Business Environment

Business Environment

All over the world, mobile operators are providing the essential connectivity that people and businesses expect. In recent years, the industry has adapted to major changes brought about by the convergence of technologies and services, and by the emergence of internet platforms and services. Telecommunications markets have expanded and competition has increased as a result.

In most countries, however, mobile operators are still subject to regulations designed for the voice era. These rules and obligations restrict their ability to innovate, invest and compete on equal terms in the digital ecosystem.

Policymakers should strive to create an enabling business environment that fosters competition and protects consumers without impeding commercial activity or economic progress. This will require a fresh look at regulations and revisions that better reflect today’s technologies and markets.

The following pages cover several policy topics affecting mobile operators, laying out the key points of debate and formally agreed industry positions. As the mobile industry continues to roll out 4G networks and initiate 5G trials, the need for pro-investment policies and modern regulatory regimes has never been greater.

Policies for Progress

Resetting policy and regulation to drive the digital economy

Digital technologies have fundamentally changed our daily lives, from shopping and entertainment to managing household finances. When given the opportunity, consumers have been quick to embrace digital tools. Many governments, recognising the value of mobile to society, have implemented bold policies to cultivate the digital economy while extending connectivity to underserved communities.

A holistic policy framework that reflects the changing digital landscape, while reducing costs and barriers to network deployment, will deliver the best social and economic outcomes. If regulatory policies and institutions fail to adapt, markets can become distorted in ways that harm competition, slow innovation and, ultimately, deprive consumers of the benefits of technological progress.

Figure 1 identifies four areas of policy action related to network investment, regulation, promoting the digital economy and demonstrating digital leadership.

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1 GSMA Report: Embracing the Digital Revolution — Policies for Building the Digital Economy (February 2017)

Emerging technologies are driving new business models and blurring boundaries between once-distinct markets. Yet, regulatory systems developed during the early years of mobile telecoms are still in place in many countries, and reforms have not kept pace with the converging and dynamic digital ecosystem. Tomorrow’s technologies cannot be allowed to be stifled by yesterday’s regulations, which need to be reframed for the digital and mobile age.

The good news is that policymakers recognise the need for change. In many jurisdictions, such as the European Union, reforms are underway that will protect competition and consumers without impeding social and economic progress. By updating the regulatory framework, policymakers can ensure that government and industry are aligned and working to foster an inclusive digital society for all.

Community Networks

Background

Community networks are a “do-it-yourself” approach to connectivity: local, community-owned (or community-managed) networks that address specific local connectivity needs. They are usually established in areas that are not commercially viable for mobile operators to cover and typically operate on a small scale, addressing discrete market failures. They can therefore be effective complements to connectivity efforts led by mobile operators.

Community networks have been made possible by advances in technology that have reduced barriers to network deployment and management and enabled non-operators to build and deploy mobile and internet connectivity solutions. Largely technology neutral, these solutions are tailored to the needs of the community or local setting, and can include the use of modular and simplified infrastructure, renewable energy, a variety of backhaul methods (including an ISP or Wi-Fi backbone, VSAT and WiMAX) and open connectivity standards. Community networks often use Wi-Fi technology in unlicensed spectrum, although very few countries have assigned spectrum specifically for their operation.

Community networks are generally funded through mechanisms such as crowdfunding, local financial contributions, the donation of connectivity expertise and equipment and sometimes customer usage fees. Since they offer a specific solution to often unique geographical, commercial and logistical connectivity challenges, they are often context specific and difficult to scale. Only a few community networks have established a lasting and financially sustainable business model.

Debate

What role can community networks play in a national connectivity approach?

How can mobile operators leverage community networks to support their rural connectivity strategies?

How should community networks be supported and regulated to ensure high-quality, local connectivity while maintaining a level playing field with mobile operators?

Industry Position

Community networks can complement the efforts of mobile operators to expand coverage since they are an opportunity to deliver the transformative benefits of connectivity to locations that are not commercially viable. By doing so, they can drive ICT usage, increase digital skills, support local business development and increase uptake of digitally delivered public services within the communities they serve.

Community networks have limitations, however. They typically do not have the resources or expertise to sustain investment in new innovations or address cybersecurity risks as effectively as scaled commercial networks. Regulatory uncertainty or constraints can also limit the potential of community networks and hamper the roll-out of larger-scale commercial connectivity networks.

