agreement’. Mobile OCPs compete with one another in a separate mobile access and origination market and do not have a major presence in NGC hosting. We agree that Ofcom’s primary focus should be on consumer rather than producer interests. However, the consumer interest cannot focus narrowly on consumers only as callers (or potential callers) of NGC numbers without considering their interests more generally, notably in relation to the balance of pricing between NGCs


and other calls. Ofcom states that it is also considering SPs as ‘consumers’, but in the event of a trade off between caller and SP interests it will give primacy to callers. We agree with this up to a point but do not believe this approach is carried through in practice where Ofcom has chosen to frame the ‘problem’ very largely from an NGC SP/TCP perspective. We are concerned that Ofcom’s characterisation of consumer concerns and the consumer interest is unduly skewed as a result and does not reflect the real preferences and concerns of consumers as demonstrated by its own consumer survey evidence. Indeed, the present consultation confirms the picture of numerous previous reviews that NGCs as a whole are a low engagement area for consumers and not a source of major consumer concern or detriment. This is a point Ofcom needs to bear in mind, not least to ensure that any regulatory intervention is proportionate.

Q2.3 Do you consider our proposed approach and framework for analysis is fit for the purpose of this review?

No, not entirely. In addition to the concerns noted above, we think Ofcom’s attempt to justify regulation by reference to a hypothetical world in which there is no regulation of NGCs whatsoever is conceptually flawed in this case. Firstly, as previously noted, the current NGC environment is so much a creature of past regulation that the ‘thought experiment’ is unusually difficult to perform. Secondly, the choice is not a binary one between ‘no regulation’ and the new models of regulation Ofcom proposes but between a neutral baseline and various different possible interventions. In other words, the question is not simply is some regulation better than no regulation, but is different regulation better than current regulation and, of the realistic alternatives, which flavour of different regulation (if any) stands to produce the greatest net benefit? Thirdly, the hypothetical ‘no regulation’ baseline Ofcom proposes is not a neutral baseline legally available to Ofcom under the EU common regulatory framework (CRF). For example, Ofcom states at A1.3 that general price publication obligations (i.e. not specific to NGCs) under GC10 would not apply in its baseline scenario, ignoring the fact that obligations of this kind are specifically mandated under the CRF. We are concerned that failure to appreciate these points has skewed Ofcom’s approach towards one in which market failure is simply asserted and then used as a catch all justification for Ofcom’s preferred intervention. This is not an approach well suited to the fulfilment of Ofcom’s duties.

Questions on the assessment of the consumer experience and detriment These questions relate to the analysis set out in Section 4 and Annex 2:


Q4.1 Do you consider that the analysis set out in this Section and in more detail in Annex 2 represents fairly the consumers’ concerns? In particular: does it provide a reasonable assessment of the type and extent of the detriment consumers currently experience? And does it identify all the relevant factors?

We do not consider that Ofcom’s analysis in Section 4 and Annex 2 properly reflects consumers’ concerns in the sense discussed at Q2.2 above. In particular, we think Ofcom risks confusing producer interests with consumer interests and ignores the direct evidence from its consumer surveys that NGCs are a low engagement area for consumers. See also our further comments on market failure and consumer detriment at Annexes 1 and 2 of this response.

Q4.2 In this section and in Annex 2 we set out our views of the main factors that contribute to the current outcomes, specifically the interaction of poor price transparency for consumers combined with poor incentives leading to vertical and horizontal externalities. Do you accept that this analysis is a valid assessment of the incentives of the market participants? Do you consider that the implications for consumers we draw are sound and represent a useful basis for assessing appropriate regulatory responses? If not, how would you categorise the relationships and motivation underpinning consumers and OCPs’ behaviour?

