Response to TRC Consultation Mobile Markets…راجعة سوق الاتصالات... · Umniah – Response to TRC consultation on Mobile Markets – March 2010 Page 4 identifying

Umniah – Response to TRC consultation on Mobile Markets – March 2010 Page 1

Umniah response

to the

Public Consultation Document issued by the TRC

Review of Telecommunications Markets:

Mobile Markets

11 March 2010


Table of Contents

A. Introduction and Executive Summary.................................................................................... 3

A.1 Wholesale termination ............................................................................................................. 3

A.2 MACO remedies ...................................................................................................................... 3

A.3 Appropriate remedies ............................................................................................................... 5

B. Market for Retail Mobile Services (in the absence of any ex ante regulation) ...................... 7

C. Market for Mobile Call Termination (in the absence of any ex ante regulation) ................... 9

C.1 Wholesale termination pricing remedies ................................................................................ 11

C.2 Margin squeeze and transparency .......................................................................................... 11

D. Market for Wholesale SMS termination .............................................................................. 13

E. Market for Mobile Access and Call Origination (MACO) .................................................. 14

E.1 The three criteria test for MACO in Jordan ............................................................................ 14

E.2 The need for Number Portability ............................................................................................ 15

E.3 Factors which can facilitate competition, ease of switching (MNP), lack of barriers to entry

(handset subsidies) ........................................................................................................................ 16

E.4 Economic aspects of dominance ............................................................................................. 17

E.5 Market power .......................................................................................................................... 18

F. Market for Retail Mobile Services with Remedies for Mobile Call Termination and Mobile

Access and Call Origination (MACO) ...................................................................................... 24


A. Introduction and Executive Summary

Umniah welcomes the opportunity to respond to the TRC Consultation on Mobile Markets.

A.1 Wholesale termination

Umniah believes that all wholesale termination markets are susceptible to regulation unless

the pricing convention or pricing level mitigates the monopoly problem, as is the case in

wholesale SMS termination today and may be the case for wholesale voice termination at

lower price levels. In most European Union markets, wholesale termination rates are no

longer allowed to include indirect costs, whereas this is still the case in Jordan, and this

implies a significant advantage to larger operators with better scale economies. Similarly, in

the United States, pricing models last estimated in the 1990‟s suggested that large operator‟s

wholesale termination costs are very low. This international experience suggests that Zain

and Orange Mobile are likely to apply high external wholesale voice call termination charges

for national calls relative to their actual costs. This means that those operators are likely to be

able to use excess profits generated in the wholesale voice call termination market to preserve

their positions in the retail market (via handset subsidies, cross-subsidisation of other services

and so on). The wholesale voice call termination asymmetry current enjoyed by Umniah

offsets some of Umniah‟s cost disadvantages from its poorer spectrum assignment (1800

MHz requires significantly more network roll-out than equivalent 900 MHz spectrum) and

also from Umniah‟s lower economies of scale, but only to a limited extent.

Umniah believes that the fundamental problem in the Jordanian market is the excess

wholesale voice call termination profits being captured by Zain and Orange Mobile. The

problems of margin squeeze and other anti-competitive practices largely stem from this

factor.

A.2 MACO remedies

The competition problems caused by wholesale termination arrangements manifest

themselves in the retail market and the TRC identifies problems on the wholesale origination

side of the market (MACO) and proposes remedies to address those problems. Zain continues

to enjoy a very strong presence on the retail market not only as a result of likely excess of its

wholesale termination profits and its overwhelming position on the post-paid segment of the

retail market but also due to the fact that other facilitators of competition are not fully in

place in Jordan. For instance, number portability is a very important facilitator of

competition, particularly in the post-paid segment of the market, but unfortunately the

mechanisms to ensure that competitive operators can allow subscribers to effectively retain

their numbers when switching networks are not in place in Jordan today. In terms of


identifying appropriate remedies that need to be placed on Zain, failing to comprehensively

address number portability, carrier selection, the anti-completive effect of Zain‟s One-

Network arrangement, etc. represents a major omission on the part of the TRC. Zain‟s market

position is based on its historical position in the post-paid segment. Appropriate carrier

selection and carrier pre-selection remedies (together with ancillary services such as

consolidated billing) need to be vigorously enforced if other market operators are to have any

chance of competing with Zain in the post-paid segment of the market, and across the market

as a whole.

In addition to Zain‟s economies of scale and scope in the Jordanian market, Zain is in a

position to leverage its broad regional presence by making its international retail tariffs equal

to the national retail tariff under its „One-Network‟ offering. Orange Mobile, as part of the

Orange group is also able to leverage other economic advantages which may become

observable in both mobile and fixed markets. These advantages can be used to thwart

competition in the retail market.

While the need to address these specific competition problems is very real and very urgent,

some of the mechanisms identified by the TRC to correct the problems at the retail level are

unlikely to be effective and may in fact prove to be counter-productive in certain

circumstances. For instance, if on the basis of the current market review process, Zain is

found to be dominant on the MACO market and is then forced to host third party MVNOs, it

will likely do so particularly in those market segments where its competitors are strongest. If

such access is mandated/given on cost-oriented terms, entrants benefiting from low cost

access to the network with by far the best economies of scale and the best on-net

arrangements may be able to undermine existing MNO‟s retail offerings based on lower input

costs. Such a development is likely to increase Zain‟s share of traffic (including wholesale

termination traffic) increasing its scale economy advantages even further and allow it to

leverage the spectrum cost advantages it enjoys at the expense of its competitors. Indeed such

a development will logically increase Zain‟s likely excess profits in the wholesale call

termination market which it can use then in the outbound retail market to further push

handset subsidies in that part of the market where it is strongest today (post-paid).

