The Wireless World: Ofcom Launches Key Review Of Mobile Regulation As Sector Enters "Second Revolution"

Wednesday, October 1, 2008 - 01:00

On 28 August 2008, the Office of Communications ("Ofcom") published its consultation "Mobile citizens, mobile consumers - Adapting regulation for a mobile wireless world" inviting stakeholder responses on the future regulation of the mobile sector. The regulator, which expects mobile calls to outnumber fixed calls in the next twelve months, will review issues such as increasing demand for mobile broadband, the regulation of call termination charges between mobile operators, and consumer protection in the wake of increased access to a wider choice of content and services. Ofcom's review comes at a time when network operators and service providers already face a range of other regulatory pressures, for example from the European Commission on the pricing of data roaming services, and from Ofcom itself, whose investigation into misselling of mobile services concludes shortly. It is vital that the regulatory burden on industry is kept at the forefront of any future reforms to ensure that new technologies and competition in the sector continue to grow.

Ofcom derives its regulatory powers principally from the Communications Act 2003. However, legislation such as the Wireless Telegraphy Act 2006 (which governs the release and license of spectrum) and other non-statutory regulation such as the Committee of Advertising Practice ("CAP") Code of Practice (which deals with mobile marketing) have recently taken centre stage in shaping the mobile market. The breadth of regulation affecting the mobile sector is one of the main challenges facing Ofcom in constructing a new regulatory landscape that is both consistent and effective.

The average UK household spent nearly £65 per month on communications services last year and more than half of this sum was channelled into mobile services. Indeed, one of the most significant general developments has been the switch from fixed to mobile technologies, with use of the former confined to broadband, pay TV and supplying connectivity (for example to Dongles, data cards and other remote devices). Consumers and business are increasingly relying on mobile devices for both voice and data services. It is important to consider the current state of the legal framework in light of these market developments and the resulting issues that will be prominent in any regulatory reform programme.

The most significant developments in the mobile sector this year have had their roots in competition law. The European Telecoms Commissioner, Viviene Reding, has warned mobile operators to reduce charges for data roaming services or face regulatory intervention from Brussels in the form of mandatory price caps, similar to those which already exist for voice calls under the EC's Roaming Regulation. UK operators have responded positively and reduced many of their tariffs. However, Commissioner Reding has recently called on operators one last time to bring charges down. The Telecoms Commissioner believes that demand for data roaming services continues to be stifled by high charges. If intervention is to be avoided, higher charges must be justified by additional costs incurred by operators in providing data roaming services. Commissioner Reding will be compelled to introduce measures to safeguard the EU's important single-market principle if consumers moving across different countries are unable to benefit from transparent and low-cost access to mobile data services.

It is surprising that Ofcom's mobile Consultation does not discuss data roaming in any detail. If mandatory caps are proposed by the Telecoms Commissioner, this impact on network operator's revenue will need careful consideration before Ofcom introduces any further regulatory burdens that will reduce or limit other revenue streams.

The release of spectrum has also been particularly important in providing operators with the means to deliver faster and higher-quality services directly to mobile devices. Ofcom is consulting separately on how best to licence the spectrum bands that will become available once television services in the UK go digital (the so-called "digital dividend"). Two spectrum bands have been identified as particularly suitable for the delivery of mobile broadband and television, and the way that these are auctioned to service providers will be key in shaping the mobile market going forward. New spectrum will enable existing mobile operators to generate new network capacity, but will also allow for new market entrants, potentially using WiMAX and other forms of spectrum based technology. The mobile Consultation further highlights the importance of liberalising existing spectrum bands by removing any unnecessary service and technology restrictions in licences. This will help improve the quality of 3G networks and increase coverage in rural areas.

The other key competition development in the mobile sector has been Ofcom's regulation of mobile call termination rates. Call termination rates are the fees charged by a recipient mobile network operator for receiving a call from a different network (for example when an Orange customer calls a Vodafone customer). The fee is paid by the originating mobile network operator and indirectly passed through to the customer.

Ofcom's latest set of decisions on call termination rates concluded that each mobile network operator has significant market power in the provision of call termination on each of their own networks. As a result, charge controls (limiting the rates imposed by each operator) have been imposed up to 2011. There have been further appeals by operators this year to the Competition Appeal Tribunal ("CAT"), however decisions to date have approved the UK regulator's decision to intervene and regulate interconnection more closely. H3G currently has an appeal before the Court of Appeal challenging the market power findings of the CAT's most recent judgment and the proportionality of Ofcom's regulatory action.