A level playing field is essential, and regulation should empower both community networks and mobile operators to drive connectivity and accelerate digital inclusion. The regulation and policies applied to community networks should not impair or discourage the deployment of larger-scale commercial network operations and put mobile operators at a disadvantage.

Where Wi-Fi cannot provide a suitable solution, voluntary spectrum sharing can be an interesting opportunity to open access to new spectrum for community networks. However, careful planning is required, and it is essential that the chosen approach protects the needs of incumbents, supports the needs of new users and does not limit the evolution of the spectrum band.

Voluntary spectrum trading through secondary market transactions should be considered to enable spectrum access for community networks. Countries should have a regulatory framework that allows mobile operators to engage in voluntary spectrum trading.

Spectrum that is set aside for community networks in mobile bands may be underused. As a result, it may not just waste a valuable resource, but also threaten the success of commercial networks through reduced coverage, slower roll outs and worse performance.

Resources

The Internet Society: Community Networks

WNDW Report: Wireless Networking in the Developing World

Competition

Background

Mobile phones are the most widely adopted consumer technology in history. In large part, this success is due to competition in the mobile industry that has driven innovation.

The rise of the digital economy and explosive growth in smartphone adoption have brought innovation and disruption to traditional mobile communications services. These changes are also having an impact on existing policy frameworks and challenging competition policy, which includes government policy, competition law and economic regulation.

Despite the influence of new market dynamics on the mobile sector, the industry is still subject to the contradictions of a legacy regulatory system. This has put services in competition with each other, such as voice services offered by mobile operators and internet players that are regulated differently.

These differences can be seen in how economic regulation and competition law are applied to the sector. For example, a regulator’s jurisdiction may be limited to the telecommunications sector and not extend to internet players. As a result, regulators often fail to take wider market dynamics into account during the evaluation and decision-making process. Equally, a failure to understand the complex value chain can affect how competition law is applied.

Current competition policy is also being challenged by the competitive advantage conferred on some companies through their ability to collect and analyse large troves of data. Combined with powerful network effects and the tendency for markets to tip in favour of dominant platforms, this can harm consumers, hinder competition and stifle innovation.

The ability of competition policy and enforcement to deal with issues arising in digital markets is, therefore, key to the competitive development of the entire digital economy.

Debate

How should markets be defined in the digital age?

How can traditional competition tools be applied in the digital age?

Are significant market power (SMP) access remedies still appropriate?

Industry Position

The mobile industry supports competition as the best way to deliver economic growth, investment and innovation for the benefit of consumers. Excessive regulation stifles innovation, raises costs, limits investment and harms consumer welfare through the inefficient allocation of resources, particularly spectrum.

To ensure that competition and innovation thrive, it is essential that policymakers create a level playing field across the digital ecosystem. All competitors providing the same services should be subject to the same regulatory obligations, or absence of obligations. This should be achieved through a combination of deregulation and increased use of horizontal legislation to replace industry-, technology- or service-specific rules.

Regulators and competition authorities must recognise the dynamic nature of competition in the digital age. Internet players adopt new and different business models to offer services to customers, such as advertising-supported services that rely on sophisticated web analytics. Regulators and competition authorities need to understand these models and map their competitive impact before imposing regulatory obligations or competition law commitments. Otherwise, services that are in competition with each other may end up being regulated differently. For example, players that adopt traditional business models that are better understood may find themselves subject to greater scrutiny.

Including these new types of competitors in market assessment reviews could reveal there is much more competition in communications services than regulatory and competition authorities currently recognise. It could also demonstrate the potential for regulatory policy goals to be achieved through competition law. A basic principle of economic regulation is that regulation should not be imposed if competition law is sufficient to deal with the issues identified. Therefore, regulation of licensed providers could be lessened or may no longer be needed. Competition law itself could also be improved and updated to tackle the issues arising in digital markets more effectively.

Resources

GSMA Competition Policy website

GSMA Handbook: Competition Policy in the Digital Age

GSMA Report: The Data Value Chain

Deeper dive: competition in digital markets

The global economy is undergoing a major transformation. The rapid uptake of technologies, including mobile communications, digital platforms, big data, cloud computing and social media, are changing the nature of products and services and how people interact. This transformation disrupts existing business models and industries while also offering significant potential to enrich lives and raise living standards.