For reasons discussed more fully in the body of this response, we do not entirely agree with Ofcom’s presentation and interpretation of its evidence base. At a high level, Ofcom risks confusing preference by SPs for a ‘free lunch’ with economic demand i.e. willingness and ability to pay. This calls into question Ofcom’s characterisation of the supposed vertical externality market failure. If SPs value retail price certainty, why do they not contract for it? Similarly, if consumers would prefer rebalanced prices, why does the observed pattern persist? Ofcom tells a complex story that attempts to portray the current pattern as ‘market failure’ which, by implication, regulatory intervention can ‘correct’. However, the relevant question is not whether the current pattern is ‘optimal’ in some abstract theoretical sense but whether any post intervention outcome is likely to be better or worse in consumer welfare terms than what it replaced. Ofcom is at risk of assuming the outcome it posits is optimal without any solid empirical basis. The published evidence base provides ample reason to question whether the market failures Ofcom claims to identify are significant in practice. It therefore does little to support Ofcom’s apparent conviction that post intervention pattern would be an improvement. In fact, the available evidence is consistent with OCPs responding to the preferences of their customers as regards relative pricing of NGCs and other services as one would expect in a competitive market. It is also consistent with the observed pattern of SPs not generally caring sufficiently about OCP retail pricing to attach economic value to securing the particular pricing they may ‘prefer’.


Q4.3 We have identified five key areas of consumer detriment as a result of the poor transparency and poor incentives in the market: reduction in demand for NGC, relative prices not reflecting consumers’ preferences; costly avoidance strategies; increased fraud risk and loss of service diversity; and the disproportionate impact these problems have for low income mobile only households when accessing essential services. Do you consider that this represents a comprehensive summary of the impact on consumers? If not, how should it be modified and why?

For the reasons set out above and in the main body of this response, we do not consider that Ofcom’s descriptive analysis provides a coherent, reliable or comprehensive summary of the impact on consumers. We address the main heads of Ofcom’s analysis specifically at Annexes 1 and 2. The principal modifications of approach we would recommend are a) to adopt a more realistic neutral baseline than the hypothetical ‘no regulation at all’ scenario and b) to test theoretical claims about market failure and consumer detriment more thoroughly against the available empirical evidence before relying on them.

Q4.4 Do you consider that our assessment of the state of the market in the absence of ex ante regulation is a reasonable extrapolation of the evidence? If not, why?

Not necessarily, no. As discussed above, the current market is a product of intervention, so complete withdrawal of all regulation is not necessarily realistic or appropriate (or legally tenable under the CRF). Notwithstanding these reservations, an interesting point of comparison is with the evolution of mobile short codes, without regulation, where the problems Ofcom perceives with NGCs are largely absent. Against this background, ascribing perceived problems with NGCs to ‘market failure’ is particularly questionable. Ofcom should also consider the extent to which consumer confusion may in fact be attributable to regulatory failure, through piecemeal and cumulatively incoherent and contradictory interventions. Ofcom also seeks to suggest that the adverse features it currently identifies are getting worse over time and would deteriorate further without corrective intervention. We do not find this analysis compelling. In particular, Ofcom downplays its own role in precipitating change and sowing confusion through tinkering with the regulatory framework and offers an unconvincing narrative account of progressive recent departure from a mythical golden age.

Questions on the assessment of the providers’ experience The following questions relate to the analysis set out in Section 5 and Annex 3: Q5.1 Do you consider that the analysis set out in this Section and in more detail in Annex 3, fairly represents the wholesale relationship and issues in this market? If not, why?


Not entirely, no. In particular, we consider the claimed failure of OCPs to take due account of the ‘preferences’ of SPs due to a vertical externality open to question. It implies, among other things, that SPs adopted numbers on one basis – for example, that freephone would be universally free-to-caller - that has since changed. This is clearly not the case, however. Similarly in relation to so-called local/national rate calls, the concept of a local/national rate has never been meaningful in the mobile context. More generally, while we note the analysis in Annex 3 and agree that relationships are complex, the weight to be attached to individual factors, and the completeness of the factors considered relevant, remains uncertain. It is not clear, therefore, that Ofcom’s more detailed analysis of wholesale relationships supports the summary version presented in Section 5. For example, Ofcom’s apparently firm conclusion that NGC call volumes are significantly depressed due to consumer price uncertainty seems to rest more on a view of retail markets than wholesale relationships, and as discussed elsewhere in this response, is open to question.

