ttr final report - 8 feb 2013

7/29/2019 TTR Final Report - 8 Feb 2013

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Trans-Tasman roaming

Final Report

February 2013


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ContentsNo reliance .............................................................................................................................................. 3

Background to the final report ............................................................................................................... 4

Executive Summary ................................................................................................................................. 6

Approach ............................................................................................................................................. 6

Market definition ................................................................................................................................ 6

Recent market outcomes .................................................................................................................... 6

Future market outcomes .................................................................................................................... 7

Options for intervention ..................................................................................................................... 8

Recommendation ................................................................................................................................ 8

Reasons for recommendation ............................................................................................................ 9

Section 1: Market definition ................................................................................................................. 10

1.1 Wholesale market ................................................................................................................. 10

1.1.1 Product dimension ........................................................................................................ 10

1.1.2 Geographic dimension .................................................................................................. 11

1.1.3 Customer dimension ..................................................................................................... 11

1.2 Downstream market ............................................................................................................. 111.2.1 Product dimension ........................................................................................................ 11

1.1.2 Geographic dimension .................................................................................................. 20

1.1.3 Customer dimension ..................................................................................................... 20

1.3 Conclusion ............................................................................................................................. 20

Section 2: Competition assessment: current state of the markets ...................................................... 21

2.1 Introduction .......................................................................................................................... 21

2.2 The wholesale market relevant to New Zealand roamers .................................................... 27

2.3 The retail market relevant to New Zealand roamers ............................................................ 27

2.4 The wholesale market relevant to Australian roamers ........................................................ 28

2.5 The retail market relevant to Australian roamers ................................................................ 29

Section 3: Competition assessment: future state of the markets ........................................................ 30

3.1 What constraints have caused the wholesale margins to trend downwards? ..................... 30

3.1.1 Credible service alternatives ......................................................................................... 30

3.1.2 Market forces ................................................................................................................ 31

3.1.3 Existing ex ante regimes................................................................................................ 36


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3.1.4 The current investigation .............................................................................................. 36

3.2 Will the relevant constraints on wholesale remain in place? ............................................... 37

3.3 Will new constraints on wholesale emerge? ........................................................................ 37

3.4 Will retail margins continue to trend downwards? .............................................................. 38

3.4.1 The impact of high IOTs on retail prices ....................................................................... 38

3.4.2 The extent to which retail margin change will mitigate high IOTs ............................... 39

3.5 Conclusion on future state of the markets ........................................................................... 40

Section 4: Analysis of options for action ............................................................................................... 41

4.1 Maintaining a watching brief ................................................................................................ 41

4. 1.1 Submissions ................................................................................................................... 41

4.1.2 Our view ........................................................................................................................ 42

4.1.3 Conclusion on maintaining a watching brief ................................................................. 44

4.2 Direct intervention in the market ......................................................................................... 44

4.2.1 Measures directly aimed at pricing levels ..................................................................... 44

4.2.2 Measures to alter the market structure ....................................................................... 48

4.2.3 Conclusion on direct intervention in the market .......................................................... 52

4. 3 Measures to promote pricing transparency ......................................................................... 52

4.3.1 Submissions ................................................................................................................... 53

4.3.2 Our view ........................................................................................................................ 54

4.3.3 Conclusion on promoting pricing transparency ............................................................ 54

4.4 Enhancing the abilities of the regulators .............................................................................. 55

4.4.1 Submissions ................................................................................................................... 55

4.4.2 Our view ........................................................................................................................ 56

4.4.3 Conclusion on enhancing the abilities of the regulators .............................................. 58

4.5 Conclusions on options for action ........................................................................................ 59

Glossary and acronyms ......................................................................................................................... 60


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No reliance

The opinions and proposals contained in this document are those of MBIE and DBCDE and do not

necessarily reflect government policy.

Readers are advised to seek specific legal advice from a qualified professional person before

undertaking any action in reliance on the contents of this publication. The contents of this final

report must not be construed as legal advice. MBIE and DBCDE do not accept any responsibility or

liability whatsoever whether in contract, tort (including negligence), equity or otherwise for any

action taken as a result of reading, or reliance placed on MBIE and DBCDE because of having read,

any part, or all, of the information in this draft report or for any error, inadequacy, deficiency, flaw in

or omission from it.


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Background to the final report

In 2005, the Australian Competition and Consumer Commission (ACCC) examined international

mobile roaming (IMR) services and concluded that the prices paid by Australian consumers appeared

high1. Subsequently, in 2009, the Australian House of Representatives Standing Committee onCommunications released the report Phoning Home: Inquiry into international mobile roaming.

One of its recommendations was that the Australian Government engage other countries in bilateral

and multilateral negotiations to address high roaming costs, ensuring that countries with the largest

number of Australian visitors be given priority.

In this context, in May 2010, the then New Zealand Minister for Communications and Information

Technology, Steven Joyce, and the Australian Minister for Broadband, Communications and the

Digital Economy, Stephen Conroy, released a discussion document prepared by officials from the

then Ministry of Economic Development (MED) and Australias Department of Broadband,

Communications and the Digital Economy (DBCDE).

The purpose of the discussion document was to test whether the state of the trans-Tasman roaming

market was such as to warrant a full market investigation. The discussion document and the

responses to it are available at:

www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-

phones/trans-tasman-roaming/submissions

www.dbcde.gov.au/mobile_services/mobile_roaming/trans-

tasman_mobile_roaming_discussion_paper

In April 2011, having considered submissions on the discussion document as well as traffic and

revenue data collected from operators, Minister Joyce and Senator Conroy announced that theywere launching a full market investigation. The reasons for their decision are at:


phones/trans-tasman-roaming

www.dbcde.gov.au/ttmr

The purpose of the full investigation has been to determine whether the market is competitive and,

if not, what (if any) form of intervention by the New Zealand and Australian governments should be

considered.

To this end, the Ministry of Business, Innovation and Employment (MBIE) and DBCDE prepared a

draft report, published in August 2012. The draft report comprised a market definition, anassessment of competition within the market so defined and an analysis of potential interventions.

As an input to the draft report, MBIE and DBCDE (together referred to in this final report as we)

also funded the preparation of a separate study by a consulting firm, WIK-Consult (WIK). WIKs study

estimated the underlying costs that mobile operators face in providing trans-Tasman roaming

services.

The draft report, the WIK study and submissions on them are available at:

1 ACCC, 2005, Mobile Services Review: International inter-carrier roaming, p. 53,www.accc.gov.au/content/index.phtml/itemId/333898
http://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming/submissionshttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming/submissionshttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming/submissionshttp://www.dbcde.gov.au/mobile_services/mobile_roaming/trans-tasman_mobile_roaming_discussion_paperhttp://www.dbcde.gov.au/mobile_services/mobile_roaming/trans-tasman_mobile_roaming_discussion_paperhttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.dbcde.gov.au/ttmrhttp://www.dbcde.gov.au/ttmrhttp://www.accc.gov.au/content/index.phtml/itemId/333898http://www.accc.gov.au/content/index.phtml/itemId/333898http://www.accc.gov.au/content/index.phtml/itemId/333898http://www.accc.gov.au/content/index.phtml/itemId/333898http://www.dbcde.gov.au/ttmrhttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.dbcde.gov.au/mobile_services/mobile_roaming/trans-tasman_mobile_roaming_discussion_paperhttp://www.dbcde.gov.au/mobile_services/mobile_roaming/trans-tasman_mobile_roaming_discussion_paperhttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming/submissionshttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming/submissions


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phones/trans-tasman-roaming

www.dbcde.gov.au/ttmr

Following consultation and analysis of submissions, MBIE and DBCDE have prepared this Final

Report.
http://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.dbcde.gov.au/ttmrhttp://www.dbcde.gov.au/ttmrhttp://www.dbcde.gov.au/ttmrhttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaminghttp://www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming


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Executive Summary

Approach

In this Final Report, MBIE and DBCDE set out a market definition, an assessment of competitionwithin the market so defined, and an analysis of different interventions.