In practical terms, if Zain were to launch additional products similar to Zain 5 which had a

very important impact on the market in 2009, and/or a wholly owned or substantially

controlled „fighting brand‟ which targeted its competitors, the Jordanian competition

authority or the TRC itself might be minded to take action. A „fighting brand‟ refers to a new

brand of an existing or similar product which is priced very low or below cost, and which is

made available for a limited time period in specific market areas in order to combat

competition from other (usually smaller) firms. Dominant Firms typically introduce fighting

brands to avoid lowering the prices charged for their established brands, as this may prove

commercially unattractive to a firm which, for example, prices its established brands


uniformly across a wide number of markets. Such brands are typically designed to be close

competitors of the new rival‟s product or services. Because fighting brands are designed to

target a product or service that is similar to that provided by the new rival, they can be

especially effective when used as part of a broader predatory strategy.

Fighting brands are often used as a form of predation or anti-competitive practice designed to

drive out competitors from a broader relevant product market. Fighting brands are introduced

by a dominant firm to inflict harm on a new rival, either to limit or eliminate that new rival‟s

competitive significance, or to seek to temporarily punish a new rival for competing too

vigorously. It will remain to be examined by the relevant Authorities what position Friendi

will have on the market once it has commenced services and these concerns will have to be

addressed.

The MACO remedies proposed now by the TRC run the very real risk of allowing Zain to

achieve the same objective (pulling more traffic onto the Zain network, weakening its

competitors) but under the cover of a regulatory obligation. Umniah therefore considers that

the proposed MACO obligation on Zain is wholly unwarranted and risks to cause

considerable harm to competition and ultimately, to consumers.

A.3 Appropriate remedies

There are many reasons why the facilitators of competition such as mobile number portability

need to be facilitated both in the direct interests of end-users (choice) but also in terms of

facilitating the competitive process between operators for those customers. These facilitators

of competition should be dealt with independently of the MACO market.

The TRC has correctly identified issues in relation to Zain‟s (and Orange Mobile‟s) ability to

use the larger network effects based either on wholesale termination or origination transfers.

Umniah believes that many of the wholesale call termination remedies would be appropriate

unless the pricing convention or pricing level mitigates the monopoly problem, as is the case

in SMS termination today and may be the case for voice termination at lower price levels and

invites the TRC to go further in terms of proposed margin squeeze tests. Specifically, Umniah

believes that wholesale national termination rates should be lowered more aggressively whilst

maintaining a significant asymmetry for the later entrants. Umniah also believes that it would

be appropriate for the TRC to consider imposing restrictions on the handset subsidies that

Zain and Orange Mobile can put in the market, and to impose effective limitations on Zain‟s

One-Network offers. These measures to regulate Zain (and Orange Mobile) activities in the

retail market will ensure that competition will be more sustainable as Umniah and others

compete on a more even basis.


Umniah reiterates its concerns that the MACO remedies proposed by the TRC could distort

the market and cautions that the TRC must consider the impact that any proposed measures

will have on existing operators. Certain remedies could even achieve the opposite of the

TRC‟s objectives. Such remedies, e.g. MVNO access to Zain‟s network on specific terms,

and in particular if cost-based (by regulation) or near or below cost (by Zain‟s own choice)

are likely to make wholesale access available on terms that other physical infrastructure

operators cannot match and may lead to the long term consolidation of the mobile industry in

Jordan to the detriment of end users.

In relation to the existing obligations that apply to Umniah, Umniah is not dominant in any

market, therefore it can certainly not be justified that Umniah be subject to any call

origination obligation (NTTO) as is currently mandated in the current Interconnection

Instructions. The TRC must recognise in its analysis that it also needs to stop the current

Interconnection Instructions obligation that is imposed on Umniah to provide call origination

(NTTO) at cost based prices and at regulated terms and conditions. The TRC must also

remove the obligation to provide any other Interconnection Service which we might

voluntarily choose to provide (such as Transmission or Traffic Transit of all types), at cost

based prices and regulated terms and conditions. Umniah‟s position is that such obligations

are in error and this error is highlighted in the current market analysis process.

Since Umniah is not dominant in the call origination market we should not be obliged to

provide NTTO at cost-based prices and regulated terms and conditions. Nor is Umniah

dominant in any market related to Transmission or International Transit service provision,

accordingly it is not appropriate to oblige Umniah to provide such services at cost-based

prices and/or at regulated terms.


B. Market for Retail Mobile Services (in the absence of any ex ante regulation)

Q1. Do you agree with the TRC’s preliminary conclusion regarding the relevant product and geographic market definitions for retail mobile services? Umniah simply wishes to observe that the inference at page 15: that the mobile market in

Jordan is somehow immature and in need of significant new entry, does not stand up to

scrutiny.

The mobile penetration level in terms of active2

mobile subscriptions was around 91% by the

end of 2008 and, by Q3 of 2009, had surpassed 100%. It should also be noted, however, that

around 28% of Jordanian subscribers were independently estimated in the second half of

2007 to hold more than one mobile subscription (i.e., multi-SIM card owners).3

The inference of this observation is that the market has plenty of scope for growth. Indeed

there is no doubt that further room for some growth exists (especially if abuse of dominance

is effectively controlled by TRC ex-ante regulations). However, the fact that nominal

saturation in Jordan is accompanied by 28% multiple SIMs is not unusual and does not

suggest that such penetration levels mask significant pent up demand. For instance in the UK,

Ofcom observed that penetration is over 100% but that there are 11% of users with more than

one SIM. However, when allowances are made for population distributions (users under age

14 might reasonably be excluded in whole or in part) then the actual penetration level in

Jordan might be expected to rise to above 80%1 in line with international mature mobile

markets.