Q5.2 Specifically, do you agree with our assessment of the market experience for SPs’, including in hosting markets? Do you agree with our assessment of SPs’ concerns about price transparency and the impact on their incentives? If not, how would you characterise the market from the SPs’ perspective?

We do not entirely agree with Ofcom’s assessment. We note from Analysys Mason’s survey of SPs that some of the so-called SPs surveyed are not in fact end-user customers, let alone ‘consumers’, but rather integrated TCP/SP hosts or reseller/aggregators who operate at a level of the market between the TCP and real end-user customer (e.g. a bank). As already noted, NGCs are used by a wide variety of different organisations for different purposes so it would be surprising if their outlook and priorities were identical. However, the broad distinction between ‘end user’ SPs who use NGCs to offer access to callers and ‘intermediary’ SPs who provide wholesale services to those end-user SPs is an important one to keep in mind when assessing the consumer interest. While Ofcom refers ‘SP’s concerns about price transparency and the impact on their incentives’, it is not clear that these are the primary concerns of SPs themselves. The Analysys Mason survey in fact suggests that SPs concerns centre on the perception of their organisation and revenue/cost implications for them of using a particular type of number, which are invariant to OCP pricing other than in the special case of BT. We recognise that some SPs complain about their inability to control the cost to callers from all OCPs and use this to explain why they do not compete with other SPs on price. Ofcom seems sympathetic to the idea that SPs should be able to exercise retail price control in relation to callers, despite a general presumption in competition law against vertical price fixing agreements including resale price maintenance. Ofcom does not explain why NGCs should be considered exceptional.


Ofcom suggests that NGCs can be considered as a ‘two-sided market’. However, it is not clear that Ofcom’s description of NGCs as a two-sided market assists its analysis or supports the idea that SPs should be able to set retail prices to callers. The literature on two-sided markets generally relates to cases where the supplier has different types of customer on either side of a market that it services via a common platform. Commonly cited examples include credit cards, where credit card providers serve both consumers and merchants, and newspapers which serve both readers and advertisers. All telecoms markets could potentially be described as ‘two-sided markets’ in the sense that telephone calls involve both a calling party and a called party. However, it is only in the case where both customers are customers of the same network (or equivalently where the same communications provider is both OCP and TCP) that the common platform element comes fully into play. The main analytical insight is that the common platform provider’s optimal pricing strategy will take account of and balance demand on both sides of the market. This may involve charging relatively lower prices to the more price sensitive side of the market if such a strategy boosts profits on the other side of the market e.g. a low cover price for a newspaper to support wide circulation which is attractive to advertisers and affects their willingness to pay. Critically, however, it is the platform owner that determines its own pricing on either side of the market, taking account of demand conditions on both sides, not customers on one side of the market dictating the price to be charged to customers on the other side of the market (as would be the case if SPs were able to set retail prices charged to callers by third party OCPs). Characterising NGCs as a two-sided market does not, therefore, lend strong support to the proposition that SPs, rather than OCPs, should determine retail prices to callers. The analysis may be more relevant in cases where the SP contracts with the OCP to charge a particular retail price to callers. This is the model through which the DWP enables calls to its benefit claims number to be free-to-caller from mobile networks, and shows that where there is economic demand from SPs, OCPs can and do take account of it. The fact that SP contracting with OCPs is relatively rare is not evidence of market failure, however, but simply a reflection that where supply and demand do not meet there is no market clearing price.

Q5.3 Do you agree with: our assessment of the OCPs’ incentives and behaviour and our preliminary views of the outcome for OCPs under the current market conditions? Are there other factors we should take account of in our analysis? How complete do you consider the tariff rebalancing effect would be in the event of any changes to retail prices, and what impact might any reduction in NGC prices have on consumers?

As noted above, OCPs respond to the preferences of their paying customers – i.e. normally consumers or callers. This is what one would expect in a normal competitive market and is not evidence of market failure.