This approach accords with that taken by the two countries telecommunications regulators, the

Commerce Commission and the Australian Competition and Consumer Commission, when they

investigate domestic telecommunications issues.

Market definition

MBIE and DBCDE maintain the conclusion in the Draft Report that there are four relevant markets.

Two of these markets are relevant to New Zealand customers roaming in Australia and two are

relevant to Australian customers roaming in New Zealand.

The markets relevant to New Zealand roamers are:

the wholesale market in which Australian visited networks sell services to New Zealandhome networks; and

the retail market in which New Zealand home networks and MVNOs, and potentially

Australian visited networks, sell services to New Zealand customers roaming in Australia.

The markets relevant to Australian roamers are:

the wholesale market in which New Zealand visited networks sell services to Australian

home networks; and the retail market in which Australian home networks and MVNOs, and potentially New

Zealand visited networks, sell services to Australian customers roaming in New Zealand.

The services in question, which cover voice, SMS and data communications, comprise traditional

international roaming services but also mobile local access services, which enable a home

networks roamer to use a mobile device like a local user, without having to swap the SIM card,

while remaining contactable on the original number.

Recent market outcomes

In the Draft Report, we assessed market outcomes in the calendar years 2009, 2010 and 2011,examining the pricing of, and margins on, services in the wholesale and retail markets, as well as

other features such as the range and quality of services offered. Voice, SMS and data were examined

separately in the pricing analysis, due to the different units used (minutes, texts, and MBs).

However, voice, SMS and data were aggregated in the margin analysis to reflect the market

definition.

We maintain our conclusion that, within the wholesale and retail markets examined, prices and

margins have, broadly speaking, been trending down since 2009 (particularly for data roaming), and

the quality of service is high. While margins are still significant, and no New Zealand or Australian

operator has introduced mobile local-access services, very recent developments, such as Telecom

New Zealands flat-rate for post-paid data roaming, nevertheless suggest positive progress.


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Future market outcomes

We maintain the conclusion of the Draft Report that the joint investigation by the New Zealand and

Australian governments has been a key factor in the emergence of reduced prices and margins in

each countrys wholesale market. Reductions have coincided with the joint investigation, and other

factors, though they may have contributed to the reductions, are unlikely to have been sufficient, forthe following reasons.

Service alternativesthere are no credible service alternatives at wholesale level that constrainvisited networks terms of supply.

Emergence of three solid operators in each marketthis is unlikely to have stimulated

significant competition in trans-Tasman mobile roaming since:

o there does not appear to be a clear correlation between the number of visited networks in

a given destination and the level of wholesale pricing;

o visited networks in New Zealand and Australia cannot compete on an even playing field for

trans-Tasman roaming traffic, due to such factors as frequency incompatibilities, grouployalties and vastly different levels of return traffic.

The existing ex ante regulatory frameworksthese create an effective threat only where there

are access seekers with an ability and willingness to seek regulated terms of supply. In

international roaming, the access seekers are the home networks. However, a home network

that is net inbound2 actually prefers high wholesale prices, since they contribute to its

wholesale profit without (given price inelasticity) significantly reducing its retail profit. A home

network that is net outbound3, meanwhile, has its incentive to seek a low wholesale price

undermined by the desire to secure the most return traffic it can, as this will minimise the loss

it makes at wholesale level.

We further consider that other potential constraints on visited networks behaviour are unlikely to

emerge in the next few years.

Mobile local-access servicesno operator has indicated it has plans to introduce 2G or 3G-compatible mobile local-access services, and the LTE-based local break-out solution will not be

available to the vast majority of trans-Tasman roamers for many years to come (if at all).

Structural change in the market2degrees is likely to increase its footprint and (potentially) its

volume of return traffic, and VHAs 850MHz overlay network will equip it to compete better

for Telecom NZ traffic. However, the majority of structural challenges in the market will remain,

including frequency incompatibility, group loyalties, and Telecom NZs lack of a 2G network

(although as Australian 2G traffic declines, this last factor will become less of a handicap for

Telecom NZ).

Strengthening of countervailing buyer powerthe growing importance of data may lead home

networks to place more emphasis on the quality of service a visited network can offer,

potentially shifting their focus away from return traffic. However, this is still an embryonic

change and the extent to which it overrides a (net outbound) home networks desire to

minimise wholesale losses is yet to be seen.

2 A home network is net inbound, vis--vis a given foreign operator, if the wholesale revenue it receives from that foreign operator (for hosting that operators

customers), exceeds the wholesale payments it makes to that f oreign operator (for hosting the home networks customers).

3 A home network is net outbound, vis--vis a given foreign operator, if the wholesale revenue it receives from that foreign operator (for hosting that operators

customers), are less than the wholesale payments it makes to that foreign operator (for hosting the home networks customers).


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Threat of entrymarket entry appears unlikely in either New Zealand or Australia, with the

global trend towards consolidation. In any event, we have not seen a clear correlation between

the number of visited networks in a market and the wholesale prices charged to home

networks.

Regulatory developmentsfor incoming voice calls, the charges that operators can levy for

mobile termination access services (MTAS) are trending down, by virtue of regulation, and for

practical reasons these drops will also apply to the termination charges levied by visited

networks. However, the impact will not be significant on the wider trans-Tasman roaming

market.

In this context, we consider that, upon the conclusion of the joint investigation, wholesale prices and

margins are likely to cease to fall. We also consider that retail margins are likely to cease to fall,

meaning that they will not mitigate the impact of the wholesale price issue. This provides

justification for considering joint action by both governments.

Options for intervention

In the Draft Report, we set out seven options for coordinated action by the New Zealand and

Australian governments. Some alternative options were also suggested in submissions.

In this Final Report, the original seven options and the alternatives have been grouped into four

categories:

Option 1: maintaining a watching brief;

Option 2: directly intervening in the market;

Option 3: requiring reporting on pricing trends; and

Option 4: enhancing the ability of the regulators to intervene effectively.

Option One is for the two governments to maintain a watching brief, and to launch a furtherinvestigation in future, if necessary.

Option Two is for the two governments to introduce, through legislation, measures directly aimed at

pricing levels (imposing wholesale regulated terms of access, or wholesale and/or retail price caps)

or measures designed to alter the market structure (unbundling trans-Tasman roaming from

domestic mobile services, or requiring operators to offer mobile local-access services).

Option Three is for the two governments, through legislation, to require mobile operators to

provide the New Zealand and Australian regulators with wholesale and retail traffic and revenue

information on trans-Tasman roaming, and for the regulators to report publicly on this.

Option Four is for the two governments, through legislation, to empower the New Zealand and

Australian regulators, when investigating trans-Tasman roaming services, to choose from a wider

range of regulatory measures, should the regulators determine that intervention is warranted.

Recommendation

We favour Options Three and Four in parallel. We therefore recommend that the New Zealand and

Australian governments:

require the New Zealand and Australian regulators to collect and report regularly on wholesale

and retail price trends for trans-Tasman roaming, with appropriate protections against

disclosure of commercially sensitive information; and


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expand the remedies available to the New Zealand and Australian regulators for investigations

into trans-Tasman roaming services, to include:

o wholesale regulated terms of access;

o wholesale price caps;o retail price caps, whether opt-in, opt-out or compulsory for roamers (with a

presumption in favour of opt-in, in order to minimise market distortions);o mobile local-access obligations:

a wholesale obligation on visited networks to offer home networks a mobile

local-access service, and a corresponding retail obligation on home networks

to offer that mobile local-access service to their end-users; or

a retail obligation on visited networks to offer directly to inbound roamers a

mobile local-access service.

We also recommend that, in implementing these recommendations, the two governments ensure

that:

regulators aim to cooperate on remedies rather than imposing them unilaterally, whilerecognising that different market conditions in different countries could justify a departure

from this principle;

regulators be free to apply remedies asymmetrically amongst operators, and to impose

combinations of remedies, if that is appropriate in the circumstances at the relevant time.