Q2: Do you agree with the TRC’s preliminary conclusion that, in the absence of any ex ante regulation, the three criteria are cumulatively fulfilled in relation to the relevant market for retail mobile services?

Umniah finds it unusual that the TRC would carry out a „Greenfield‟ assessment of the 3

criteria test without including those regulatory obligations which would exist independently

of this market review. In the normal course of events only those obligations which depend on

the regulation at hand are excluded so that competition law or symmetrical obligations (such

as the obligation to interconnect) would be taken into consideration.

However, the TRC correctly identifies many real impediments to competition which exist

even in the presence of basic regulatory obligations. In particular, the high on-net/off-net

ratio enjoyed by Zain and the absence of other facilitators of competitive markets (e.g.

number portability, carrier selection/pre-selection with consolidated billing), do place Zain‟s

1 See for example a study conducted by Wireless Intelligence

http://ict4dblog.files.wordpress.com/2009/05/wireless-intelligence-multiple-sims-per-user-vs-penetration.pdf


competitors at a distinct disadvantage. Furthermore, the current obligations regarding

interconnection fall symmetrically on all operators in the market and represent a far greater

burden on smaller operators such as Umniah compared to Zain and Orange Mobile. Umniah

believes that non-dominant operators should not be subject to regulatory obligations, other

than elementary measures such as number portability.


C. Market for Mobile Call Termination (in the absence of any ex ante regulation)

Q3. Do you agree with the TRC’s preliminary conclusion regarding the relevant product and geographic market definitions for wholesale call termination? Unless the pricing convention or pricing level mitigates the monopoly problem, as is the case

in wholesale SMS termination today and may be the case for wholesale voice call termination

at lower price levels, the TRC has (correctly) defined the relevant product market as „that for

the termination of voice calls on individual mobile networks‟. However, Umniah disagrees

that the wholesale SMS and voice termination markets are only different because of the

charging regimes in place (the counter-factual, if the charging schemes and levels converged

would not put them in the same market) but also because of functional and product

characteristics. The competitive dynamic which has led to different charging regimes is what

is most important rather than the outcome per se. This may be crucial if charging for

wholesale SMS termination were to be introduced or indeed if a similar analysis of MMS

termination were to be carried out.

A second and related observation relates to the issue of technological neutrality in wholesale

termination. Umniah agrees that wholesale voice call termination is a single product based on

a functional assessment of that product but Umniah further observes that though the product

itself is identical, the costs for producing termination services might not be uniform and may

be technologically dependent, at least in the medium term (in the presence of spectrum

trading).

For instance, looking at the spectrum allocations made in Jordan, it is clear that Umniah has a

major cost disadvantage which is crucially beyond its control. The spectrum awards set out in

table 1 of the TRC‟s consultation document show that through its allocation of 1800 MHz

spectrum (only), Umniah‟s unit costs of termination will, ceteris paribus, be higher than

those of its competitors. The trend in some jurisdictions is to move quickly to symmetrical

termination rates (allowing for cost differences outside the control of the operator) which do

not include spectrum costs in the presence of spectrum trading. However, in the absence of

spectrum trading the differential in term of termination charges must be allowed to the

disadvantaged operator.

Q4. Do you agree with the TRC’s preliminary conclusion that, in the absence of any ex ante regulation, the three criteria are cumulatively fulfilled in relation to the markets for wholesale call termination on individual mobile networks and that these markets are therefore susceptible to ex ante regulation?


The answer to this question depends on the pricing convention or pricing level, which

mitigates the monopoly problem, as is the case in wholesale SMS termination today and may

be the case for wholesale voice termination at lower price levels.

Q5. Do you agree with the TRC’s preliminary conclusion that Zain, Orange Mobile, XPress and Umniah each hold a dominant position in the markets for wholesale call termination on their own respective networks? The answer to this question depends on the pricing convention or pricing level, which



Q6. Do you agree with the TRC’s preliminary conclusion about the potential competition problems related to the dominant position of each MNO in the market for wholesale call termination on its own network? In most European Union markets, wholesale termination rates are no longer allowed to

include indirect costs, whereas this is still the case in Jordan, and this implies a significant

advantage to larger operators with better scale economies. Similarly, in the United States,

pricing models last estimated in the 1990‟s suggested that large operator‟s wholesale

termination costs are very low. This international experience suggests that Zain and Orange

Mobile are likely to apply high external wholesale voice call termination charges for national

calls relative to their actual costs, and may well be able to use excess profits generated in the

wholesale termination market to preserve positions in the retail market (via handset subsidies,

promotions, advertising, cross-subsidies, and so on). The asymmetry current enjoyed by

Umniah offsets it costs disadvantages to a limited extent from its poorer spectrum assignment

(1800 MHz requires significantly more network roll-out than 900 MHz spectrum) and also

from Umniah‟s lower economies of scale. Clearly the cost disadvantages experienced by

Umniah will not disappear as a result of lower wholesale termination rates and therefore a

level of asymmetry is essential for Umniah whatever the absolute level of MTRs.

Q7. Do you agree with the TRC’s preliminary conclusion about the appropriate remedies that should be imposed on Zain, Orange Mobile, XPress and Umniah to address the identified competition problems? The answer to this question depends on the pricing convention or pricing level, which




C.1 Wholesale termination pricing remedies

In general, the problem of using termination price discrimination to foreclose the market

arises mainly in the situation where one mobile operator has a significantly higher market

share than its competitors. The incumbent operator(s) may foreclose the retail market by

charging a high (above-cost) termination charge to other networks whereas (implicitly)

charging a lower price internally. This leads to high costs for off-net calls for other operators

at the wholesale level and thus to high prices for off-net calls at the retail level.