Competition in digital markets has certain features that distinguish it from competition in traditional markets, including:

  • Waves of investment and innovation and rapid technological progress;
  • Quality and product features that are often more important to consumers than price;
  • Winner-takes-all outcomes where new entrants offering innovative products or services may be able to leapfrog established firms;
  • Economies of scale and strong network effects in the supply of digital services;
  • Multisided markets and platforms with distinct groups of users benefitting from the presence of the other; and
  • Large-scale data gathering and analysis with the potential for anticompetitive effects, especially where it contributes to service quality.

These differences in the digital ecosystem challenge existing policies and demand an update of the competition framework and a more nuanced approach to competition policy.

Deeper dive: recommendations for resetting competition policy frameworks

The GSMA advocates that governments adopt the following recommendations to ensure their competition policy frameworks remain relevant and can address issues of abuse of market power and market failures in the digital economy.

Efficient Mobile Market Structures

Background

From the outset, mobile markets have been characterised by a vibrant, competitive market structure that drives investment and innovation.

Today, demand for robust, high-speed, high-quality mobile broadband continues to grow. This drives mobile operators to make large, regular investments in network infrastructure and services to provide consumers with improved offerings at lower costs. For example, while operators continue to invest in their 4G networks, they are also starting to invest in the spectrum and technology required to roll out 5G networks.

The high level of competition in the mobile services market has caused the tariffs charged to mobile users to fall steadily and significantly over the past few years. At the same time, consumption of mobile services, particularly mobile data, has grown steadily, with users typically getting more for their money.

To preserve competition, foster innovation and support the wider societal benefits of mobile connectivity, policymakers must ensure the right economic conditions are in place to support investments. In particular, they must recognise the competitive nature of today’s mobile markets, avoid regulating prices and steer clear of interventions aimed at engineering market structures. Instead, they should allow market mechanisms to determine the optimal mobile market structure.

Some regulators have used spectrum caps – limits on the amount of spectrum one entity can hold – to influence market structure. However, spectrum caps can have unintended consequences, including inefficient allocations of spectrum and/or reduced incentives to invest. Since this ultimately produces poor outcomes for consumers, they must be considered carefully.

At the same time, competition authorities tasked with assessing the impact of proposed mobile mergers must take full account of the dynamic efficiencies (and accompanying societal benefits) arising from mobile mergers.

Debate

Can mergers between mobile operators bring significant consumer benefits in mobile markets and wider society?

Industry Position

When assessing mobile mergers, policymakers should consider the full range of benefits of mergers, including price effects, innovation, investments and the use of spectrum over the short- and longer term.

Investment and quality of service. Competition authorities should consider placing greater emphasis on how mergers may affect an operator’s ability to invest. Growing demand for data services requiring ever-increasing bandwidth necessitates continuous investment in new capacity and technology.

Positive spill-over effects in the wider economy. Improvements to digital infrastructure support economic growth by increasing productivity across the economy.

Greater benefits than network sharing. Competition authorities have often argued that network sharing is a better alternative to mergers. While the pro-competitive nature of network-sharing agreements can only be assessed on a case-by-case basis, these agreements are not always feasible between merging parties because of an asymmetry of assets (such as spectrum holding) or different deployment strategies.

Unit prices. There is no robust evidence to suggest that four-player markets have produced lower prices than three-player markets in the past decade, in Europe or elsewhere. Mergers can accelerate the transition between technology cycles in the mobile industry (which are responsible for significant reductions in unit prices), leading to improvements in quality and innovation in services. As the market moves from voice to data, the global volume growth rate of mobile networks is accelerating. This requires more concentrated market structures to meet the investment challenge, drive mobile data unit prices down and fuel demand for mobile data services.

Effects of remedies on investments and use of spectrum. Mergers that compel mobile operators to provide third parties with access to their networks could reduce incentives to invest and significantly diminish benefits for consumers. In three cases where the European Commission’s Directorate-General for Competition made a network entry option available (Ireland, Germany and Austria), nobody took the option, even though it was arguably offered on favourable terms. Remedies that involve reallocating network assets or reserving spectrum for other operators could, in some cases, deter investment and lead to the underuse or misuse of resources.