Reasons for recommendation

The benefits of expanding the regulators palette of remedies mimic those of directly intervening,

with far fewer upfront costs. Because operators, particularly those in New Zealand, have responded

to the threat of effective regulation posed by the current investigation, it is likely that, once

enhanced remedies are implemented, prices for trans-Tasman roaming will continue their decline

and operators will continue to expand the array of features they offer their trans-Tasman roamers

perhaps even introducing mobile local-access services. In the event that this does not occur, and

regulators are obliged to intervene in the market, then prices will at that time be forced down to

competitive levels.

Requiring the regulators to collect and report on pricing trends could name and shame operators

(as a group) into more competitive offerings. It would also provide the regulators, and potentially

the Governments during a review of the effectiveness of the regime proposed, with information

they could use to decide whether consideration of further (or less) intervention is necessary. It is

therefore a useful and proportionate complement to the expansion of regulatory remedies.


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Section 1: Market definition

We begin this section with a brief comment on the approach we have taken.

In the Draft Report, we approached the definition of relevant (wholesale) markets by:- starting with the provision by VNs to HNs of trans-Tasman voice, SMS and data roamingservices;

- considering whether other services should be included in the same market as those services

either because:

o the other service is substitutable for those services; or

o the other service forms part of a cluster with those services.

In our assessment of substitutability, we used the hypothetical monopolist test, to determine

whether a small but significant, non-transitory price (SSNIP) increase would be sustainable. Some

respondents criticised this approach.

Telecom NZ submitted that the use of the SSNIP test to the markets for services in network

industries should in our view be the exception rather than the rule.4 Vodafone NZ echoed this by

stating that SSNIP tests are commonly used in an anti-trust context for mergers and acquisitions.5

These submissions are misplaced. It is true that there are occasions when the SSNIP test should be

avoided in network industries, but that is where industry rates are regulated. This is because, if the

regulated rate is lower than the hypothetically competitive rate, there is more scope for a SSNIP

on the regulated rate to be sustainable. As a result, the market can be defined too narrowly (the

reverse Cellophane fallacy). In the present case, however, there is no regulation of trans-Tasman

roaming rates.

1.1 Wholesale market

1.1.1 Product dimension

In the Draft Report, we concluded that the product dimension for wholesale trans-Tasman roaming

services included access, origination and termination, and that it encompassed these services

whether they were supplied in the context of traditional roaming (where communications primarily

hub through the home network) or in the context of a mobile local-access (MLA) service (where

communications are effected by the visited network alone).

Telecom NZ made an oblique criticism of this approach in stating that the market definition should

have taken a broader approach to economic substitutes and not been as technologically focussed.6

When asked for clarification, the company stated in correspondence with us that wifi (a

technologically different service) might be a wholesale substitute for HNs. In fact, the Draft Report

4Telecom NZ, para 8

5Vodafone NZ, para 26

6Telecom NZ, para 8


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considered wifi as a wholesale substitute. We stated that this service faces obstacles to being

considered a substitute for wholesale IMR services: not only is it a data-centric service, but it also

fails to offer the comprehensive geographic coverage of a mobile network.7 We have seen no

evidence in submissions to suggest that this conclusion was flawed. We note further that HNs do not

provide the ability to redirect incoming calls to their roamers Wi-Fi VoIP service.

1.1.2 Geographic dimension

The Draft Report concluded that the wholesale market for the provision of trans-Tasman roaming

services is a single national one. In other words, VNs compete in one territory, being the whole of

the country in which they are established. Respondents did not comment on this conclusion, and we

maintain it.

1.1.3 Customer dimension

The Draft Report defined the wholesale market as the market for the provision of IMR-like services

to HNs across the Tasman, rather than to HNs from all foreign destinations. Respondents did not

comment on this conclusion, and we maintain it.

1.2 Downstream market

1.2.1 Product dimension

In the Draft Report, we concluded that the product dimension for retail trans-Tasman roaming

services included access, origination and termination, and that it encompassed these serviceswhether they were supplied in the context of traditional roaming or in the context of an MLA

service.

The two major issues that emerged during the consultation period were:

- whether domestic services should be included in the retail market; and- whether alternative means of communication should be included in the retail market.

1.2.1.1 Domestic services

The Draft Report concluded that domestic retail mobile services should not be considered to form acluster market with trans-Tasman roaming services, given the evidence of the MED survey that a

large number of customers would unpick the two services if they were able.

In its submission, Optus however stressed that operators compete by selling a multi-product bundle

of services to consumers These services are not typically offered on a stand-alone basis rather they

are offered in combination as product bundles. As such any proper analysis of the market must

consider how operators compete across the combined bundle.8 (para 1.3). The GSM Association

7Draft Report,section 1.1.1.1, at p.15

8

Optus, para 1.3


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echoed these comments, stating that looking at roaming prices in isolation may be misleading, as

the price of roaming is one element within an overall tariff bundle for the total mobile service that a

consumer purchases. This bundle can include the price of a mobile handset, the monthly rental,

domestic call charges, SMS charges, volume discounts, contract term, and interconnection charges

for terminating calls that originate off-net.9

What these respondents are effectively claiming is that operators determine the market definition

by their practices: if they include a service in a bundle, then it is part of the same retail market as the

other services in the bundle.

However, as the European Commission has made clear, if, in the presence of a small but significant

non-transitory increase in price there is evidence that a sufficient number of customers would

unpick the bundle and obtain the service elements of the bundle separately, then it can be

concluded that the service elements constitute the relevant markets in their own right and not the

bundle.10

The MED survey results seemed to provide the evidence mentioned by the European Commissionbut, given recent price drops for retail roaming services, they may now be vulnerable to the

cellophane fallacy. Still, respondents have not provided any evidence contradicting the initial

assumption we made in the May 2010 Discussion Document that sufficient customers would choose

to unpick domestic services and international roaming if they had the choice. Nor, as we noted in

the Draft Report, has any New Zealand or Australian operator ever argued that the OECD/Teligen

domestic pricing benchmarks (often relied upon by the New Zealand regulator, the NZCC/M, and the

Australian regulator, the ACCC, for the regulation of domestic services) should be extended to

include IMR pricing in order to reflect a wider retail market definition. Finally, we also wonder to

what extent operators can credibly argue that trans-Tasman roaming services are part of the

domestic services market when the bulk of their submissions argue that trans-Tasman roaming

services are in the same market as local alternative services.

As such, we maintain our view that, despite the bundling of domestic services with trans-Tasman

roaming services, there are insufficient grounds on which to include the two services within a cluster

market.

1.2.1.2 Roaming in other destinations

The Draft Report concluded that it was not appropriate to include roaming services for third-country

destinations in the retail market, notably due to the lack of demand-side substitutability.

Respondents did not comment on this conclusion, and we maintain it.

9GSM Association, p.8

10See Explanatory Memorandum to Commission recommendation dated 11 December 2011 on Relevant

Product and Service Markets within the electronic communications sector susceptible to ex ante regulation, at

section 3.2


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1.2.1.3 Alternative means of communication

The Draft Report concluded that it was inappropriate to include any alternative means of

communication in the same retail market as trans-Tasman roaming. It did so on the basis of limited

supply-side and demand-side substitutability.

Arguments on this point centred on the interpretation of survey results and on the conclusions

reached.

Interpretation of survey results

In the Draft Report, we made two key assumptions when interpreting the results of the MED survey:

first, that using a roaming service less in response to a SSNIP (own price elasticity) is not sufficient

to demonstrate demand-side substitutability; and that when assessing diversion ratios to alternative

services (cross price elasticity), it was appropriate to test individual alternatives rather than

alternatives collectively.