On-net calls, on the other hand, are associated with a lower cost (potentially below cost) and

thus with lower retail prices. Whether on-net costs are lower or not is open to debate but such

a price structure is likely to be out of place anyway since it creates network externalities

(„tariff-mediated network externalities‟)2 and thus puts smaller networks with fewer

participants at a disadvantage. The disadvantage is larger the higher the termination charge

and thus the higher the difference between the price of an on-net and an off-net call. Where

the market in question has a firm which has a large proportion of on-net versus off-net traffic

then competition concerns arise where prices vary depending on call structure since

competing operators‟ ability to compete based on retail pricing packages is very limited. This

is clearly the case that is under consideration in Jordan.

International experience from Europe and the United States suggests that the level of

remuneration that Zain is permitted to receive for its wholesale call termination may be well

in excess of its actual direct costs. Zain enjoys a significant cost advantage over Umniah due

to both the spectrum allocations discussed earlier as well as the fact that Umniah is operating

at lower scale economies than Zain. The implication is that Zain is subject to a regulated

price which is likely considerably higher than its costs and that therefore, Zain likely has

surplus funds to spend and Umniah is concerned that excess profits available to Zain can be

used to finance handset subsidies or network roll-out in adjacent or neighbouring markets

(One-Network). The cost disadvantages experienced by Umniah will not disappear as a result

of lower termination rates and therefore a level of asymmetry is essential for Umniah

whatever the absolute level of MTRs.

C.2 Margin squeeze and transparency

Umniah welcomes the transparency and margin squeeze tests being proposed on Zain and

Orange Mobile. However, Umniah believes that the TRC must adapt its margin squeeze test

so that the margin squeeze tests are retail-product specific, which means that every product

2 See for example Steffen Hoernig ‘Tariff-Mediated Network Externalities: Is Regulatory Intervention Any

Good?’ CEPR, London, November 2007


in the Zain and Orange Mobile portfolios must be capable of individually passing a

margin squeeze test. Any third party relying on Zain and Orange Mobile externally provided

wholesale termination services ought to be able to create a retail product that can compete

with any individual Zain and Orange Mobile product without recourse to discounts or

„dynamic pricing arrangements‟. Anything else will mean that the abusive behaviour by Zain

in particular will simply continue.

The principal mechanism used by Zain and Orange Mobile for effecting margin squeeze in

the Jordanian market is the use of handset subsidies. Such subsidies are extremely appealing

to end-users at the retail level but such subsidies also allow Zain/Orange Mobile to dictate the

level of funds that Umniah is able to direct at developing its market position. Zain and

Orange Mobile know that the more they subsidise handsets, that Umniah is obliged to react

with its own subsidies and that the ultimate result is that Umniah has less funds to develop its

products, network and customer base. The infrastructural gap that exists between

Zain/Orange Mobile and Umniah will continue to exist and will indeed become even greater

in a UMTS context. This will ultimately undermine Umniah‟s ability to compete in the

wholesale access and call origination market.

Umniah therefore asks the TRC to limit Zain and Orange Mobile handset subsidies in the

Jordanian market. In other markets3 where such prohibitions exist or existed in the past there

is no evidence to suggest that end users are adversely affected while a major anti-competitive

lever which is currently in the hands of Zain and Orange Mobile would be removed from the

market.

3 E.g. Finland and Belgium


D. Market for Wholesale SMS termination

Q8. Do you agree with the TRC’s preliminary conclusion regarding the relevant product and geographic market definitions for SMS wholesale call termination? Umniah does not believe that the pricing regime should limit the scope of the product market

definition alone.

The wholesale termination monopoly problem is indeed mitigated by the charging convention

that exists in the market and no further remedy is required for wholesale SMS termination.

However, the monopoly problem could be revealed at very short notice in the event that this

charging convention for SMS (and MMS) broke down and in those circumstances a remedy

would be required.

Q9. Do you agree with the TRC’s preliminary conclusion that, in the absence of any ex ante regulation, the three criteria are not cumulatively fulfilled in relation to the market for SMS wholesale termination, and that this market is thus not susceptible to ex ante regulation? In the absence of regulation, wholesale termination rates tend to be high and symmetrical

regardless of the service in question. High and symmetrical termination rates benefit larger

operators since they will be net recipients of revenues. However, where traffic is balanced,

the level of termination rates does not matter directly to the operators concerned since

payments in and out will cancel each other.

Such is the case in the case of SMS. In terms of the three criteria set out by the TRC as

justifying a regulatory intervention, Umniah believes that the reasoning should be the same as

it is for voice.

Due to the fact that traffic is much closer to being balanced than in wholesale voice call

termination, operators have adopted a billing convention which mitigates the problems

associated with a standard termination monopoly and therefore ex-ante regulation is not

required at this time.


E. Market for Mobile Access and Call Origination (MACO)

Q10. Do you agree with the TRC’s preliminary conclusion regarding the relevant product and geographic market definitions for wholesale MACO services? Umniah has shown its capacity for growth in the past and currently the TRC‟s own

assessment is that Umniah has focussed on the pre-paid segment of the market. Umniah

believes that it can grow significantly in both the post-paid and pre-paid segments of the

market. Umniah therefore believes it still has significant capacity to grow organically without

diverting its resources to managing third party relationships.

