Should regulators define a combined market in which mobile voice services are substitutes for fixed voice services, there would be significant implications for the level of regulation in fixed markets.
Historically, fixed and mobile narrowband markets have been perceived as separate by regulators on both sides of the Atlantic. However, as mobile voice services become increasingly affordable, and users opt for the convenience of mobile phones, mobile voice services are progressively substituting for fixed voice services, both in terms of connections (see Figure 1 below) and usage.
The market review process is a key part of the telecoms regulatory regime in both Europe and the USA, although it is used to achieve quite different purposes on either side of the Atlantic. Within the European Regulatory Framework, it is necessary for a regulator to conduct a market review and conclude a finding of significant market power (SMP) in order to justify the introduction or maintenance of regulatory remedies. In the USA, by contrast, the Federal Communications Commission (FCC) and the various state commissions have typically conducted market reviews in the context of justifying a removal of regulation.
Figure 1: Fixed and mobile connections in Western Europe, March 2004–March 2006 (Source: Analysys Research, 2007)
The current approach of separate fixed and mobile narrowband markets means that in Europe fixed incumbents tend to retain dominance in all but a few specific markets such as international retail calls, where new entrants have been relatively successful in gaining market share. Mobile operators, on the other hand, are viewed as being part of a competitive market and therefore tend to be subject to light-touch regulation (with the exception of call termination markets in Europe). Some European regulators have considered findings of joint dominance on wholesale origination markets, but enforcing this finding has been difficult.
In the USA, regulators have been notably inconsistent in their approach to defining the relevant markets. As early as 1996, the FCC determined that mobile wireless services had the attributes to “become a true economic substitute for wireline local exchange service in the future.”1 By 2003, the future seemed to have arrived as the FCC granted regulatory relief to one of the Bell Companies. This decision relied partly on the widespread availability of mobile wireless as proof that the local market was open to competition. A year later, the FCC acknowledged that “a growing proportion of customers use wireless as their primary line or have cut the cord altogether.”2 In other contexts, the FCC has drawn back a bit from defining a combined market, and the state commissions have been particularly reluctant to accept this premise, although some (notably Texas) have done so.
Within Europe, the Commission’s proposal for a new list of relevant markets indicates that it considers retail regulation is no longer required for fixed narrowband services, regardless of the level of competition from mobile services. However, this view has been challenged by a number of responses from regulators to the ongoing consultation on this topic. In terms of market trends towards fixed–mobile substitution, the proportion of mobile-only households is as high as 35% in some Western European countries (versus around 12% on average in both Western Europe and the USA) and the proportion of total voice minutes originated on mobile networks is as high as 70%. This suggests that in some countries at least, consumers have begun to view mobile services as a substitute for fixed services.
In summary, regulators seem reluctant to define a single fixed and mobile market on either side of the Atlantic but there are indications that this may change in the coming years, especially as price differences collapse. The large amounts of minutes in mobile bundles, and hence low per-minute price in the USA, suggest that US regulators may conclude that a single market exists before European regulators. However, if mobile growth in Eastern Europe continues and the differential on price and performance between fixed and mobile in Eastern Europe continues to be less than in Western Europe, then this may be the place where a single market first emerges.
Should regulators in future define a combined market in which mobile voice services are substitutes for fixed voice services, there would be significant implications for the level of regulation in fixed markets. We would expect regulators no longer to be able to justify retail call regulation, and wholesale market remedies such as carrier preselection (CPS) and wholesale line rental (WLR) might also need to be removed. Therefore, potential substitution of mobile for fixed services will be an increasingly important aspect of regulatory market reviews of fixed narrowband markets.
Notes:
1 In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report and Order, CC-96-98, 11 FCC Rcd. 15,499, 1031 (rel. 8 Aug. 1996).
2 In the Matter of Applications of AT&T Wireless and Cingular Wireless Corporation for Consent to Transfer Control of Licenses and Authorizations, WT 04-70, 237 (rel. 26 Oct. 2004).
