The Hungarian Communications Market Developments and ...

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The Hungarian Communications Market Developments and Regulation between 2004 and 2008 Regulation of mobile call termination In the market “Voice call termination on individual mobile networks” (market 16) every authority, including the NHH introduced rigorous regulations. The general basic problem relating to call termination is the consequence of the so-called “calling party pays”-principle (CPPprinciple), according to which the subscriber originating the call pays the bill containing all expenses of the call. The CPP-principle takes effect both in the retail and the wholesale market. The charge of the call is defined by the subscriber’s service provider, which, upon calling a mobile telephone, contains, in addition to the expenses relating to the call, the termination rate payable to the mobile service provider. As the termination rate is not paid by the party called but the service provider of the caller, the provider of the termination service is not pressurised by its own consumers to keep termination rates low. The wholesale market is similarly affected. In the termination market, service providers buying call termination services are under pressure, as they have to terminate the calls of their subscribers. Analysing the effects of the CPP-principle, the Board established that the application of this principle makes it possible for mobile service providers to define their call termination rates for the most part independently of consumers. According to the 2005 and 2006 market analysis statements of the Board, voice call-termination services in the networks of individual mobile service providers constitute nationwide independent markets. It means that in respect of termination, every mobile service provider is in a monopolistic position with reference to its own network, i.e. it qualifies as a service provider with significant market power. Before the period under review, certain service providers had already been subject to regulation. The termination rates of T-Mobile (Magyar Telekom) were regulated two times (from 1 September 2003 and from 15 July 2004) and the rates of Pannon one time (from 15 July 2004). At the same time, the termination rates of Vodafone had not been subject to regulation before 2005. As a consequence of the different regulation of the service providers, which at that time fully complied with the EU regulatory framework, different termination rates has been established by 2005: the rates of T-Mobile, the service provider first undergoing regulation were the lowest, while those of previously unregulated Vodafone were the highest. During market analysis, the Board identified two major effects of market distortion as a consequence of excessive pricing applied in the wholesale market: 1. High fixed-mobile retail rates. The unreasonably high call termination rate surfaces as expense on the part of the fixed service provider originating the call, which incorporates these expenses in its fixed mobile retail prices. Consequently, this may cause unreasonably high fixed-to-mobile rates, with direct effect on the customers of the fixed service provider. 2. Income rearrangement not justified by cost relations between service providers. Extreme termination rates may cause unjustified income rearrangement between fixed and mobile service providers as well as between call origination and call termination mobile service providers. Unjustified income-re-arrangements may also come about if unjustified differences are detected in the call termination rates of mobile service providers. Mitigation or elimination of the market distortion effects identified can be realised by reducing the termination rates to a justifiable level. Therefore, cost-based price regulation became the primary obligation of dealing with market failures, to which other obligations (transparency, non-discrimination, accounting separation, ensuring access and interconnection) were also added. For the definition of the cost-based rate level, the Board applied the internationally accepted and used method of Long Run Incremental Cost (LRIC). Both decisions obligated service providers to execute and submit to the NHH for approval a so-called TD-LRIC cost calculation, to ensure that service providers justify for their costs themselves. The detailed rules to be applied for the model are set forth in the decisions. However, the Authority did not accept the TD-LRIC calculations submitted by the service providers, as it found that none of them met the requirements and the rules. Consequently, termination rates have been established by the NHH itself. In 2005, this was carried out using the European benchmarks, and upon making the 2006 decision, it was performed by applying the so-called BU-LRIC methodology developed by the Authority. The BU-LRIC cost model was prompted by the Authority’s recognition that the Authority shall have a so-called “gauging line”, a reference point as regards the specification of the cost-based obligation to be fulfilled by the service providers with significant market power. Moreover, NHH continuously confronted with demands arising both on the part of the service providers and the European Committee, according to which in its opinion the Authority should declare, in connection with the cost-based setting of call termination rates and regarding the current situation of the electronic communications market, the extent and calculation method of the cost-based call termination rate as well as the principles and aspects taken into account for such calculation. The Board was fully aware of the significant difference between the average call termination rates previously applied by obliged service providers, and the results of the BU-LRIC method or any similar results, therefore, the immediate introduction of the rates so defined would have caused serious disruption in the operation of service providers. In addition, the Authority had to remember that the desired aim, the use of cost-based call termination rates in favour of ensuring the conditions of effective competition, was not to be