Q11. Do you agree with the TRC’s preliminary conclusion that, in the absence of any ex ante regulation for MACO, the three criteria are cumulatively fulfilled in relation to the wholesale market for Mobile Access and Call Origination (MACO), and that the MACO market is therefore susceptible to ex ante regulation? Since Zain and Orange Mobile have many cost advantages due to scale effects within Jordan

and beyond, Umniah faces a very difficult position to grow its position on the retail market.

Umniah is concerned that any remedies imposed should act to foster competition in the retail

market (and by extension on the wholesale outbound market) and Umniah insists that

remedies which may undermine infrastructure based operators should be avoided.

Specifically, Umniah believes that the TRC needs to prioritise an effective mobile number

portability regime together with CS/CPS (with consolidated billing) and effective limitations

on the One-Network offers as a first step in allowing competition on the post-paid market

segment. Umniah also believes that the cost advantages enjoyed by Zain (and Orange

Mobile) mean that they have misused the handset subsidy regime to undermine competition

in the retail market and Umniah believes that Zain and Orange Mobile‟s discretion in the area

of handset subsidies should be curtailed.

E.1 The three criteria test for MACO in Jordan

The TRC indicates that the decision to make an intervention on a market will be first based

on the three criteria (high entry barriers, dynamic of market behind any entry barriers, and the

insufficiency of competition law) being met. These criteria then have to be applied in a

forward-looking way in order to assess whether or not a market should be considered for

regulation.


E.2 The need for Number Portability

Umniah recognises that the absence of an effective mobile number portability regime is a

problem but it is a problem which is unrelated to the need for regulation on MACO and

should be made effective on its own merits. Traditionally, consumers of mobile

telecommunications services were required to give up their number when switching

providers. Consumers were thus hesitant to switch from the incumbent to competing

operators, thereby inhibiting more effective competition in mobile telecommunications.

Lately, the picture has changed dramatically, as mobile number portability (MNP) has been

implemented in the European Union (EU) and many other countries around the world.

MNP means that customers are given the right to keep their mobile telephone number when

switching between service providers. From a property rights perspective, the introduction of

MNP reallocates the property rights in mobile telephone numbers from operators to

consumers. The main rationale for this re-allocation is the enhancement of competition in

mobile telecommunications. As the EU argues, “number portability is a key facilitator of

consumer choice and effective competition in a competitive telecommunications

environment”.4 Following from that, national regulatory authorities (NRAs) shall ensure that

(a) charges for mobile number portability are cost-oriented and “that direct charges to

subscribers, if any, do not act as a disincentive for the use of these facilities”, and (b) retail

charges for MNP do not distort competition.

The rationale of introducing mandatory MNP is simple: It is expected to bring about

considerable benefits to consumers of mobile services5. The most obvious is reduced

switching costs. In the absence of MNP, customers that actually switch (and thus give up

their number) incur a utility loss. Also, switching costs induce some consumers to stick to a

provider which is not their preferred choice. Introducing MNP benefits both types of

consumers: consumers who switch even in the absence of MNP can retain their number, and

consumers who switch only with MNP are more likely to obtain services from their preferred

operator. While MNP thus benefits consumers that actually switch, there are also benefits to

non-switching consumers resulting from more intense competition among providers of

mobile telecommunications services. Furthermore, introducing MNP benefits consumers who

place calls to ported numbers. Without MNP, these consumers have to update their address

books, may be unable to call a particular user, etc. Finally, introducing MNP benefits mobile

customers because of the reallocation of property rights. The fact that MNP reallocates

property rights in telephone number is especially important for so-called vanity numbers. If

customers advertise their telephone number, this increases the number‟s value and may be

seen as a specific investment into the number‟s value. Hence, a telephone number‟s value is

to some extent endogenous. The incomplete contracts literature suggests that

4 Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002. 5 Ovum (2000), Mobile Numbering and Number Portability in Ireland, A Report to the ODTR, Ovum: London.


underinvestment results if the customer making the investment does not hold the property

right in the number. Hence, the reallocation of property rights strengthens the customers‟

investment incentive. This thickening of consumers‟ property rights benefits all consumers –

whether they actually port their number or not.

E.3 Factors which can facilitate competition, ease of switching (MNP), lack of barriers

to entry (handset subsidies)

The need to introduce MNP to facilitate ease of switching between operators in Jordan has

just been described above. The issue of barriers to entry erected through the use of handset

subsidies is also a factor in the Jordanian market.

The principal mechanism used by Zain and Orange Mobile for restricting Umniah‟s ability to

expand in the Jordanian market is the use of handset subsidies. Such subsidies are extremely

appealing to end-users at the retail level but such subsidies also allow Zain/Orange Mobile to

dictate the level of funds that Umniah is able to direct at developing its market position. Zain

and Orange Mobile know that the more they subsidise their handsets, that Umniah is obliged

to react with its own subsidies and that the ultimate result is that Umniah has less funds to

develop its products, network and customer base. The infrastructural gap that exists between

Zain/Orange Mobile and Umniah will continue to exist and will indeed become even greater

in a UMTS context. This will ultimately undermine Umniah‟s ability to compete in the

wholesale access and call origination market.

In the interim it also preserves Zain‟s position on the post-paid retail segment of the market

since together with the absence of functional MNP and inadequate enforcement of CS/CPS

provisions, as well as the non-existence of regulation to stop the One-Network anti-

competitive cross subsidy, the costs to address this market to win market share is

prohibitively high.

Umniah therefore asks the TRC to limit Zain and Orange Mobile handset subsidies in the

Jordanian market, launch MNP, and curb the anti-competitive cross subsidies inherent in the

One Network offers.