In our opinion, such an approach sits well with Queensland Wire, where it was stated that in the

determination of a 'market' for particular purposes, regard shall be had to substitute products, being

products which have a reasonable interchangeability of use and which have high cross-elasticity of

demand, i.e. where a small decrease in the price of a particular product would cause a significant

quantum of demand for a similar product to switch to the product in question.11

Nevertheless, Optus objected to both our assumptions. It considered that significant own price

elasticity was sufficient to demonstrate demand-side substitutability.12 It also submitted that the

SSNIP test must be applied to all alternative means of communication as a group.13

On the first point, we can understand Optus perspective. However, it fails to take into account therisk of false negatives that the SSNIP test can generate; the fact that many people might simply use

a product less, rather than switch to any alternatives, may mean that a price rise is unsustainable,

but not because of any demand-side substitutability (which is what we are trying to assess).

On the second point, Optus appears to be echoing sentiments expressed in the academic literature.

Werden, for example, has written that it is folly to focus on the competitive significance of

individual substitutes rather than on the collective competitive significance of all substitutes. He

states:

If there are many brands, as with breakfast cereals, the cross elasticities of demand between

any pair of products may be quite small [A] small increase in [a brands] price would induce

substitution to many other brands, each of which gains only a small fraction of the customers. Ifcross elasticities were the basis for market delineation, each brand would probably have to be

considered a market unto itself.14

11Mason CJ and Wilson J, in Queensland Wire Industries Pty. Ltd. v Broken Hill Proprietary Co. Ltd (1989)

Australia, 167 CLR 177

12Optus, para 2.28

13Optus, para 2.21

14Gregory Werden, Demand Elasticities in Antitrust Analysis, Antitrust Law Journal, Vol 66, No.2, 1998, p.363

at p.402


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We accept that the Draft Report may have erred in this respect. We think, as a matter of common

sense, there is a case for using the own-price elasticity as a guide for whether or not another

individual product should be added to the market definition. Individual cross-elasticities can then be

used to select the next best alternative to add to a market definition before repeating the SSNIP

test.

In this regard, the own-price elasticity indicated in the survey ranged from 40-71% of respondents in

the MED survey, depending on whether they were individuals, SMEs or large corporates, and

whether the test concerned voice or data.

On the face of it, this suggests that a 10% price increase would be unsustainable and that the next

best alternative product should be added to the market, before repeating the survey. However,

switchers would continue to generate a certain amount of roaming traffic because:

- the survey indicates respondents would try to use roaming less, not stop using it altogether;and

- there are barriers to switching that may make it hard for respondents to act on their desireto move to an alternative service (for example, wifi cannot be used outside accessible wifizones, company premises may not be accessible 24 hours a day).15

The issue becomes whether this residual use of roaming by switchers, when combined with the

increased revenue from the SSNIP applied to non-switchers, would be enough to compensate for the

loss in revenue caused by the partial switching to alternative services.

We suspect that the answer is no, and that therefore we would need to add the strongest

substitute and then rerun the SSNIP test with a new survey. However, we do not consider it

necessary to resolve this issue definitively.

That is because, as the Draft Report noted, the prices used for the MED survey were the prevailing

prices at the time. Subsequent price movements have demonstrated that these were startlingly far

from the competitive level. 2degrees, for example, now offers incoming voice calls at NZ$0.44 per

minute and data at as little as NZ$0.50 per MB. This compares with the figures of NZ$1.00 per

minute and NZ$10.00 per MB used in the survey. Telecom NZ itself highlights this cellophane

fallacy: The reality is that the starting point of the SSNIP test applied was at a price that is

substantially higher than it is today.16

As a result, the responses to the SSNIP portion of the MED survey are likely to lead to an overly wide

market definition, and should not be relied on.

15In this regard, ACCANs submission on the optimism bias seems relevant when interpreting the MED

survey results. In section 1.2 of its submission, ACCAN notes that consumers have an unrealistic optimism

about future events and believe that they are more skilled and less likely to experience a negative event than

others.

16Telecom NZ, para 8


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Conclusions reached

In this context, we consider that it is appropriate to focus on other elements that may provide clues

as to the limits of the relevant retail market. As pointed out by Optus, the ACCC has set out a

number of types of information that can inform an assessment of substitutability.17 These include:

- the function of the product;- physical and technical characteristics of the product;

- costs of switching purchases;

- views and past behaviour of buyers;- evidence of buyers switching to other products in response to price increases in the recent

past;

- evidence of producers redeploying their production capacity in response to price increases

in the recent past;

- views, business records and past behaviour of suppliers;

- relative price levels and price movements.

As evidenced by the submissions, the two main contenders for inclusion in the same market astrans-Tasman roaming services are wifi services and SIM cards.

Using the ACCC points as a guide, we consider that wifi hotspots should be excluded from the

market, on multiple grounds. For example, the function of trans-Tasman roaming is to allow

communications across the breadth of a territory; the function of wifi is to enable communications

within discrete geographic zones. The main technical characteristic of roaming is support for voice,

SMS and data services; the main technical characteristic of wifi is support for data services. The costs

of switching to wifi are high in the sense that the customer loses the ability to use his or her original

number, can no longer use traditional telephony or SMS service, and may face difficulties in

registering complaints. Wifi also generally involves significant security compromises compared to

use of a cellular network. Furthermore, there seems little possibility for wifi providers to switch toproviding mobile cellular services in response to a SSNIP. And operators, while they have expressed

the view that they compete with wifi, have produced no evidence in support, be it evidence that

they have actively monitored wifi prices abroad or evidence that roaming price trends correlate with

foreign wifi prices. For example, neither VHA (3 brand) or Telstra has provided any evidence of

customers switching to wifi, in response to their increases in outgoing voice and SMS prices for

trans-Tasman roaming between 2010 and 2011.

We are less certain about excluding SIM cards, be they local (e.g. for a New Zealander, a Telstra

SIM card) or global (e.g. TravelSIM).

In this regard, while TUANZ points out that swapping out a SIM card for a local providers card is

rarely as simple as it sounds18 (for example, with iOS handsets, the consumer must type in a local

APN before gaining access to data services), local and global SIMs do share with trans-Tasman

roaming the same function and the same technical characteristics (except to the extent that some

global SIMs are limited to voice and text).

Further, as Vodafone NZ states, mobile operators on both sides of the Tasman including Vodafone

have spent considerable amounts on advertising at international airports. International airport

17ACCC, Merger Guidelines, para 4.27

18TUANZ, p.4


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advertising for local SIMs, similar to airport car-parking, is considerably more expensive than most

other forms of similar advertising. Vodafone New Zealand continues to spend significant on

advertising at international airports. However, the benefit of engaging in such activity is clearly

correlated and only justified by local SIM substitution for mobile roaming.19

One issue that concerns us, however, is the need to change SIM cards and the associated loss of thecustomers usual mobile number. Optus claims that the fact that alternative local services do not

allow a roamer to be contacted on his or her usual number is not sufficient to warrant a separate

economic market.20 However, as TUANZ states in its submission, loss of ones usual mobile number

is not a painless experience for most customers.21 Optus has itself previously underlined the

barrier that loss of ones mobile number poses domestically, stating that with the introduction of

mobile number portability in the Australian domestic market the last barrier to competition in the

mobile market is about to finally come down.22 In New Zealand, the Telecommunications Forum

(TCF) states on its website that local and mobile number portability has empowered consumers and

businesses to choose the service provider that best meets their needs.23

Another issue with including local and global SIM cards in the same market as trans-Tasman roamingservices, at least for the downstream market relevant to Australian roamers,24 is SIM-locking. All

Australian operators SIM-lock some of their mobile devices. While most SIM-locking concerns

prepaid roamers (who are, we understand, less likely to roam):

- this is of little comfort to prepaid roamers; and

- post-paid customers using Apple and Blackberry devices are also SIM-locked. While this is at

the direction of the device manufacturer and can be reversed by a call to the operator

concerned, it remains an extra obstacle to those who, upon arrival in New Zealand, find

themselves unable to make a local SIM function.