If SPs attach economic value to mobile pricing and are willing and able to pay for it there is no reason in principle why they should not be able to strike commercial bargains with OCPs. The evidence to date shows this is perfectly possible under the current regulatory regime although it is the exception rather than rule. If, consistent with this observed pattern, most SPs do not actually attach significant economic value to the precise retail pricing to callers in a way that OCPs can internalise, Ofcom should be more concerned if prices spontaneously moved (or were forced by regulation) away from competitive outcome which seems to be in line with consumer preferences. In respect of mobile, if Ofcom were to intervene in such a way as to require lower NGC prices and margins, we would expect retail competition to drive complete or near complete rebalancing. The precise extent would depend on level of cut and any offset in volume (though of course, if there is no incremental margin, volume growth would be wholly negative and would compound the degree of rebalancing required). While Ofcom speculates that lower NGC prices would call forth volume growth, other than the example of the DWP benefit line, it provides no direct evidence on this so it is not clear to what extent this would occur in practice. The available evidence suggests that demand to call NGCs is not purely a price issue and does not lend strong support to the idea that for NGCs generally there is significant pent up demand that is only choked off by price. In fact, there appears to be little consumer enthusiasm for NGCs generally. If prices to NGCs were to reduce significantly, those who call at today’s prices might benefit from the price reduction but it is by no means clear that there would be strong volume response from others. Without empirical evidence, the nature of any demand response is inherently speculative. Against this background, we see no reliable basis for Ofcom’s rose-tinted view. On the other hand, there is clearly a risk that forced price rebalancing could make things worse not better for consumers. While Ofcom paints an alarmist picture about how BT would act as an OCP if unregulated, and how other fixed OCPs no longer constrained by BT would respond, it is not clear how BT would react in practice if de-regulated. If BT is able to act independently of competitors and customers, those are the classic hallmarks of a dominant operator which would normally justify ex ante regulation based on SMP. There is little doubt that BT has a significant presence as both OCP and NTS host. However, applying the two-sided market framework of analysis, it is not clear how the incentives Ofcom speculates about would net out. Fixed OCPs who are also TCP hosts will also face a similar balancing act, as well as being constrained by BT. Mobile OCPs operate in a separate market, and are not significantly active as NGC hosts, so there is no reason in principle to expect their competitive response to be the same.

Q5.4 Do you agree with our assessment on the complexity of the market relationships between OCPs and TCPs and the balance of bargaining power summarised in this Section and set out in detail in Annex 3? If not, what factors do you consider this analysis should include or give a different weight to?


We agree that market relationships are complex, as Annex 3 illustrates. However, the reality may be even more complex and nuanced than the analysis Ofcom presents allows for. In particular, while relative size of TCP and WOCP may be one relevant factor, the nature of services offered behind NGC numbers is also likely to be relevant. Ofcom makes a high-level distinction between ‘locked in’ calls and others, which we agree is potentially relevant. However, the unit of analysis and degree of information asymmetry between parties may also be relevant. OCPs generally lack visibility of the end user and individual service type. While the intuition behind why some calls are ‘locked in’ and others not is understandable in relation to an individual number and service, the distinction may not be easily visible to OCPs when mediated between SPs, resellers and TCPs. Other things being equal this will weaken OCPs’ bargaining position because even though a proportion of NGCs may be ‘locked in’, the risk of blocking locked in services may be significantly greater than the risk of blocking individual ‘other’ services for which competitive alternatives are available. Even if OCPs were able to discriminate between ‘locked in’ and ‘non-locked in’ numbers in principle, the overhead of monitoring individual services and attempting to apply differential policies would be enormous in practice. As previously observed, while Ofcom draws a number of distinctions between NGCs and GCs, these do not fundamentally alter the TCP bottleneck from an OCP perspective.

Q5.5 Do you consider that our assessment of the state of the market in the absence of ex ante regulation is a reasonable extrapolation of the evidence? If not, why?