62 63 postponed to the distant future, instead, it was to be reached as soon as possible. In consideration of the two aspects mentioned above, the Board approved a schedule (glide path) based on equal principles relating to all three mobile service providers, while also considering the initial differences, which stipulated the way mobile service providers were to achieve the cost-based call termination rate deemed as a target value. Service providers opposed the decisions 33 and they applied the so-called “reservation of rights”, i.e. as the court immediately refused their proposal for the suspension of the execution of the decisions, they did execute the rate reductions as specified, but they declared that if the court repealed the decision of NHH, they would demand service providers initiating the traffic of mobile termination to pay for their loss of revenue due to the differences. According to the decisions of the Board, mobile termination rates significantly decreased and the rates of service providers came closer to each other. Termination rates decreasing and converging to each other as a result of the regulation caused a drop in revenues for every mobile service provider in the case of calls originated from fixed networks and, in the case of mobile-to-mobile calls, they lead to income rearrangement between service providers. Although traffic relations do have an influence on the balance of call termination expenses and revenues relating to mobile-to-mobile calls, the differences between the incomes of service providers are primarily attributable to different call termination rates. One of the key objectives of regulation was the elimination of the unjustifiable differences in the termination rates of mobile service providers, which is to be attained by 2009. This means that the unjustified revenue of service providers applying higher rates by putting other service providers in a disadvantageous situation should be terminated, therefore the regulation is to be considered as a means of rectifying the situation with a view to reaching the required conditions and not as a means of “punishment”. Figure 4.20: Changes in regulated termination rates HUF/min 40 Vodafone 35 Pannon Magyar Telekom 30 25 20 15 31.12.2003 31.12.2004 25.05.2005 02.02.2007 01.01.2008 01.01.2009 Source: NHH According to the schedule set forth in the decision, the rates to be introduced as of 1 January 2009 shall be 50 percent lower than the termination rates at the end of 2003. According to the schedule, in 2009, differences between the termination rates of the diverse service providers will completely disappear. Market effects Effects of the decrease in termination rates on mobile service providers For mobile service providers, the decrease in mobile termination rates involves both a decrease in revenues and a decrease in expenses (because of the decrease in pay-off to other mobile service providers). Effects of the decrease in termination rates on fixed-mobile retail prices At fixed service providers, the costs of fixed-to-mobile direction calls comprise of retail expenses, the costs of the fixed call origination (transit rates, if any), and the mobile call termination rate. Should the latter costelement decrease, the profit of the fixed service providers grows. This increases the room for manoeuvre for the service providers in terms of competition, and may encourage new players to enter the market. As a result of competition, however, retail prices decrease, which finally causes lower mobile termination rates to be realised at fixed consumers, instead of increasing the profit of fixed service providers. Upon the decrease in mobile termination rates, the decrease in retail prices of fixed mobile services in the case of universal service packages is also stipulated by law, in addition to the process based on market mechanism. The Office of the National Communications Authority performed an official control procedure relating to 2005-2006 to investigate the fulfilment of this obligation. The investigation revealed that in 2005 among the universal service providers T-Com and Invitel did not pass on the decrease in mobile termination rates to subscribers, while Hungarotel, Emitel and Monortel did so only partially (either to residential or to business subscribers exclusively) . The results of the investigation cannot be generalised for the complete range of services, as the proportion of the residential subscribers of universal services was not decisive as compared to all the subscribers of service providers with significant market power. Therefore, NHH compared the development of average fixed-tomobile retail prices with changes in mobile termination rates during the periods before and after the introduction of regulation (2004-2007). The traffic per minute price collected by fixed service providers for fixed-to-mobile direction calls (average price) between 2004
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1 1 The Hungarian Communications Ma
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CONTENTS Contents 1. NHH’s role i
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02 03 years. This year one of NHH
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04 05 NHH’s role in the regulatio
Page 9 and 10:
06 07 affected parties have failed
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08 09 Figure 1.1: NHH’s regulator
Page 13 and 14: 10 11 Key areas of regulation for t
Page 15 and 16: 12 13 2.1 Changes in institutional
Page 17 and 18: 14 15 Market analysis decisions of
Page 19 and 20: 16 17 Decision Round 1 Year Round 2
Page 21 and 22: 18 19 purposes of WMAN, which was c
Page 23 and 24: 20 21 sional knowledge but also for
Page 25 and 26: 22 23 There is the possibility of p
Page 27 and 28: 24 25 lution is well demonstrated b
Page 29 and 30: 26 27 surveillance activity. Servic
Page 31 and 32: 28 29 a member of the Council of Ad
Page 33 and 34: 30 31 Electronic communications is
Page 35 and 36: 32 33 Figure 3.5: Monthly average t
Page 37 and 38: 34 35 Fixed location services In Hu
Page 39 and 40: 36 37 Figure 3.11: Changes in the n
Page 41 and 42: 38 39 Figure 3.15: Changes in the n
Page 43 and 44: 40 41 Figure 3.18: Cable television
Page 45 and 46: 42 43 Results and influence of mark
Page 47 and 48: 44 45 hindered on the retail side,
Page 49 and 50: 46 47 Figure 4.2: Voice traffic sha
Page 51 and 52: 48 49 gated price index) above the
Page 53 and 54: 50 51 Figure 4.8: Monthly spending
Page 55 and 56: 52 53 the Board imposed the obligat
Page 57 and 58: 54 55 Figure 4.10: Sales of ADSL se
Page 59 and 60: 56 57 stimulation regarding the dev
Page 61 and 62: 58 59 Figure 4.14: Broadband penetr
Page 63: 60 61 The OECD study also contains
Page 67 and 68: 64 65 mately introduced EU level re
Page 69 and 70: 66 67 According to the obligation i
Page 71 and 72: 68 69 4.5 Regulatory means applied
Page 73 and 74: 70 71 The implementation of the reg
Page 75 and 76: 72 73 Epilogue Today, electronic co
Page 77 and 78: 74 75 28 The full unbundled access
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