Resources

GSMA Report: Assessing the Case for In-country Mobile Consolidation
GSMA Report: Assessing the Case for In-country Mobile Consolidation in Emerging Markets
GSMA Report: Assessing the Impact of Mobile Consolidation on Innovation and Quality — An Evaluation of the Hutchison/Orange Merger in Austria
GSMA Report: Assessing the Impact of Market Structure on Innovation and Quality in Central America

Deeper Dive

The dynamic benefits of mergers

Recently, there has been heated debate about the effects of consolidation on the performance of mobile markets following mergers in key European markets, including Austria, Germany, Ireland and the UK. While some argue that consolidation has a detrimental effect on competition and prices, others argue that, without consolidation, mobile markets will not achieve the necessary scale and fail to attract sufficient investment.

In the past three years, multiple studies have analysed how mergers affect investment. For example, a 2017 GSMA report analysed the impact of the Hutchison/Orange merger in Austria in 2012 on coverage and quality of service. It was found that, within two years, Hutchison expanded population coverage of its 4G network by 20 to 30 percentage points as a result of the merger. 4G download and upload speeds also increased by 7 Mbps and 3 Mbps, respectively, within the same period. The quality of mobile networks in Austria improved overall, with 4G download and upload speeds increasing by more than 13 Mbps and 4 Mbps in 2013 and 2014 respectively, and 3G download speeds increasing by 1.5 Mbps after 2014.

Since 2015, at least seven other studies have examined the relationship between market structure, innovation and investment, as measured by mobile operators’ capital expenditure (CapEx). None found that greater market concentration resulted in lower investment per operator or lower total country investment.

Meanwhile, initial studies have found that investment always increases with market concentration, suggesting that the Hutchison/Orange merger would have had a positive effect on Austrian consumers.

CERRE (2015) found that, on average, a 10 per cent increase in the Herfindahl-Hirschman Index boosts the CapEx of mobile operators that have merged by 24 per cent. In 2016, Houngbonon & Jeanjean and found that markets with four players average 14 per cent lower investment per operator than markets with three players, and that a higher number of operators tends to decrease investment. DG Competition (2017) found that investment per operator increased as a result of the five-to-four merger in the UK in 2010, although no statistically significant effect was found when analysing investment per subscriber.

A second set of studies (Houngbonon & Jeanjean, 2016 and HSBC, 2015) suggests that greater market concentration increases CapEx per operator only when their profit margins are less than 37 to 44 per cent. Operators in most four-player markets are below this threshold, including the Austrian operators before the merger. These studies suggest that the introduction of competition initially has a positive effect on investment, but that as mobile markets become less concentrated it has a negative effect. Other studies have found that investment does not depend on market structure (WIK, 2015 and Frontier, 2015), suggesting that a mobile merger would have a neutral effect on outcomes such as network quality and coverage.

While many believe that consolidation is likely to lead to less investment by operators, there was evidence that concentration leads to increased investment after a merger. This is because larger operators enjoy economies of scale that enable them to extend coverage and undertake network upgrades. They are also financially stronger due to higher profit margins and better access to complementary assets and commercial partnerships, which can lead them to expect higher returns from their investments.

3 GSMA. (2017). Assessing the Impact of Mobile Consolidation on Innovation and Quality: A Evaluation of the Hutchison/Orange Merger in Austria.
4 CERRE (2015), Frontier (2015), Houngbonon & Jeanjean (2015), Houngbonon & Jeanjean (2016), HSBC (2015), WIK (2015) and DG Competition (2017).

5 Although WIK (2015) found that market structures that provide higher profit margins and greater economies of scale (both enhanced by market consolidation) boost total CapEx per country.

Infrastructure Sharing

Background

Common in many countries, infrastructure sharing can provide additional capacity in congested areas where space for sites and towers is limited and help to expand coverage in underserved geographical areas.

Infrastructure-sharing arrangements allow mobile operators to jointly use masts, buildings and even antennae, avoiding unnecessary duplication of infrastructure. Infrastructure sharing has the potential to strengthen competition and reduce the carbon footprint of mobile networks while also reducing costs for operators.

As with spectrum trading arrangements, mobile infrastructure sharing has traditionally involved voluntary cooperation between licensed operators based on their commercial needs.
Debate

Debate

Should regulators oversee, approve or manage infrastructure-sharing arrangements?