This question appears to duplicate Q4.4 above. Questions relating to the assessment of the impact of the different options The following questions relate to the analysis set out in Section 6 and Annexes 4 to 7: Q6.1 Do you agree with our assessment of the likely failure of deregulation to address the identified market failures? If not, please explain why, ideally with reference to the analysis set out Annex 2 and 3.

For reasons set out elsewhere in this response, the characterisation and claimed extent of supposed ‘market failures’ is open to question. Given the complexity of market relationships Ofcom identifies, it is hard to anticipate the eventual outcome of complete de-regulation with any certainty. It is also not clear what extent of de-regulation Ofcom is actually contemplating. If, for example, a complete relaxation of regulatory rules on use of numbers were being considered


this would clearly have ramifications well beyond NGCs. However, the debate is purely academic to the extent that Ofcom’s duties are prescribed. In any event, Ofcom does not face a straight choice between its favoured intervention and no regulation at all. As discussed in relation to Q2.3 above, it is important to set a realistic baseline against which options for change can be tested and evaluated.

Q6.2 Do you consider that we were right to put aside consideration of wholesale intervention at this stage? If you disagree please set out your views, ideally with reference to the wholesale analysis set out Annex 3.

Not entirely, no, since it is not clear that Ofcom has considered the full range of wholesale options available. Neither of the two options Ofcom mentions corresponds to the proposition Vodafone suggested for consideration in its response to the call for inputs, namely that Ofcom regulate permissible termination charges by number range. In fact, Vodafone’s suggestion was similar in some respects to Ofcom’s proposals in respect of numbering plan rationalisation and regulation of the service charge under unbundling. The essential difference is that wholesale regulation of termination (equivalent to service charge in Ofcom’s unbundled model) through the numbering plan would be a self-standing intervention not coupled with the concept of a ‘standard’ access charge. The aim would be to ring fence regulation to a wholesale level linked to use of the number without extending regulation to competitive retail markets. That said, we agree that Ofcom is right to reject the BT concept of wholesale charges linked to retail prices, for reasons discussed more fully in relation to recent determinations on 080 and 0845/0870 charges. We also agree that ‘cost based’ regulation of termination is not necessarily appropriate in the context of a revenue share model. However, we remain of the view that price banding by number range is potentially modest intervention consistent with retail competition which should not be lightly discounted.

Q6.3 Do you agree with our assessment of the limitations of informational remedies to address the totality of the identified market failures? If not, what informational solutions would you propose and to what extent do you see that they would resolve the market failures identified, ideally with reference to the analysis set out Annex 4.

As noted, we have substantial reservations about Ofcom’s analysis of ‘market failures’ on which this question is premised. To the extent that Ofcom remains concerned about price transparency (which is not axiomatically the same as spontaneous ‘price awareness’ based on the number alone) it is worth considering how pricing information can best be communicated.


It is partly the difficulty of communicating a large number of NGC price points clearly and accessibly to consumers that has led Vodafone to simplify and rationalise retail pricing rather than pass through the full complexity of wholesale pricing to consumers. Figure 3.4 shows that only a tiny proportion of consumers consider 08 and 09 call prices as a factor in choosing a mobile supplier (just two mobile users spontaneously mentioned non-geographic calls as being important). Figure 3.7 backs this up by showing, in the research’s own words, that: “most mobile users, including mobile-only users, were not particularly interested in receiving [08/09 call cost] information, nor would it have affected their choice of supplier”. Given levels of consumer engagement therefore, what informational remedies are useful? Levels of engagement would seem to suggest that the right level of information would be that consumers are able to find out the cost of calling NGCS if they so wish. The features of such information would include:

• Easy-to-find website location for call costs • Clear, simple, user-friendly lay-out of call costs • Call costs should be in a discrete location – i.e. have their own dedicated

page and not be buried in a range of terms and conditions • All call costs, including PRS call costs, should be prominently displayed (for

PRS a number checker would be a user-friendly way to present such information although a clear table might suffice)

• There should be a clear indication of which numbers are free-to-caller (though the current pre-call announcement on chargeable 080 calls avoids the risk of bill shock on this range)

