Can an operator with insignificant scale have significant market power?

David Rogerson, Associate Principal Consultant, Regulatory Practice

Within the European Union's regulatory framework there is a requirement for national regulatory authorities (NRAs) to test for significant market power within a range of 18 different product and service markets.

One of these markets (Market 16) is defined as the market for call termination on an individual mobile operator's network. By definition, therefore, each mobile operator has 100% market share within this market. Furthermore, the concept of significant market power (SMP), based on the Competition Law concept of dominance, makes the presumption of SMP with anything over 40% or 50% market share. Does it therefore follow that all mobile operators are SMP operators in Market 16?

None of Europe's NRAs has deviated from the above logic; each has designated all mobile network operators (MNOs) as SMP in Market 16. But their logic has come under scrutiny based on recent decisions by the Competition Appeal Tribunal in the UK and the Electronic Communications Appeal Panel in Ireland. Both of these authorities have determined that SMP designation is not just a matter of 100% market share; in reality there are countervailing buyer powers that offset market power. In the case of small MNOs this is sufficient to offset even 100% market share in Market 16.

The UK and Irish decisions apply only to the case of Hutchison 3, which appealed the prior decisions of the NRAs. From this, we may hypothesise that a mobile operator with less than 5% share of mobile subscribers (the scale of 3 in the UK) should not be designated as having SMP in Market 16.

But what of MNOs just slightly above this threshold? Should they suddenly have the full force of SMP regulation thrust upon them, through such measures as accounting separation and cost-based pricing? Of course not! And here Europe's NRAs apparently agree; operators which have less than 20% market share have been allowed to set mobile termination rates that are on average 27% higher than those of the largest MNOs.

Evidence then suggests that there should be a three-pronged approach to regulating mobile termination rates as shown below.

Figure 1 Three-pronged approach to regulating mobile termination rates

David Rogerson is an Associate Principal Consultant with the Regulatory Practice at Ovum.