Abstract - Vodafone

6
On-net Pricing in Mobile Moving the debate forward • The Policy Paper Series • Number 8 • April 2008
relevant fact when we consider groups of individuals which
share social ties (ie. families, groups of friends, co-workers,
etc.). These social groups determine “exogenous” networks,
for which the network effect is particularly strong.
The network effect becomes even more relevant if the billing
system is ruled by the calling party pays (CPP) principle.
When CPP is used, as in Europe, users generally do not care
much about the price of call termination, since they do not pay
directly for that service. This is not, however, the case within
so-called closed user groups (CUGs). Within the members of a
family or a company, users care for the welfare of their callers
(and very often, as in families or companies, they even pay for
the bills of their callers) and, as a consequence, this increases
their sensitivity to the costs of terminating calls. In this case,
the network externality is “internalized”.
It is therefore not surprising that on-net calls tend to be much
lower than off-net calls in telephony markets. With these price
differentials companies either try to develop “endogenously”
closed user groups or communities (ie. this has been the
strategy recently of the retailer Carphone Warehouse1 in
the UK and Spanish cable operators such as ONO), or try to
capture market share by incorporating into their client base
exogenous CUGs, such as families, groups of friends or groups
of employees working for specific companies (in mobile,
pricing plans target families (ie. TME’s Plus Familia) or friends
(ie. Amena’s Duo) and this is of course also a feature present
in many products of Vodafone targeting the business market
(ie. Planes Universales and VPN). To be able to capture these
customer groups, firms compete by offering pricing plans that
lower the cost of on-net calls. Users recognize that most of
their calls are placed within the CUG and, as a consequence,
they are attracted by these price advantages. Examples of low
(or even free) on net calls abound both for fixed and mobile
telephony in many EU markets.
These basic economic features of telephony markets and their
consequences for firm strategy are clearly detected in the
recent evolution of the Spanish voice telephony market and,
in particular, in mobile telephony.
Mobile competition
In the Spanish market there are three main providers of
mobile network and retail services: Telefónica Móviles España
(TME), Vodafone and Amena, although a fourth licensee
(Xfera) can enter the market with the introduction of 3G
services. The current market leader is TME with more than
half of the market, followed by Vodafone and Amena, both
with market shares below 30% (see table 1). In recent times,
the third provider (Amena) has gained market share at the
expense of both TME and Vodafone.
Table 1. Spanish Mobile Market
Year 2000
Traffic volume market share
Year 2001 Year 2002
TME 65,35% 63,72% 60,00%
Vodafone 24,32% 22,07% 25,00%
Amena 10,33% 14,21% 15,00%
Customer market share
TME 56,33% 56,63% 54,90%
Vodafone 28,34% 25,75% 25,80%
Amena 15,33% 17,62% 19,30%
Retail revenues market share
TME 62,18% 60,52% 57,30%
Vodafone 27,08% 25,45% 26,30%
Amena 10,74% 14,03% 16,40%
Source: CMT. Market shares refer to all retail services and not only voice.
The competitive dynamics of the industry in recent times has
been characterized by the gradual maturity of the market.
Competition has changed in focus, away from bringing new
customers onto the networks with the use of heavy handset
subsidies, and towards the competitive fight for existing
telephony customers. Handset subsidies and overall customer
acquisition costs have been reduced, although they continue
to be substantial.
The trend towards increasing competition for existing
telephony users has been reinforced by the introduction of
number portability which has increased churn. The fraction
of customers that changed provider in a given period has
increased from 19% in 2000 to 23,45% in 2003. 2
The evolution of competition has led to the continuous
decline of the price of voice telephony services served by
mobile operators. Revenues per minute have declined by
8% in 2001 and by 12% in 2002.
This downward trend has modified the competitive strategies
of mobile operators in several directions. The companies
are trying to increase revenue per customer through the
development of data services (not discussed here); they
are encouraging incremental usage of existing services like
voice, competing fiercely on price; and they try to win market
share through the introduction of innovative services, with
the goal of better serving the needs of specific customers.
The increased use of alternative pricing plans and VPNs with
expanded functionalities is a reflection of this trend.
Mobile Virtual Private Networks (MVPNs)
The supply of VPNs by mobile operators follows a practice
pioneered by fixed operators. VPN products target corporate
clients. The objective is to provide the customer with
an integrated product offering that solves many of the
communications needs of corporations, with a comprehensive
service that is independent of the network and infrastructure
that provides the technological support.
The product includes a variety of services. The employees of
the client form a Closed User Group (CUG) and the services
provided include calls within the CUG, calls to and from the