• Call centre staff should be briefed to access such information for those without access to the internet

• There should be the opportunity to check NGCs costs at point of purchase

Such a solution offers those who are interested in NGCs call costs the opportunity to find out what call costs are. Annex 6 provides and example of Vodafone’s current approach to presenting NGC pricing information to consumers (for comparison, BT’s approach is presented at Annex 7). Given levels of interest in NGCs pricing it is open to debate as to whether the radical overhaul of transparency created by the unbundling solution is warranted or wanted. Vodafone would suggest that there is a limit as to how far pricing information for small-value purchases can and should be forced in spite of evidence of lack of interest. To make an analogy with the travel sector, we would contend that consumers would check the cost of long-distance travel in advance – a train from London to Glasgow and certainly a flight abroad – as it will be relatively expensive and the costs could vary considerably. We would question however whether consumers would feel the need to check the cost of local travel in the same way – a short bus ride to the train station will be trivial by comparison. Ofcom is a sectoral regulator, with sectoral powers, but it should be judicious in its exercise of these powers when potentially implementing costly schemes (for which


consumers ultimately pay) which at best will only lead to more transparency of small variations in small amounts of money. Notwithstanding these reservations, we see Ofcom’s proposed unbundled structural solution as largely about clearer indication of who does what and who sets what price. In the context of that model, we agree that the transparency burden is appropriately on the service/access provider to make clear their own respective component. Thus the service provider would have the obligation to state the price wherever the number is publicised (long life media may necessitate stable pricing), while the access provider would have the opportunity to present the access price(s) alongside other call prices at the point of subscription decision (rather than on a call by call basis). We see potentially substantial problems with PCAs, however, especially those that attempt to cover both access and service charges. We note that while Ofcom does not favour PCAs as a stand alone remedy it moots the possibility of PCAs in addition to other remedies. In this context, we query the proportionality of requiring PCAs in addition to a structural remedy, given existence of other transparency obligations in context of unbundling. We agree with Analysys Mason that TCPs are better placed than OCPs to implement any announcements about the service charge, and that the costs and difficulties of implementing accurate PCAs at the OCP end are likely to be substantially greater. However, any PCA that needs to be provided free-to-caller will introduce additional billing complexity at both wholesale and retail level. The likely costs and complexities would clearly require further detailed investigation ahead of any regulatory mandate. However, there is little point undertaking such detailed work in isolation from any view on possible corresponding benefits. It is not clear that the incremental benefits that might be associated with pre-call announcements over and above those expected from any accompanying structural remedy would be substantial enough to justify the effort.

Q6.4 Do you agree with our assessment of unbundled tariffs as a potential remedy for the market failures identified? Do you agree with our assessment of the pros and cons of this approach? What do you consider would be the impact of the introduction of unbundled tariffs in this market? Ideally include in your response reference to the analysis set out Annex 5.

Not entirely, no. Please see section 3 of this response for a fuller discussion of unbundling.

Q6.5 Do you agree with our assessment of maximum price as a potential remedy for the market failures identified? Do you agree with our assessment of the pros and cons of this approach? What do you consider would be the impact of the introduction of maximum prices in this market? How should such a scheme be structured? Ideally include in your response reference to the analysis set out Annex 6.


Maximum price regulation is a bad idea for all the reasons Ofcom itself identifies. In any event, it is not an option available to Ofcom via its ‘clarified’ powers (see Annex 4 for further discussion of the legal issues).

Q6.6 Do you agree with our assessment of the impact of different options relating to calls to Freephone numbers summarised in this Section and set out in full in Annex 7? In particular, do you agree with our preference for 080 to be “free-to-caller”?

Not entirely. Please see section 2 of this response for a fuller discussion of the issues.

Q6.7 Do you agree with our assessment of the impact of different options relating to calls to numbers which prices are linked to the prices of geographic calls (03,0845,0870) summarised in this Section and set out in full in Annex 7? In particular, do you agree with our preference for 03 to be the only range with calls prices at geographic rates?