Still, we note that despite similar barriers to switching faced by domestic end-users (for example, the

absence of mobile number portability in New Zealand until 2007; SIM-locking in Australia; theexistence of incompatible CDMA and GSM networks in both countries for a time), the NZCC/M and

ACCC have both included all mobile connections in the same retail mobile services market

19VFNZ, para 25. We would point out, however, that while operators domestic teams are aware of pricing for,

and compete with, roaming services (e.g. advertising at airports), operators have produced no evidence that

their roaming teams are aware of pricing for, and compete with/feel constrained by, domestic services. New

Zealand operators produced no charts from their roaming teams showing they track (or are even aware of)

Australian prepaid pricing, and Australian operators produced no charts from their roaming teams showing

they track (or are even aware of) New Zealand prepaid pricing.20

Optus, para 2.57

21TUANZ, p.4.

22See media release dated 27 August 2001 at

www.optus.com.au/aboutoptus/About+Optus/Media+Centre/Media+Releases/2001/Optus+unveils+MNP+pla

ns

23See www.tcf.org.nz/content/26d0a04d-68a3-4cbd-bafb-ebee1d688992.html

24Telecom NZs Skinny brand also SIM-locks its handsets, although it is a very minor player in the market.
http://www.optus.com.au/aboutoptus/About+Optus/Media+Centre/Media+Releases/2001/Optus+unveils+MNP+planshttp://www.optus.com.au/aboutoptus/About+Optus/Media+Centre/Media+Releases/2001/Optus+unveils+MNP+planshttp://www.tcf.org.nz/content/26d0a04d-68a3-4cbd-bafb-ebee1d688992.htmlhttp://www.tcf.org.nz/content/26d0a04d-68a3-4cbd-bafb-ebee1d688992.htmlhttp://www.optus.com.au/aboutoptus/About+Optus/Media+Centre/Media+Releases/2001/Optus+unveils+MNP+planshttp://www.optus.com.au/aboutoptus/About+Optus/Media+Centre/Media+Releases/2001/Optus+unveils+MNP+plans


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downstream from wholesale mobile termination services.2526 They do not appear to have

considered that these barriers to switching warranted defining separate retail markets for different

operators (although we can find no active consideration of this point by the regulators). Is there

something that distinguishes trans-Tasman roaming services from domestic services, such that the

regulators approach to domestic market definition should not apply?

We believe there may be. This is because the costs associated with switching SIM cards, and losing

ones original number, seem higher when roaming than when at home, both in absolute terms and

relative to the benefits gained.

In absolute terms, the switching process domestically is seamless: customers are in a familiar

environment (their home market) and can use their original number without penalty until the very

moment they insert the rival companys SIM card. Whats more, after switching mobile numbers,

many can still be reached on a fixed line connection (be it at the home or at the office) by those

unaware of their change of number.

By contrast, roaming customers are in an unfamiliar environment and, unless they hold a (still active)SIM card from a previous trip, they will also have to either go without communication, or navigate a

period of roaming charges, before they locate and insert a local SIM (and for New Zealand travellers

in Australia, produce appropriate registration details).27 After switching numbers, they are unlikely

to be as easily reachable on a fixed line connection, since their fixed contact number will have

changed also (and indeed may change from day to day if they are travelling around their visited

destination). They will also lose in terms of mobile coverage: roamers enjoy the combined coverage

of all the visited networks with which their home network has a roaming agreement, but on

switching to a local SIM they are limited to the coverage offered by the local operator they have

chosen. Roaming customers who use local SIM or global cards also have to switch numbers twice:

once upon arrival in the destination; and again on their return to their home market.

In relative terms, domestic customers stand to gain for a long period of time by switching to a more

competitive provider. By contrast, trans-Tasman roamers travel to their destination for a limited

period of time. In this context, the cost of changing SIMs becomes greater, relative to the likely

benefits: a morning spent finding a local SIM card,28 then making calls to ones home network to

unlock ones device, is a valuable portion of ones trip not spent visiting local attractions or securing

a business deal.

In this context, we tend to the view that local and global SIM cards are not part of the same retail

market as trans-Tasman roaming services.

25By contrast, neither the ACCC nor the NZCC/M has ever included wifi in the downstream (domestic) mobile

market for any wholesale mobile service

26See also the ACCC Final Report on mobile number portability (MNP) dated September 1999, at

www.accc.gov.au/content/item.phtml?itemId=688494&nodeId=bcc11f2ed2bdfe18764f9eaf364f6932&fn=Mo

bile+number+portability+final+report+(Sep+99).pdf

27Local SIM cards are available at some international airports.

28Anecdotal evidence suggests that most visitors arriving after a three-hour trans-Tasman flight do not line up

to acquire a local SIM card at the airport.
http://www.accc.gov.au/content/item.phtml?itemId=688494&nodeId=bcc11f2ed2bdfe18764f9eaf364f6932&fn=Mobile+number+portability+final+report+(Sep+99).pdfhttp://www.accc.gov.au/content/item.phtml?itemId=688494&nodeId=bcc11f2ed2bdfe18764f9eaf364f6932&fn=Mobile+number+portability+final+report+(Sep+99).pdfhttp://www.accc.gov.au/content/item.phtml?itemId=688494&nodeId=bcc11f2ed2bdfe18764f9eaf364f6932&fn=Mobile+number+portability+final+report+(Sep+99).pdfhttp://www.accc.gov.au/content/item.phtml?itemId=688494&nodeId=bcc11f2ed2bdfe18764f9eaf364f6932&fn=Mobile+number+portability+final+report+(Sep+99).pdf


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However, we think it important to consider a further indicator useful for market delineation

purposes: price correlation. If two products/regions are in the same market, one would expect that

prices move together over time due to active demand and supply substitution.

Given that New Zealand operators do not generally SIM-lock their mobile devices, and that roaming

to Australia constitutes a large proportion of all outbound roaming for New Zealand operators, onemight expect any price correlation between trans-Tasman roaming prices and local/global SIM prices

to be more apparent in the New Zealand (as opposed to Australian) Retail Market.

However, trends in New Zealand operators roaming prices for Australia do not appear to have

correlated significantly to trends in pricing for Australian local users or to trends in pricing for global

SIM users.

For example, the graph below shows New Zealand operators pricing for data roaming in Australia as

against recent trends in Australian wireless Internet pricing.2930 The graph shows little apparent

price correlation.

The graph below shows New Zealand operators pricing for voice roaming31 in Australia as against

recent trends in Australian prepaid GSM pricing (GSM pricing being a proxy for voice pricing,

although SMS are also included in the basket32).33 This appears to show some degree of correlation,

although only after the 2009/2010 period when the joint investigation was launched.

29 Australian pricing has been sourced from the ACCC report entitled Changes in prices paid for

telecommunications services in Australia, 201112, scheduled to be tabled in the Australian Parliament in the

first sitting week of 2013. That report states that wireless internet services are those services that provide internet

connectivity via a USB modem key or wireless card. In other words, they reflect dongle data pricing.30

The Australian data prices reflect both prepaid and postpaid pricing (the ACCC has not isolated prepaid

pricing for this service).

31We have calculated New Zealand operators pricing using the typical roamer profile approach used in the

Discussion Document of May 2010 (using outgoing and incoming calls of 2 and 2.5 minutes).

32Section 8.1.2 of Report 2 of the ACCC Report for 2010/11 (available at

www.accc.gov.au/content/item.phtml?itemId=1060713&nodeId=5efa3bfbeea69f8cf1cf30c7690edbcb&fn=AC

CC%20Telecommunications%20reports.pdf) sets out the manner in which baskets were constructed.

-

20

40

60

80

100

120

2007/8 2008/9 2009/10 2010/11 2011/12

Index

NZ data roaming prices versus

Australian data pricing

Australian local pricing NZ roaming pricing
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Overall, we acknowledge that local and global SIM cards can and possibly do exert constraint on

trans-Tasman roaming services, at least in the absence of SIM-locking. However, given our residual

concerns, we consider it more appropriate to consider the impact of this constraint in the

assessment of competition.

In this conclusion, we see a parallel with the decisions of the NZCC34

and the ACCC35

to consider that

butcheries, bakeries, dairies and convenience stores were not part of the same retail market as

supermarkets, on the basis that only supermarkets provided a one-stop shopping experience.