What role should governments play in the development and management of core infrastructure?

Industry Position

Governments should have a regulatory framework that allows voluntary infrastructure sharing among mobile operators.

While it may, at times, be advantageous for mobile operators to share infrastructure, network deployment remains an important competitive advantage in mobile markets. Any sharing should therefore be the result of commercial negotiation, not mandated or subject to additional regulatory constraints or fees.

National regulatory frameworks should facilitate all types of infrastructure-sharing arrangements. This can include sharing various components of mobile networks, including so-called passive and active sharing. In some cases, site sharing (a type of passive sharing) increases competition by giving operators access to sites necessary to compete on quality of service and coverage.

Infrastructure-sharing agreements should be governed by commercial law and, as such, subject to assessment under general competition law.

Access to government-owned trunk assets should be available on non-discriminatory commercial terms at a reasonable market rate.

Resources

GSMA Report: Unlocking Rural Coverage: Enablers for Commercially Sustainable Mobile Network Expansion

ITU Mobile Infrastructure Sharing website

ZDNet Article: Learning to Share: Could Tower-Sharing be the Solution to Rural Networks’ Problems?

Deeper Dive

Types of Infrastructure Sharing

Infrastructure sharing can be passive or active. Passive sharing includes site sharing, where operators use the same physical components but have different site masts, antennae, cabinets and backhaul. A common example is shared rooftop installations. Practical challenges include availability of space and property rights. A second type of passive sharing is mast sharing, where the antennae of different operators are placed on the same mast or antenna frame, but the radio transmission equipment remains separate.

In active sharing, operators may share the radio access network (RAN) or the core network. RAN sharing may create operational and architectural challenges. With core network sharing, operators also share the core functionality, demanding more effort and alignment, particularly the compatibility of the operators’ technology platforms.

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Infrastructure sharing optimises the utilisation of assets, reduces costs and avoids duplication of infrastructure (in line with town and country planning objectives).

It may also:

  • Reduce site acquisition time;
  • Accelerate the roll-out of coverage into underserved geographical areas;
  • Strengthen competition;
  • Reduce the number of antenna sites;
  • Reduce the energy and carbon footprint of mobile networks;
  • Reduce the environmental impact of mobile infrastructure on the landscape; and
  • Reduce costs for operators.

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Intellectual Property Rights — Patents

Background

The mobile ecosystem has been a major driver of economic progress and welfare globally. Countries around the world continue to benefit from improvements in productivity and efficiency brought about by the uptake of mobile products and services. GSMA Intelligence predicts mobile will generate five per cent of global GDP by 2022, or $4.6 trillion in economic value.

Without the immense efforts of the mobile operator community, many of the adopted technologies in 2G, 3G and 4G would not have been successfully developed, implemented or adopted on a mass scale.

At no point in history has telecommunications technology had a greater impact on peoples’ lives than now. The public has become heavily reliant on mobile telecommunications technology and the ability of mobile operators to deliver such services. Mobile telecommunications services provided by the operator community have become fundamental to everyday existence.

However, in the past few years, there have been radical changes in the licensing of telecommunications technology (i.e. the prime use of patent portfolios in telecommunications). Initially, patents were used to preserve a company’s “freedom to operate” (i.e. its ability to bring its products to market by seeking large portfolio cross-licences). Increasingly, patents have become tradeable, income-generating assets (via the “secondary patent market”) capable of being asserted against start-ups, small and large companies, and, in certain cases, used to stifle competition.

Debate

Now that patents have become tradable and income-generating asset, can they still be looked upon as a tool to support and promote innovation?

Are Patent Assertion Entities (PAEs) having a negative effect on competition?

Industry Position

The secondary patent market has greatly encouraged the rise of non-innovating, non-practising, patent monetisation and licensing or enforcement entities, known as PAEs. Usually, PAEs are purchasing patents (rather than developing and licensing technology) to be asserted against manufacturers and operators already using the technology.

There are several reasons mobile operator networks have become a premium target for so-called “patent trolls” in Europe, America and Asia. These include:

  • The complexity of mobile operator networks;
  • The scale of investments needed to build them;
  • The level of revenues they generate; and
  • The reliance of these networks on standards-based technology.