Q12. Do you agree with the TRC’s preliminary conclusion that Zain holds a dominant position in the wholesale MACO services market, based on its position in the retail services market, and that it should be designated as being individually dominant at the MACO level?

The TRC notes that:


‘There are no technical reasons for capacity to be constrained. With the exception of one

operator, all other operators reported that they have established methods in place to address

any possible capacity constraints.’

Umniah would like to take issue with this position since it believes that it is operating with

limited excess capacity today and prefers to operate with maximum efficiency. Capacity on

three mobile networks can only be expanded if it is viable to do so. As discussed above, all

the various competitive restrictions in the market have the net impact of making significant

expansion feasible only with prohibitive expenses. In such circumstances it is difficult to see

any likely expansion of capacity as suggested by the TRC.

E.4 Economic aspects of dominance

Many real world markets are characterised by having one very large firm, which accounts for

a large share of the relevant market, with a number of much smaller firms, which, although

they may be competitors, may be unable to compete very strongly with the larger firm. In

such circumstances the large firm may effectively be able to ignore the actions of its

competitors and influence market prices by varying its output. A firm in such circumstances

is said to be in a dominant position in the relevant market. Although a dominant firm may not

enjoy a monopoly in a particular market, it can, by exercising its market power, harm

consumers and competitors.

A firm may be dominant for a variety of reasons. In particular it may be more efficient than

rival firms, it may have grown larger as a result of economies of scale or its products may be

regarded as superior to that of its competitors. Zain in particular enjoys considerable

advantages not only through its economies of scale achieved in the Jordanian market but also

as a well established regional operator. Zain is in a position to leverage its broad regional

geographic presence by making its international and roaming tariffs equal to the national

tariff under its „One-Network‟ offering. It should be noted, however, that there is no

presumption in any part of competition law, that mere size, or even possession of a dominant

position, is offensive or problematical in itself. The concern is with conduct and behaviour on

the market.

Dominant firms potentially face competition from smaller rivals. Such firms have strong

incentives to compete aggressively with the dominant firm since they could achieve large

increases in profitability by doing so. However, such firms face the threat of an

overwhelming reaction by the dominant firm, which can act as a significant deterrent. Thus,

rather than challenging the dominant firm across the board, smaller firms are likely to confine

their activities to specialist niches, thereby not posing a major threat to the dominant firm. In

the literature smaller firms in such circumstances are referred to as a „competitive fringe‟.


The point to be considered is what constitutes a dominant position. Dominance is essentially

a legal rather than an economic concept. Economists focus on the issue of market power

rather than dominance. While there are obvious links between the two concepts they are

somewhat different.

Typically most real world markets can be characterised as having a relatively small number

of firms producing differentiated products. All that is required for products to be regarded as

differentiated is that consumers perceive them to be different or, put another way, consumers

do not regard them as perfect substitutes for one another. In differentiated product markets all

firms have some degree of market power, i.e. some power over price. Perfect competition

with homogenous products would mean that the demand curve facing each firm would be

infinitely elastic or horizontal so that any unilateral price increase would cause it to lose its

entire sales. In such circumstances a firm cannot have any market power, it is a price taker. In

differentiated product markets the firm‟s demand curve is downward sloping. A firm that has

a downward sloping demand curve possesses some degree of market power. This is because

it has some control over price since an increase in price will not cause it to lose all of its

customers. Thus as Carlton and Perloff point out the typical firm has some market power and

at the same time responds to competition from its rivals.6

Market power is therefore a matter

of degree.

E.5 Market power

Essentially to be regarded as dominant in an economic sense, a firm, or group of firms, must

have sufficient market power to enable them to raise prices or act in some other way

independently of their rivals. Since the market is for now vertically integrated (though with

the advent of Friendi this may change) we can look at the retail level as a fair reflection of the

wholesale level. A downward sloping demand curve means that, if a firm unilaterally

increases its prices, it will lose some but, crucially, not all of its sales. Whether or not it

would be profitable for the firm to raise prices depends on whether the profits from selling a

smaller volume at a higher price are greater than from selling a larger quantity at a lower

price. This in turn depends on the elasticity of the individual firm‟s demand curve, referred to

as the residual elasticity of demand.7 If the firm‟s residual demand curve is relatively elastic,

i.e. a small increase in price would result in a substantial drop in sales, then it cannot increase

prices unilaterally as it would not be profitable to do so. If a firm faces a relatively inelastic

residual demand curve, then the decline in sales as a result of a price increase will be

relatively small and it will be profitable for it to raise prices unilaterally. Advertising to

6 Carlton, D. and Perloff, J, [1990], Modern Industrial Organisation, Scott, Foresman, Little, Brown.

7 The residual demand curve is the demand curve faced by an individual firm. It is the total market demand

curve less the supply of all the other firms in the market at each price.


establish brand image is one means by which firms attempt to differentiate products thereby

increasing the slope of the demand curve.