Only trans-Tasman roaming services from HNs offer a one-stop communication experience: the

customers home number; the use of the home SIM; full mobile coverage; etc.

There may be merit in VHAs suggestion36 to consider dividing the retail market for trans-Tasman

roaming into two, with mobile telephony services on the one hand (for which local and global SIMs

would not be substitutable) and mobile broadband services on the other hand (for which local and

global SIMs would be substitutable). However, we do not consider it justified at this time.37

33The figure for 2011/12 includes both prepaid GSM and prepaid 3G mobile services, due to changes in

the data reported by the ACCC.

34 See NZCC Decisions nos.606 and 607, Foodstuffs and the Warehouse, 8 June 2007 at paras 120 et seq,available at www.comcom.govt.nz/assets/Imported-from-old-

site/PublicRegisters/ContentFiles/Documents/PUBLIC-VERSION-Decision-606-and-607.pdf35

See Australian Competition and Consumer Commission: Public Competition Assessment on Woolworths

Limited Proposed Acquisition of 22 Action Stores and Development Sites , 19 October 2005, at p.636

VHA, p.7

37The ACCC considered whether retail mobile services should be split into two markets, mobile telephony and

mobile broadband, in its consideration of the Vodafone-Hutchison merger in 2009. It rejected this idea on the

basis of supply-side substitutability, and limited but increasing demand-side substitutability. See the ACCC

Public Competition Assessment dated 24 June 2009 at para 51, available at

www.accc.gov.au/content/index.phtml/itemId/874445/fromItemId/751043

40

50

60

70

80

90

100110

2007/8 2008/9 2009/10 2010/11 2011/12

Index

NZ voice roaming pricing versus

Australian prepaid GSM pricing

Australian local pricing NZ roaming pricing
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1.1.2 Geographic dimension

The Draft Report concluded that the retail market for the provision of trans-Tasman roaming

services is a single national one. In other words, HNs compete in one territory, being the whole of

the country in which they are established. Respondents did not comment on this conclusion, and we

maintain it.

1.1.3 Customer dimension

The Draft Report defined the retail market as the market for the provision of IMR-like services to

customers who travel across the Tasman. Respondents did not comment on this conclusion, and we

maintain it.

1.3 Conclusion

We confirm our conclusion in the Draft Report that, in each of New Zealand and Australia, there is a

wholesale market for the provision:

- by VNs;- to HNs based across the Tasman;

- of IMR-like services (including traditional IMR services and MLA services);

- for voice, SMS and data communications.

We also confirm our conclusion in the Draft Report that, in each of New Zealand and Australia, there

is a retail market for the provision:

- by HNs

38

, their MVNOs, and potentially VNs;- to customers who travel across the Tasman;- of IMR-like services (including traditional IMR services and MLA services);

- for voice, SMS and data communications.

38 New Zealand HNs are downstream from Australian VNs; Australian HNs are downstream from New Zealand VNs.

38 However, the emerging use of send or pay arrangements could be construed as a form of access charge.

38 VNs charge the MSRN termination fee not to the HN but to the telecommunications operator that ultch enables services with high price elasticity to be offered at lower

prices.

38 These activities will be supplemented by others: for example, in the case of outgoing SMS and data, the HN will need to arrange and pay for the termination of the SMS

on the destination network / the c onnection of the data to the internet.

38 Some Australian HNs also charge a flag fall.

38 Mobile operators in the same country typically charge one another an SMS termination charge. By contrast, mobile operators in different countries typically use bill

and keep.

38 We have calculated HN profit by subtracting, from HNs revenues, wholesale charges paid to VNs and the additional costs identified by WIK.

38 See the MED survey results, available a t www.med.govt.nz/sectors-industries/technology-communication/communications/mobile-phones/trans-tasman-roaming

38 They may, by contrast, have regulatory incentives to do so, such as in the face of the current joint investigation.

38XT does, however, refer to the fact that Vodafone NZ and VHA have joint ownership: We do understand

that Vodafone New Zealand and Vodafone Australia roam on each
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Section 2: Competition assessment: current state of the

markets

2.1 Introduction

For the Draft Report, we commissioned WIK to produce estimates of the costs underlying the

provision of wholesale trans-Tasman roaming (TTR) services by a VN to a HN. WIKs estimates, and

our aggregation of them, appear in the tables below:

2011 costs to New Zealand VNs (NZ cents, to one decimal point)

Scenario

WIK cost

estimate

(NZ cents)

Assumed

proportionSub-total

Assumed

aggregate

cost

(NZ cents)

Voice outgoing

per min

Local 6.3 0.15 0.945

11.7Home 12.6 0.80 10.08

3rd

country 12.6 0.05 0.63

Voice incoming

per min

From local 9.1 0.15 1.365

5.8From home 5.2 0.80 4.16

From 3rd

country5.2 0.05 0.26

SMS outgoing

per text

Local 0.9 0.15 0.135

0.9Home 0.9 0.80 0.72

3rd

country 0.9 0.05 0.045

SMS incoming

per text

From local 0.9 0.15 0.135

0.9From home 0.9 0.80 0.72

From 3rd

country0.9 0.05 0.045

Data

per MBn/a 27.5 1 27.5 27.5

2011 costs to Australia VNs (AU cents, to one decimal point)

Scenario

WIK cost

estimate(AU cents)

Assumed

proportion Sub-total

Assumed

aggregate

cost

(AU cents)

Voice outgoing

per min

Local 6.0 0.15 0.9

9.3Home 9.8 0.80 7.84

3rd

country 10.9 0.05 0.545

Voice incoming

per min

From local 8.4 0.15 1.26

5.6From home 5.1 0.80 4.08

From 3rd

country 5.1 0.05 0.255

SMS outgoing

per text

Local 0.8 0.15 0.12

0.8Home 0.8 0.80 0.64

3rd

country 0.8 0.05 0.04


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Scenario

WIK cost

estimate

(AU cents)

Assumed

proportionSub-total

Assumed

aggregate

cost

(AU cents)

SMS incoming

per text

From local 0.8 0.15 0.12

0.8From home 0.8 0.80 0.64From 3

rdcountry 0.8 0.05 0.04

Data

per MBn/a 24.7 1 24.7 24.7

For the Draft Report, we assumed that these costs would have been 5 per cent higher in 2010 and 5

per cent higher again in 2009. We further assumed, for outgoing voice calls and SMS, that 80 per

cent are calls/texts back to the home country, 15 per cent are calls/texts to a network within the

visited country, and 5 per cent are calls/texts to networks in a third country. We used the cost

estimates to help calculate the margins that VNs enjoy (profit divided by costs).

We also commissioned WIK to produce estimates of the costs that a HN incurs in providing TTR

services to its retail customers (beyond the wholesale charge it must pay to the VN). This produced

the following.