We agree with the abandonment of the so-called ‘geographic link policy preference’ for 0845 and 0870. We are less convinced that the differences between 0845 and 0870 justify a fundamentally different approach as between these two ranges, however, i.e. allowing 0845 to continue but closing and requiring migration away from 0870. If the aim is to rationalise the numbering plan it might be more appropriate to harmonise 0870 with 0871 in the same way that Ofcom proposes to harmonise 0845 with 0844, with a standardised convention for transit (TCP pays). This would avoid the costs of forced migration for SPs using 0870. While it may be the case that revenue share is not currently supported, Ofcom cannot necessarily infer that SPs still using 0870 are indifferent to the loss of revenue share. SPs who do not require revenue share or who prefer an 03 or 080 range would be free to migrate if they so-wished, but would additionally have the option to remain on an 0870 number that, in all likelihood, they had originally chosen because it did support revenue share.

Q6.8 Do you agree with our assessment of the impact of different options relating to calls to revenue share ranges (084, 087, 09, 118) summarised in this Section and set out in full in Annex 7? In particular, do you agree with our preference for: Adoption of the unbundled tariff for these ranges, with a maximum tariff to apply for consumers’ protection on the Service Charge; and 0845 to be treated the same as 0844?

To the extent an unbundled remedy is appropriate at all we understand why Ofcom would wish it to apply to all revenue share ranges (or, at least, all revenue share ranges above a certain service charge threshold). However, we see some potential unitisation issues particularly for 09 and 118 ranges. Additionally, it may be that service charge designations need to be set on a fixed basis rather than an ‘up to’ maximum, given the additional complexity involved if variations of service charge on


the same number or range need to be passed through exactly at retail level. See also annex 3.

Q6.9 Do you agree with our assessment of the impact of different options relating to calls to 07 numbers which are not mobile numbers (070/076) summarised in this Section and set out in full in Annex 7? In particular, do you agree with our preference for reducing the revenues available from these calls so as to remove the incentives for fraud?

As set out above, we do not believe pursuing call cost pricing transparency is necessarily the most appropriate way to address ‘fraud’.

If Ofcom were starting with a clean sheet of paper, it would be preferable not to put personal and paging numbers behind 07 where they are easily confused with mobile. PhonepayPlus supervision of 070 seems to be working, however. We do not see a big enough fraud problem to justify closure and forced migration which would impact legitimate users. Similarly, the reported fraud 'blip' on 076 seems to have been addressed successfully and if it resurfaces the same PhonepayPlus approach as on 070 could be appropriate.

We do not think an obligation to advertise service charge wherever the number used, as Ofcom proposes for unbundling generally, will work for these ranges (e.g. 070 numbers etched into car windows). There may be a case for regulating maximum termination charges at/closer to mobile levels to curb fraud incentives. We see no case for setting maximum access charges, however.

Questions on our assessment of the potential implementation issues The following questions relate to the analysis set out in Section 7 and Annex 7: Q7.1 Do you consider 18 months would be a reasonable period for the implementation of an unbundled tariff structure? What are you views on staging for the potential implementation? In particular, would it be desirable to move more quickly to restructuring charging to reflect the new regime even if detailed billing would not be ready? What are your views of the technical cost of potentially introducing the new regime and how could implementation be staged to minimise these cost (see also Annex 7 for a discussion of costs)? What are your views on the communications’ challenges for potentially introducing this new structure and how should they be addressed?

This question is impossible to answer definitively at this stage. As the AM study noted, the concept of disaggregating NGC call charges into separate access and service charges is new and not on communication providers’ technology roadmaps. It would be necessary to scope the requirement and impact in detail before estimating a realistic timescale for implementation. 18 months is a minimum and not a maximum, and would run from when requirements are confirmed rather than from broad outline concept.