Lerner8 proposed that the degree of market power should be defined as:

(p-c)/p

where p is price and c represents short-run marginal cost. The Lerner Index essentially is the

left-hand side of the profit maximisation condition for a monopolist, which is normally

expressed as:

(p-c)/p = 1/e

where e is the elasticity of demand. The above condition for a monopolist can easily be

modified to the case of a dominant firm where e is the residual elasticity of demand of the

dominant firm. It follows from this that the firm‟s residual elasticity of demand provides an

indication of market power since the inverse of the residual elasticity of demand is the Lerner

index. It has therefore become common in US cases for economists to estimate residual

elasticities of demand and these have been accepted by US courts. For example, the US

Supreme Court has expressed the view that:

‘[w]hat constrains [a] defendant’s ability to raise prices…is the elasticity of demand faced

by the defendant – the degree to which its sales fall…as its price rises.’9

An interesting application of residual demand estimation that is relevant to the present case is

provided by Kahai et. al. who applied this methodology to analysing whether or not AT&T

should be considered dominant in the US long-distance telephony market.10 In that case

AT&T‟s market share fell from 84% to 59% over the 1984-93 period. Its two largest rivals

increased their market shares from 5.5% and 2.6% to 17.8% and 10% respectively with the

balance of the market being divided up between a large number of very small suppliers. The

results indicated that AT&T could not be considered to be dominant. The present response

has not involved an estimation of residual demand elasticities for Zain. Nevertheless some

intuitive observations are possible.

The evidence presented on pricing by the TRC suggests that Zain has generally been in a

position to enjoy a price premium over its competitors. In fact, as noted above, the indications

are that, despite the entry of other operators into the market, and despite the aforementioned

price premium, Zain has been in a position to preserve its overwhelming position on the key

post-paid segment of the market.

8 A. Lerner, (1934), The Concept of Monopoly and the Measurement of Market Power, Review of Economic

Studies, Vol.1, 157-75. 9 Eastman Kodak v. Image Technical Servs., Inc., 540 US 451, 469 (1992).

10 Kahai, D., Kaserman, D., and Mayo, J., (1996), Is the “Dominant Firm” Dominant? An Empirical Analysis of

AT&T’s Market Power, Journal of Law & Economics, Vol.39, October 1996.


As already noted a firm‟s degree of market power will depend, to some extent, on the degree

of product differentiation. Mobile telephony services are close to being homogenous. In other

words consumers regard them as close substitutes. In the event of a full-scale inquiry it may

be worth commissioning some empirical research on this issue. However, it is clear that Zain

has successfully used products such as the „One-Network‟ product offering to differentiate

itself in the market.

It is also true that Zain currently enjoys a large market share. However, while a large market

share may, in some circumstances, indicate that a firm has a dominant position, of itself,

market share is neither a necessary nor a sufficient condition to establish dominance. In Akzo

[1991 ECR I 3359] the European Court of Justice considered that a stable market share of 50

per cent or more raised a rebuttable presumption, although it added that the Commission was

right to consider other factors. Similarly in Hoffmann La Roche [1979 ECR 461] the Court

held that:

‘An undertaking which has a large market share and holds it for some time, by means of the

volume of production and the scale of the supply which it stands for – without those having

much smaller market shares being able to meet rapidly the demand from those who would

like to break away from the undertaking which has the largest market share – is by virtue of

that share in a position of strength which makes it an unavoidable trading partner and which,

already because of this secures for it, at the very least during very long periods, that freedom

of action which is the special feature of a dominant position.’

Again this point is consistent with the results of economic analysis. Studies have shown that a

dominant firm‟s market share may decline over time. However, such declines generally occur

gradually and there are numerous examples of dominant positions continuing for decades.

This is because a dominant firm will normally be able to take measures to prevent the erosion

of its market share, much as Zain has managed to do in key market segments. Similarly the

opening up of public utility industries to competition in many countries has been

characterised by the dominant incumbent retaining a large market share for some

considerable time in the face of new entry. One example already noted is the AT&T case

cited above where the incumbent‟s market share fell from 84% to 59% over a decade.

Similarly following liberalisation of fixed telephony in the UK, BT still retained an 80%

market share several years after the entry of Mercury.

Q13. Do you agree with the TRC’s preliminary conclusion about the potential competition problems related to the dominant position of Zain in the wholesale MACO services market? Umniah believes that there are very specific competition problems that need to be addressed

on the Jordanian market.


However, there are problems which manifest themselves at the retail level and have their

origins in both this and the other wholesale market. The very high ratio of on-net to off-net

traffic allows Zain to leverage the network effects. Using its larger base, Zain can set its

tariffs in such a way as to lower its termination costs by keeping more traffic on-net, placing

all smaller operators at a profound disadvantage.

The disadvantage is larger the higher the termination charge and thus the higher the

difference between the price of an on-net and an off-net call. Where the market in question

has a firm which has a large proportion of on-net versus off-net traffic, then competition

concerns arise where prices vary depending on call structure since competing operators‟

ability to compete based retail pricing packages is very limited. This is clearly the case that is

under consideration in Jordan.

It is appropriate to address the restriction on competition caused by this traffic imbalance.

However, Umniah believes that it is the causes that should be addressed, not the symptoms. A

restriction on Zain and Orange Mobile‟s ability to finance handset-subsidies would facilitate

competition by cutting off one of the principal outlets for likely excess termination profits.

Q14. Do you agree with the TRC’s preliminary conclusion about the appropriate remedies to be imposed on Zain, to deal with the identified competition problems? No, following from the last answers Umniah believes that an intervention that would mandate

MACO (and specifically MVNO access) on Zain, is not appropriate and that it would be

counterproductive if cost-based (by regulation) or near or below cost (by Zain‟s own choice).

The impact of possible distortions coming from inappropriate regulation could be severe.

We might consider that if Zain has better economies of scale than any other operator on the

market, then by obliging Zain to make MACO available on cost oriented terms, other

infrastructural operators will be placed at a disadvantage.

Umniah is potentially at a particular disadvantage compared to MVNOs who would have the

ability to build out its network where it is cheapest and buy national roaming in all other

areas at a geographically averaged price. This geographically averaged price would not

reflect the costs which exist in those areas which are less densely populated. If Zain makes a

national offer for MACO this would implicitly be an average of (cheap) urban origination and

(expensive) rural origination. If access is made available on non-discriminatory terms then

the TRC might see Umniah purchasing discounted origination outside urban areas. This

would lead to a regression of infrastructure competition and the creation of a reverse ladder

of investment.


