Abstract - Vodafone

Moving the debate forward • The Policy Paper Series • Number 8 • April 2008
Richard Feasey
Introduction
On-net call discounts, which allow customers to pay less
for calls which remain within their own home network, have
been a feature of telecommunications markets for many
years. But they have recently begun to receive attention
from regulators and anti-trust authorities as smaller
operators claim that they are being used by large operators
to restrict competition.
It might be thought that regulators would be more
concerned if on-net discounts did not exist. Cheaper on-net
calls mean lower prices for customers who take advantage of
them. In Europe’s calling party pays environment the marginal
costs of making calls to other networks are higher than
those of making calls on-net. The fact that these differences
are reflected in retail prices would tend to suggest that
competition is working, rather than suggesting the opposite.
As Jonathan Sandbach shows in his paper, on-net discounts
have been part of an increasingly competitive European
market, and have not prevented new entrants from gaining
market share.
It is also possible that customers are more sensitive to the
price of calls between users who benefit by being on the
same network (e.g. friends and family) or that customers value
receiving calls as well as making them (in which case on-net
tariffs allow these benefits to be kept within the same network
rather than shared with other networks). It is pretty clear that
most customers have both characteristics to a greater or
lesser degree. This suggests that on-net discounts will make
sense, and are likely to be more efficient, even in the absence
of a calling party pays termination rate environment. This may
be why we observe differentials in the United States, despite
much smaller differences in the costs of making on-net and
off-net calls in that market. Nor is it clear that networks have
Public Policy Director,
Vodafone Group
On-net Pricing in Mobile
Richard is the Public Policy Director for the Vodafone Group, coordinating global public policy and
regulatory affairs throughout Vodafone’s operating companies including Europe, the Americas, and
the Asia-Pacific. Richard has over fifteen years experience in international telecommunications in fixed,
internet and wireless sectors; having been responsible for public policy at MCI Worldcom International,
Ionica plc and TeleWest Communications plc. He has chaired worldwide industry bodies and is currently
chair of the Regulatory Advisory Board of the GSM Association.
to be large to benefit from these effects. Frequent calling
circles can be small, and consumers can gravitate to the
same network regardless of its size.
Some firms and regulators take a different view. They argue
that on-net price discounts are best understood as a form of
predatory pricing by larger networks, raising concerns that
they will eventually ‘tip’ customers onto a single network.
These fears echo concerns about ‘snowballing’, ‘tipping’
and other network effects which have featured in many
discussions about the internet, normally in relation to global
backbones or search.
These concerns appear to be growing as one important
explanation for on-net discounts – the imposition by
regulators of ‘asymmetric’ termination charges for calls to
smaller networks – is being withdrawn in Europe. This has
led some regulators and operators to argue that these
higher termination rates should be retained in order to
‘protect’ smaller operators from on-net price discounts.
Other regulators and operators use the same reasoning to
come to the opposite conclusion, suggesting that on-net
pricing supports the case for much lower termination rates
for all operators.
Simple ex ante remedies like these are unlikely to be
appropriate because the challenge for regulators and anti
trust authorities here – as with most predation cases – is to
distinguish between conduct which is efficient, benefits
consumers and reflects competitive forces on the one
hand; and conduct which leads to foreclosure on the other.
Crude prohibitions fail to do this, resulting in more harm than
good. The European Regulators Group wisely said in its May
2006 version of its ‘remedies’ document that: ‘There is no
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