2011 costs to New Zealand HNs (NZ cents, to one decimal point)

Scenario

WIK cost

estimate

(NZ cents)

Assumed

proportionSub-total

Assumed

aggregate cost

(NZ cents)

Voice outgoing

per min

Local 32.9 0.15 4.935

32.9Home 32.9 0.80 26.32

3rd

country 32.9 0.05 1.645

Voice incoming

per min

From local 36.9 0.15 5.535

36.9From home 36.9 0.80 29.52

From 3rd

country 36.9 0.05 1.845

SMS outgoing

per text

Local 21.0 0.15 3.15

21.0Home 21.0 0.80 16.8

3rd

country 21.0 0.05 1.05

SMS incoming

per text

From local 21.0 0.15 3.15

21.0From home 21.0 0.80 16.8

From 3rd

country 21.0 0.05 1.05

Data

per MBn/a 36.4 1 36.4 36.4

2011 costs to Australia HNs (AU cents, to one decimal point)

Scenario

WIK cost

estimate

(AU cents)

Assumed

proportionSub-total

Assumed

aggregate cost

(AU cents)

Voice outgoing

per min

Local 28.0 0.15 4.2

28.0Home 28.0 0.80 22.4

3rd

country 28.0 0.05 1.4

Voice incoming From local 31.3 0.15 4.695 31.3


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Scenario

WIK cost

estimate

(AU cents)

Assumed

proportionSub-total

Assumed

aggregate cost

(AU cents)

per min From home 31.3 0.80 25.04

From 3rd

country 31.3 0.05 1.565

SMS outgoing

per text

Local 17.8 0.15 2.6717.8Home 17.8 0.80 14.24

3rd

country 17.8 0.05 0.89

SMS incoming

per text

From local 17.8 0.15 2.67

17.8From home 17.8 0.80 14.24

From 3rd

country 17.8 0.05 0.89

Data

per MBn/a 31.0 1 31.0 31.0

For the Draft Report, we assumed that these costs would have been 5 per cent higher in 2010 and 5

per cent higher again in 2009. We further assumed, for outgoing voice calls and SMS, that 80 percent are calls/texts back to the home country, 15 per cent are calls/texts to a network within the

visited country, and 5 per cent are calls/texts to networks in a third country. We used the cost

estimates to help calculate the margins that HNs enjoy (profitdivided by costs).

Several operators criticised WIKs price estimates, with Telstra and Optus submitting detailed

critiques.

Telstra expressed concerns about some of the parameters used by WIK in its analysis. In particular,

some figures do not appear to have been updated from the levels used in [the ACCCs model of]

2007.39

Regarding revisions to the 2007 model, the ACCC has advised that they engaged WIK to provide a

cost model in 2007 and WIK updated it in 2008 to replace 2001 Census data in the model with 2006

Census data. The updated model was referred to in the ACCC MTAS pricing principles determination

in March 2009, which Telstra notes in its submission.

In response to Telstras claim, we note that, in its work for the current investigation, WIK took as a

starting point the model with the 2006 Census data, which is what the ACCC has indicated was the

basis for the revised model they used.

Some of the more specific issues that Telstra raises for example, that dongles were not yet a factor

during WIKs earlier work, but are now are fair points. However, the focus in the WIK study was on

unit costs, not on total costs. Higher volumes from dongles and the like would (mostly) tend to imply

lower unit costs. We consider that the numbers provided by Telstra to WIK40 suggest WIK has been

conservative in its traffic assumptions and that this reinforces the view that WIKs results can be

viewed as an upper bound.

39Telstra, para 63

40Internal Telstra information concerning voice and data traffic. See Telstras comments on the average

traffic per SIO at para 63 of its submission.


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Optus, for its part, raised five specific criticisms of the WIK study. All of these had to do with the cost

model derived from the previous work. Its five criticisms, and our discussion of them, are set out

below, grouped into three categories:

(i) Traffic assumptions

According to Optus, the WIK study includes an incorrect treatment of data traffic, resulting in an

over-estimation of total network traffic of between 90-190%. Optus also claims that the study

includes an incorrect ratio of voice to data traffic, resulting in a significant cost allocation away from

voice services towards data services.

In the WIK model, we note that they use a GPRS MB per voice minute conversion of 0.080357. This is

what was used in the original model. Using this conversion number and an estimate of the data

traffic (measured in MB), WIK estimate the data traffic equivalent in voice minutes, which is what

the model uses to dimension the network. The split of voice against data traffic is roughly 20%-80%,

as noted by Optus.

We do not consider that WIK should be using another conversion factor. In our view, WIK should be

consistent with the modelling framework it is working with, which is 2.5G. WIK cannot in our view

implement conversion factors that reflect, say, LTE when that is not achievable within the confines

of the model.

WIK knew it was using an outdated model (from a technology perspective) to derive costs. Using

outdated or inefficient technology, it reasoned that the costs coming out of the model most likely

were higher than efficient costs. What Optus is claiming is that, had WIK used another conversion

factor, then voice share of direct costs would have been larger and hence would have attracted

more common costs. This is correct, but WIK is also using outdated, less efficient technology to

model costs. The issue becomes: which one of these effects dominates? We would suggest themodeling using old technology. In this context, making the adjustment Optus proposes would make

little difference to the final result.

(ii) Price assumptions

Optus claims that the WIK study fails to update asset prices to 2012 levels. It makes similar claims

regarding Australian spectrum prices.

In respect of asset prices, Optus main critique relates to leased lines. It provides a table claiming

that the leased line prices used in the WIK model are much lower than 2012 Regulated DTCS Prices.

To reach its result, Optus has calculated prices assuming lines are 1 km in length. In our opinion, this

approach greatly exaggerates the cost estimate. If one takes a more reasonable approach and

calculates the cost of the line at the mid-point of the distance range, i.e. for a leased line that is

between 0 and 10 km, take the price of a 5km line and divide by 5 (to get a price per km), the result

is a much lower price (in fact lower than used in the WIK model41).

41Leased line prices used in the WIK model reflect Telstra's wholesale leased line pricing in 2007. WIK assumed

the price trend was 0%, i.e. no price change. The prices are quoted per km.


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In any event, WIK reran its calculations using the ACCCs DTCS calculator42. It confirmed that the

prices WIK has used are in fact likely higher than the DTCS prices, and not lower as suggested by

Optus. In other words, with its 2012 values for leased lines, WIK is not understating the regulated

cost of leased lines in Australia.

In respect of Australian spectrum prices, Optus' critique consists of two parts: first, that the price ofspectrum should be updated compared to 2007; and second, that additional spectrum costs should

be included to account for spectrum in the 2.1 GHz and 850 MHz range.

On the first point, Optus submits that the WIK cost model update should have taken into account

the latest spectrum renewal prices for 900 MHz and 1.8 GHz. The latest yearly charge for 900 MHz

licences is AU$23 million, and the total price paid by the three operators for 1.8 GHz renewal was

AU$485 million. Optus submits that using the same 'simple average' method used in 2007 results in

the value of 1.8 GHz being AU$162 million.

In its cost model, WIK assumed as in 2007 a yearly charge for 900MHz of AU$20.4 million and an

initial value for 1.8 GHz of AU$96.5 million. Hence it is correct when Optus states that the values arethe same as in 2007. In our opinion, it would therefore be appropriate to update the figures as Optus

suggests, i.e. assume for 900 MHz an annual licence fee of AU$23 million and the value of 1800 Mhz

being AU$162 million.

We therefore asked WIK to run its model with revised spectrum values. WIKs conclusion was that

the change proposed by Optus has nearly no impact on the results. The unit costs change in the

order of plus 0.01 AU cents for origination and termination.

On the second point, Optus submits that the updated WIK cost model should also include the

valuation for other spectrum ranges over which data services are provided namely, 850 MHz, and

2.1 GHz. Optus submits that it is incorrect for the WIK cost model to assume data usage consistentwith what is currently seen over hybrid 2G/3G/HSPA/LTE networks yet fail to include any of the

costs. In Optus opinion, in the absence of the 2007 WIK cost model being able to structurally deal

with data networks, such data volumes should not be included. However, failing this, Optus submits

that the cost model update should include as many possible data-asset upgrades that can be

handled. An obvious inclusion is the cost of spectrum over which data is supplied.

We disagree with this point. The WIK model uses 900 and 1800 MHz frequencies and hence should

only include the cost of this spectrum.

To explain, WIK calculated the service unit costs within the confines of the WIK mobile model which

is based on 2G/2.5G technology. Since this model was built, there have been significant

developments in the mobile industry in both New Zealand and Australia, including a migration to

3G/3.5G networks, increased penetration, growth of data services, etc. While WIK has tried to take

as many of these developments into account as possible, upgrading the model to newer mobile

technology was not possible. Hence the model uses 2G/2.5G as the basis for the cost calculations.

In our opinion, WIKs approach leads to a conservative upper bound estimate of efficient costs.