Such an obligation on Zain would also further exacerbate Umniah‟s competitive disadvantage

compared to Zain. It is clear that if Zain is forced to host third party MVNOs it will likely do

so particularly in those market segments where its competitors are strongest (particularly in

the pre-paid market). Such a development is likely to increase Zain‟s share of termination

traffic increasing its scale economy advantages and allow it to leverage the spectrum cost

advantages it enjoys at the expense of its competitors. Indeed such a development will

logically increase its likely excess profits in the termination market which it can use then in

the outbound market to further push handset subsidies in that part of the market where it is

strongest today (post-paid).

The MACO remedies proposed now by the TRC run the risk of allowing Zain to host third

parties‟ traffic onto its network at a marginal price that relies on its economies of scale

(which in turn are improved by pulling more traffic onto the Zain network, weakening its

competitors) but under the cover of a regulatory obligation. If Zain were to launch a wholly

owned „fighting brand‟ which targeted its competitors, the Jordanian competition authority or

TRC itself might be minded to take action to preserve competition on the market. In the

current context a fighting brand is most likely to take the form of a third party pre-paid offer

which is priced very low or below cost, and which would be made available for a limited time

period in order to weaken Umniah. Zain could introduce such a fighting brand to avoid

lowering the prices charged for its established brand, as this may prove too costly.

Such a fighting brand would be introduced by a Zain to inflict harm on Umniah, either to

limit or eliminate Umniah‟s competitive significance. Such a strategy could also be used to

temporarily punish Umniah if Zain felt it was competing too vigorously. It will remain to be

examined by the relevant Authorities what position Friendi will have on the market once it

has commenced services and these concerns will have to be addressed. However, the MACO

remedies proposed now by the TRC run the very real risk of allowing Zain to achieve the

same objective (pulling more traffic onto the Zain network, weakening its competitors) but

under the cover of a regulatory obligation. Umniah therefore considers that the MACO

obligation is wholly unwarranted, and that other remedies for observable competition

problems in the Jordanian market are more appropriate.

The TRC must be clear about what its objective is. If its objective is to promote investments

in infrastructures and innovations, then the access remedies as currently proposed will not

achieve that objective. Mandated access with access prices which are set too low will

undermine the incentive to invest (and may unwind existing investments). Finally, access

prices which are national will massively understate the cost of network in less densely

populated areas and probably overstate costs in densely populated areas. Therefore, third

parties are being sent the wrong „build or buy‟ signals in the market and those operators

considering rolling out their networks will not do so, at least in rural areas.


Meanwhile, the key remedies that need to be promoted by TRC receive insufficient attention

in the TRC‟s analysis. Umniah believes that the TRC needs to prioritise an effective MNP

regime together with CS/CPS (with consolidated billing) and effective limitations on the anti-

competitive cross subsidies inherent in the One-Network offer, as a first step in allowing

competition on the post-paid market segment. Umniah also believes that the cost advantages

enjoyed by Zain (and Orange Mobile) mean that they have misused the handset subsidy

regime to undermine competition in the retail market and Umniah believes that Zain and

Orange Mobile‟s discretion in the area of handset subsidies should also be curtailed.

Finally, in relation to Umniah‟s existing obligations, Umniah is not dominant in any market.

In particular, it cannot be justified that Umniah be subject to any call origination obligation

(NTTO) as is currently mandated in the current Interconnection Instructions. The TRC must

recognise in its analysis that it also needs to stop the current (Interconnection Instructions)

obligation that is imposed on Umniah to provide call origination (NTTO) at cost based prices

and at regulated terms and conditions. The TRC must also remove the obligation to provide

any other Interconnection Service which we might voluntarily choose to provide, at cost

based prices and regulated terms and conditions. Our position is that such obligations are in

error and this error is highlighted in the current market analysis process. Since we are not

dominant in the call origination market we should not be obliged to provide NTTO at cost-

based prices and regulated terms and conditions. Nor is Umniah dominant in any market

related to Transmission or International Transit service provision, accordingly it is not

appropriate to oblige Umniah to provide such services at cost-based prices and/or at regulated

terms.


F. Market for Retail Mobile Services with Remedies for Mobile Call Termination

and Mobile Access and Call Origination (MACO)

Q15. Do you agree with the TRC’s preliminary conclusion that in light of the proposed ex ante regulatory remedies (if implemented) put forward in this Public Consultation, the three criteria are not cumulatively fulfilled for the retail mobile services market and that, therefore, this market is not susceptible to ex ante regulation? Umniah believes that there are deep competition problems on the retail market and that

appropriate remedies need to be put in place. The TRC needs to mandate an effective MNP

regime together with CS/CPS (with consolidated billing) as a first step in allowing

competition on the post-paid market segment. Umniah also believes that the cost advantages

enjoyed by Zain (and Orange Mobile) mean that they have misused the handset subsidy

regime to undermine competition in the retail market and Umniah believes that Zain and

Orange Mobile‟s discretion in the area of handset subsidies should be curtailed.

* * *

Should you require any clarifications or further information on the positions set out in this

response, please contact:

Umniah

Khaled Hudhud

Director of Government Relations

[email protected]

Documents

Response to TRC Consultation Mobile Markets…راجعة سوق الاتصالات... · Umniah – Response to TRC consultation on Mobile Markets – March 2010 Page 4 identifying