As explained in Annex 3, Ofcom decisions can ease or compound difficulty of implementation. A service charge free-for-all is most difficult to accommodate, whereas a stable relationship between number and service charge is potentially easier by comparison. All else equal, uniform structures (unitisation etc) will also help. Complex structures (DQ) will hinder. Billing is not just about presentation, which is secondary aspect of unbundling (it does not particularly help prepay customers who do not receive bills, or pay monthly customers who do not read bills). As discussed at Annex 3, the primary challenge is about accurate pass through. In relation to communications, we envisage that the NGC access charge(s) would be subject to same existing transparency obligations as everything else under GC10. The service charge would need to be published alongside the number where advertised. This is a further reason why the relationship between service charge and number should be durable to minimise potential for confusion (or abuse).

Q7.2 Do you consider 6 months would be a reasonable period for the implementation of the maximum price structure? What are your views of the cost of the potential new regime and how could implementation be staged to minimise these cost? What are your views on the communications challenges for introducing this potential new structure and how should they be addressed?

No, a maximum price structure is not appropriate. Q7.3 What are you views on the implementation period of up to 6 months for the change to Freephone charges? What are your views of the challenges to the implementation of the new regime and how could implementation be managed to overcome these challenges and minimise any cost? What are your views on the communications challenges for introducing this potential new structure and how should they be addressed?

While less technically challenging than unbundling, six months looks optimistic and may not be realistic. Ofcom would most likely have to determine the appropriate differential mobile outpayment if it sought to mandate this change universally. It is not clear that six months would leave sufficient opportunity for SP migration to/from existing numbers. SPs are unlikely to want to make that decision without prior certainty on the applicable commercial terms. It is premature to consider communication issues in the event of a regulatory mandate in detail at this stage since it is not clear that such a mandate is appropriate. Where SPs enter into voluntary commercial agreements with MNO OCPs however, it is because they genuinely value free-to-caller pricing from mobile and therefore have appropriate incentives to promote the fact that their number is accessible free-to-caller.


Q7.4 What are you views on the implementation period of up to 3 years for the modification of the 0870/0845/070/076 ranges? What are your views of the challenges to the implementation of the new regime and how could implementation be managed to overcome these challenges and minimise any cost? What are your views on the communications challenges for introducing this potential new structure and how should they be addressed?

It is not immediately clear why 0845/0870 requires a longer transition than other number ranges. If migration is the issue, then similar lead time considerations are potentially applicable across the board. As discussed in Section 1 of this response, we think Ofcom could potentially harmonise designations relating to 084 and 087 prefixed numbers ahead of (or, perhaps, instead of) unbundling. For reasons discussed more fully above, we do not consider that 070/076 merit unbundling. However, it is possible that minor changes to regulation of 076 numbers to align the current approach to PhonepayPlus supervision of 070 could potentially be achieved more quickly than changes requiring migration.

Q7.5 Do you consider that the potential approach to the potential price publication obligations would be likely to be effective?

In the context of the unbundled model, we agree that it should be for the OCP to communicate the access charge and for the SP to communicate the service charge. However, we do not believe the unbundled remedy is appropriate to all NGC ranges, notably 070 and 076.

Q7.6 Do you consider 6 months would be a reasonable period for the implementation of the maximum price structure? What are your views of the cost of the potential new regime and how could implementation be staged to minimise these cost? What are your views on the communications challenges for introducing this potential new structure and how should they be addressed?

As explained in further detail at annex 4 of this response, attempting to regulate maximum inclusive retail charges is neither appropriate nor legally open to Ofcom under the CRF. The issue of communications challenges does not arise, therefore.

Q7.7 Do you consider that the potential approach to the potential price publication obligations would be likely to be effective?

This question appears to duplicate Q7.5 above. If, however, it is intended to relate specifically to regulation of maximum inclusive retail prices, the issue does not arise for the reasons given in response to Q7.6 above.


Annex 6 To illustrate Vodafone’s current approach to presenting call price information to consumers we reproduce below relevant extracts from information readily available to consumers on-line.

Vodafone’s response to Ofcom’s consultation “Simplifying Non- Geographic Numbers ... · 2016....

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Transcript of Vodafone’s response to Ofcom’s consultation “Simplifying Non- Geographic Numbers ... · 2016....