Government’s policy towards future competition in mobile market

As required by the Direction and in the light of Ofcom’s primary duty, the main aim in this award is to promote competition in future mobile market for the benefit of consumers. This could be done by promoting competition at the national wholesale level. This supports the promotion of opposition at the retail level as successful retail competition depends on retailers either being national wholesalers or relying on access provided by national wholesalers.

In markets where there is no competition at the wholesale level, then regulation has to be used to mimic this competitive pressure. The outcome may not be substantial but it would be better than no regulation at all. Hence Ofcom believe that promoting competition at the national wholesale level is the best way to achieve its aim. There won’t be any need for regulatory interference as there would be competition at the retail level.

In Ofcom’s view the UK citizens and consumers are well served by the mobile markets in the UK and according to Ofcom competition between the national wholesalers is the reason for this best service. During the last decade, there were five national wholesalers to compete in the UK’s mobile market but currently there are only four national wholesalers as two companies, T- Mobile and Orange merged together to form Everything Everywhere. Each of these four national wholesalers today exerts a strong competitive force on the others.

A key input to the provision of mobile services is access to spectrum. As laid out in Section 3, spectrum is an exhaustible or limited resource especially at frequencies most suited to the efficient provision of mobile services. As such access to suitable spectrum will have significant impact on the nature of competition in the market and the services that it can offer.

A large amount of spectrum available for the provision of mobile services would be made available by this Auction. The scarcity of this type of spectrum would have significance over future competition in mobile markets and the extent to which individual national wholesalers are able to compete credibly with one another.

According to standard classifications, the present market is already concentrated and the consolidation of four national wholesalers to three would further concentrate the market. Not only that there are high barriers to entry to national wholesale mobile services apart from heavy infrastructure costs and scarcity of spectrum.

The regulator recognizes that the intensity of competition will depend on a range of factors like the strength of national wholesaler competitors, barriers to entry, the number of competitors etc. However, Ofcom considers that in such a concentrated market with high barriers to entry, the presence of more competitors would be better for the promotion of competition.

When consumers are having greater choice between providers of a service, providers would be forced to work hard and offer better services to win and retain customers. This process of rivalry will prevent the providers from increasing prices or lowering service quality. It would force them to invest and innovate and make it more difficult to coordinate their prices and services so as to avoid competition.

Ofcom considers that the reason for delivering a wide range of benefits for consumers by the four existing national wholesalers is the competition between them. Ofcom thinks that if as a result of this Auction only fewer operators happen to have access to sufficient spectrum, then it will lead to a reduction in competition which would be detrimental to the interest of consumers.

Ofcom has considered the effects of a reduction in competitive intensity on consumers. A reduction in competition in a market would prompt the national wholesalers to increase prices, to reduce investments in new services and to reduce investment in innovations compared to a more competitive market. In this case, the remaining national wholesalers would be benefited in this situation. However, such a change would adversely affect consumers in terms of higher prices, reduced choice and delayed access to improved or new services. That would be inconsistent with the duties assigned to Ofcom under Section 3(5) of the Communications Act 2003 in furthering the interests of consumers especially to their interests with regard to price, choice and service quality.

The market for mobile services is so large that in 2010 in mobile market was worth 15.1 billion Pounds. It is estimated that per head mobile connection in the UK is 1.3 active connections and great majority of UK adults and children use these services. For every two people in the UK there is a 3G connection. The value of a service to a consumer minus the price paid for that particular service is defined as consumer surplus. It is estimated that the consumer surplus generated in the UK during 2010 is 24 billion Pounds. This suggests that even small reductions in the intensity of competition could have a significant economic impact.

Basing on Ofcom’s competitions assessment and in accordance with the Direction, Ofcom has considered whether it should implement proportionate and appropriate measures through rules that govern the Award with the aim of promoting competition in such markets after the completion of that award. Ofcom has specifically considered whether it is to introduce measures to ensure that there are at least four operators to have access to spectrum to enable them to become credible national wholesalers at the wholesale level after the Auction.

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