Optus submits that the updated WIK cost model should also include the valuation for other

spectrum ranges over which data services are provided namely, 850 MHz, and 2.1 GHz. However,

this would serve no purpose for the modelling of service costs, as the frequencies would not be

42Available on the ACCC's website at www.accc.gov.au/content/index.phtml/itemId/990533
http://www.accc.gov.au/content/index.phtml/itemId/990533http://www.accc.gov.au/content/index.phtml/itemId/990533


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used. If the model had been flexible enough to adequately deal with these additional frequencies

and could be used to dimension the network then, in all likelihood, it would have been appropriate

to include them, but since WIK would simply be inflating cost estimates that it already believes are

conservative, we do not believe this is appropriate.

On a related matter, Optus notes that in a consultation paper WIK suggests that Optus can onlydeploy HSPA technology using 2.1GHz spectrum. WIK did not apply this assumption in the current

modelling. What WIK did, however, was to test the effect of using newer mobile technology by using

other WIK mobile models that are more flexible from a technology perspective. This helped WIK

understand the implications for service costs of applying 2G/2.5G technology compared to

3G/3.5G/4G technology in a world that is much more data hungry than it was when the WIK model

for Australia was built, and helped it decide whether it should be making any additional corrections

to the outputs it calculated.

(iii) Market share assumptions

In WIKs study, it notes the following with regard to market share:

"The update of the WIK-MNCM assumes the hypothetical operator has a 33.3 per cent market

share. We note that the principle of competitive neutrality defines a reference point such that all

operators in the market have the chance to reach a market position of equal market share. This

means that in a three carrier scenario the efficient operator should represent a market share of

33.3 per cent. Exhausting all economies of scale and therefore becoming the most efficient

operator in the market may however, imply a significantly higher market share for individual

MNOs."

In its submission, Optus claims that a 33.3% market share is not a realistic assumption for a

hypothetical future entrant, and that as a result the WIK model underestimates the efficient cost ofmobile services.

In order to run the model, WIK needs to assume a market share. Clearly this market share will affect

the overall level of economic costs calculated by the model and will generally result in lower costs

the more traffic and subscribers.

When we think of the hypothetical new entrant, as it may be, we should in our view be taking the

long term view, i.e. what would the market share in the market evolve to be in the long run. In this

case we have seen the market in both countries move to three operators in recent years and we

cannot see any reason (technological or economic) why this is not a reasonable assumption for what

the market in each country can sustain in the long term. Australia, of course, is geographically large

and as such may be able to attract certain niche operators. However, the definition of the entrant

should of course be that it targets the whole country and not just a subset (with domestic roaming

arrangements in the rest of the country).

An alternative approach would be to look at actual market shares. Other things being equal, the

cost per unit of service will be higher for an operator with a smaller market share than for an

operator with a larger market share, as this operator is less able to fill its base stations with traffic.

In Australia, Telstra is slightly larger than Vodafone and Optus, but generally they are all of similar

size and in that case 33% market share makes sense. WIK informs us that, previously in other

projects, they have performed some sensitivity analysis of what market share might mean for service


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costs. Based on that work, WIK estimates that within the bounds of 41% (Telstra) and 27%

(Vodafone) market share, service unit costs estimates would be within +/- 10% of those provided in

the WIK study, with Telstras cost being roughly 10% lower and Vodafone 10% higher.

For New Zealand and an operator like 2degrees the market share difference is fairly substantial.

However, here another factor comes into play: the cost per unit will be lower for an operator thatcovers with its network a smaller and relatively more densely populated portion of the national

territory and population. 2degrees relies on domestic roaming with Vodafone in certain areas. The

two cost drivers mentioned above, market share and extent of coverage, have opposing impacts on

the costs of 2degrees relative to the costs of the other operators. Unit costs of 2degress should be

higher because of lower market share, but lower because of a lower extent of coverage.

2.2 The wholesale market relevant to New Zealand roamers

Given the discussion in Section 2.1 above (and in particular the fact that the one area where we

agree that the WIK costs analysis should be amended Australian spectrum pricing in fact makesonly a minimal difference to WIKs cost estimates), we maintain our conclusions about the current

state of competition in the wholesale market relevant to New Zealanders.

That market is the market in which Australian VNs provide IMR-like services to New Zealand HNs

(the Australian Wholesale Market). The relevant conclusions are that:

- revenues per unit in the Australian Wholesale Market are trending down;

- margins in the Australian Wholesale Market are trending down, although they remain

significant;

- the quality of traditional roaming services is high, although no Australian VNs offer

wholesale MLA services to New Zealand HNs.

In its submission, Telstra stresses what it calls the potentially meaningless nature of any assessment

of [Australian] wholesale margins, given that Australian operators, being generally roaming out

(i.e. net outbound) in their relationship with New Zealand operators, make a net loss at wholesale

level.43 We would note only that a highly marked-up IOT is far from meaningless for the consumer,

since if we are to believe the operators, they are constrained by the IOT when setting retail prices.

2.3 The retail market relevant to New Zealand roamers

Given the discussion in Section 2.1 above, we maintain our conclusions about the current state ofcompetition in the retail market relevant to New Zealand roamers.

That market is the market in which New Zealand HNs (and potentially Australian VNs) provide IMR-

like services to New Zealanders travelling in Australia (the New Zealand Retail Market). The

relevant conclusions are:

- revenues per unit for voice and SMS appear constant, while revenues per unit for data havedropped significantly, in the New Zealand Retail Market;

- margins in the New Zealand Retail Market are trending down;

43Telstra, para 92


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- the quality of traditional roaming services is high, although no New Zealand HNs (or

Australian VNs) offer MLA services to New Zealand roamers.

We wish to acknowledge here the most recent pricing of Telecom NZ. Since 21 December 2012,

besides a cut to their outgoing voice rates, post-paid XT roamers have enjoyed flat-rate per-day

prices for data usage. For trans-Tasman roaming, that rate is, at least until 30 June 2013, NZ$6.00per day for any day on which data is used. 44 To our mind, this represents a significant and innovative

step.

We also note with approval the launch by Vodafone NZ in November 2012 of the Data Angel

Overseas service. Amongst other features, thisprompts travellers to consider purchasing a databundle when they arrive at their overseas destination. Data Angel Overseas also alerts data roamers

when they reach 80% and 100% of their data bundle. Once the bundle runs out, the data session

stops and roamers are redirected to a free website where they can choose to buy more from the

selection range.

A small point, though, is worthy of mention. In its submission, Telecom compares its (then) trans-Tasman roaming prices favourably to local prepaid prices. Vodafone NZ, for its part, stresses that its

roamers pay the same rate to make calls on both sides of the Tasman. Operators have not pointed

out, however, that:

- identical headline rates do not equate to identical charges, because billing increments can

differ (for example, Vodafone NZs post-paid customers are charged at a 60+1 increment

domestically, but at a 60+60 increment when roaming);

- it can be misleading to compare roaming prices with domestic prices because domesticcharges are inflated by GST.45

2.4 The wholesale market relevant to Australian roamers

Given the discussion in Section 2.1 above, we maintain our conclusions about the current state of

competition in the wholesale market relevant to Australians. That market is the market in which

New Zealand VNs provide IMR-like services to Australian HNs (the New Zealand Wholesale

Market).

That market is the market in which New Zealand VNs provide IMR-like services to Australian HNs

(the New Zealand Wholesale Market). The relevant conclusions are that:

- revenues per unit in the New Zealand Wholesale Market are trending down;

- margins in the New Zealand Wholesale Market are trending down, although they remainsignificant;

- the quality of traditional roaming services Is high, although no New Zealand VNs offerwholesale MLA services to Australian HNs.

44NZ timezone applies, and subject to a fair use policy.

45Section 11AB(b) of the Goods and Services Tax Act zero-rates residents roaming outside of New

Zealand.


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2.5 The retail market relevant to Australian roamers

Given the discussion in Section 2.1 above, we maintain our conclusions about the current state of

competition in the retail market relevant to Australian roamers.

That market is the market in which Australian HNs (and potentially New Zealand VNs) provide IMR-like services to Australians travelling in New Zealand (the Australian Retail Market). The relevant

conclusions a