Ofcom describes the future regime for mobile call termination as critical for both industry and consumers. Ofcom has invited views on the treatment of termination rates post-2011 and, in particular, whether commercial or technological change will require more or less intervention from the regulator. Regulatory price setting may become less justified with, for example, an increase in fixed mobile convergence. There is increasing scope for technology to enable fixed and mobile networks to share some access, backhaul or core elements (for example, through use of a femtocell in the home, which enables a mobile access network to use a broadband service as backhaul). Ofcom states that such technologies are likely to change more quickly than the current regulatory price-setting process. This may lead to unintended or distortionary effects of regulation and potentially create obstacles to innovation.

In addition to the influence of competition law, mobile regulation is increasingly being structured by regulatory bodies such as the Mobile Broadband Group ("MBG"), PhonePayPlus and the CAP. Indeed, Ofcom states that there is a real possibility in the coming years that content and consumer issues will assume greater significance than the influence of competition pressures and the management of spectrum. Mobile content is relatively unregulated at present and the increased availability of rich content on mobiles (through mobile broadband and television) creates the potential for what Ofcom views as a new area for consumer harm.

The MBG (an industry association comprised of the five UK mobile network operators) continues to consult closely with Ofcom on public policy issues surrounding the development of mobile broadband. In 2004, the MBG published a Code of Practice for the self-regulation of new forms of mobile content. The Code sets out commitments by mobile network operators to ensure visual content, online gambling, chat rooms and Internet access are regulated responsibly. This includes, for example, the appointment of an independent classification body (the Independent Mobile Classification Board) to provide a framework for classifying content which is unsuitable for customers under the age of 18, and taking action against unsolicited bulk communications. A further Code of Practice was published last year setting out best practice for the promotion and sale of mobile airtime subscriptions to consumers.

Ofcom comments that the 2004 Code of Practice has been effective in restricting children's access to inappropriate content. However, the mobile Consultation is silent on whether self-regulation will be favoured in the future. Co-ordination by mobile network operators should not be dismissed as an effective avenue to regulate content and protect consumers. Operators are at the forefront of commercial and technological developments and able to respond more quickly and effectively to sectoral changes. A reform programme which embraces deregulation in areas such as the management of content could lead to both enhanced consumer protection and lower compliance costs for industry.

The CAP has also been an active regulatory influence in the last year, particularly in the regulation of broadband service providers and the way they market the cost, speed and content of their service offerings to consumers. The anticipated growth of mobile broadband means that this important influence is likely to continue. Marketers generally are likely to see more active intervention from the CAP as they take advantage of new capabilities to broadcast advertisements directly to mobile devices. Delivery of marketing messages via 3G technologies and particularly mobile broadband will increase the impact of advertisements and the ease with which a recipient can follow up with the purchase of the products or services in question over the Internet. Increased ownership of 3G devices amongst children is likely to lead to a similar increase in activity by PhonePayPlus (which regulates premium rate services).

The Consultation concludes with a strong focus on consumer protection. Ofcom acknowledges the high level of mobile literacy in the UK and customer satisfaction with the choice and quality of mobile services. However, a range of ongoing practices is identified as unacceptable and a priority for reform, including standards of customer service, billing methods, and the delivery of premium rate services. Ofcom published a separate consultation on 18 March 2008 proposing a new regulation on sales and marketing practice that will apply to all mobile service providers. This was in response to the sharp increase in the general level of complaints about the misselling of communications services since 2006. The new regulation will address ongoing problems experienced by consumers such as being given false or misleading information at the point of sale and so-called "slamming," in which consumers are transferred to a new contract without their knowledge or permission.

The current Consultation does not propose any detailed regulatory reforms. Indeed, Ofcom states that the intention at this stage is to stimulate debate and review around important policy and public interest issues. A further detailed Consultation is likely to follow which brings together both stakeholder responses and the regulators own view of its role in encouraging new market entrants and increased availability and quality of mobile services. Ofcom clearly recognises that the pace of recent developments and particularly the availability of 3G services has left the current regulatory framework in need of reform. A key message in the Consultation is that consumer issues will "remain high on the agenda" and that clear rules must be set for responsible market conduct. Ofcom must, however, also recognise the significant investment made by operators in their mobile infrastructure, and the positive steps taken to coordinate a framework of self-regulation on important issues such as mobile content. The proposals in the next Consultation should embrace deregulation wherever possible to ensure the UK continues to play a key role in the development of new technologies and competition in the wireless world.

Neil Brown is a Partner in the Technology Group of Eversheds LLP and head of the Telecommuications Group. He may be reached at 44 113 200 4411. Rob Allen is a Legal Adviser at Eversheds LLP.

Please email the author at neilbrown@eversheds.com with questions about this article.