The multiple costs associated with PAE litigation and threats of injunction (as leverage in demands for disproportionately high licensing fees) have a detrimental effect, not only on a mobile operator’s business, but also on innovation and standardisation in mobile telecommunications.

Increasing PAE litigations and adversarial/litigious licensing negotiations highlight the need for greater clarity on the licensing of standard essential technology. These efforts should focus on:

  • The reliance of the public on mobile telecommunications technology and the ability of mobile operators to deliver such services;
  • The fact that disruption to these services, even somewhat, will have a severe negative effect on people’s lives;
  • The importance of maintaining the integrity of mobile telecommunication services and ensuring continuous investment and adoption of new technologies in the telecommunications market; and
  • The need to incorporate appropriate rules and regulations in frameworks governing the seeking and granting of injunctions in predatory patent assertion cases (to allow the judiciary to consider the above points).

International Mobile Roaming

Background

International mobile roaming (IMR) allows people to continue to use their mobile device to make and receive voice calls, send text messages and email and use the internet while abroad. Telecoms regulators and policymakers have raised concerns about IMR prices and the lack of price transparency, which can cause bill shock for consumers.
In December 2012, when the International Telecommunication Union (ITU) was updating the International

Telecommunications Regulations (ITRs), several governments requested that the revised treaty include provisions on transparency and price regulation for mobile roaming. However, on balance, ITU member states concluded that roaming prices should be determined through competition rather than regulation, and text was included in the treaty to reflect this approach.

In the European Union, roaming regulation has been in place since 2007, and in June 2017, “roam-like-at-home” was introduced across the EU, with mobile operators required to include it by default in contracts. Travellers can call, text and surf on their mobile devices in any EU country for no more than what they pay at home. Operators can implement “fair use” policies to prevent the abuse of regulated roaming services.

Bill shock and certain high roaming prices have also attracted the attention of international institutions such as the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO). Regional and bilateral regulatory measures are also either in place or being considered in many jurisdictions.

Debate

Some policymakers believe IMR prices are too high. Is regulatory intervention the right way to address this?

What measures can be taken to address concerns about price transparency, bill shock and price levels?

What other factors affecting roaming prices do policymakers need to consider?

Industry Position

IMR is a valuable service delivered in a competitive marketplace. Price regulation is not appropriate as the market is delivering many new solutions.

The mobile industry advocates a three-phased strategy to address concerns about mobile roaming prices:

  • Transparency: In June 2012, the GSMA launched the Mobile Data Roaming Transparency Scheme, a voluntary commitment by mobile operators to give consumers greater visibility of roaming charges and their mobile data usage when abroad.
  • Removal of structural barriers: Governments and regulators should eliminate structural barriers that increase costs and cause price differences between countries. These include double taxation, international gateway monopolies and fraud, all of which should be removed before any form of IMR price regulation is considered.
  • Price regulation: Governments and regulators should only consider price regulation as a last resort after transparency measures and innovative IMR pricing have failed to address consumer complaints and structural barriers have been removed. The costs and benefits of regulation must be assessed carefully and consider unique economic factors, such as national variations in income, GDP, inflation, exchange rates, mobile penetration rates, the percentage of the population that travels internationally and the incidence of international travel to neighbouring countries, all of which have an impact on IMR prices.

The mobile industry is a highly competitive and maturing industry, and one of the most dynamic sectors globally. In the past decade, competition between mobile operators has yielded rapid innovation, lower prices and a wide choice of packages and services for consumers. Imposing roaming regulation on mobile operators not only reduces revenue and increases costs, but also deters investment.

Resources

GSMA Roaming website
GSMA Information Paper: Overview of International Mobile Roaming
GSMA News: GSMA Launches Data Roaming Transparency Initiative

Mobile Termination Rates

Background

Mobile termination rates (MTRs) are the fees charged by mobile operators to connect a phone call originating from a different network. Setting regulated MTRs continues to be a focus of regulators in both high- and low-income countries, and many different approaches have been developed to calculate appropriate termination charges.

Regulators have generally concluded that the provision of call termination services on an individual mobile network is, in effect, a monopoly. Therefore, with each operator enjoying significant market power, regulators have developed various regulations, most notably, the requirement to set cost-oriented prices for call termination.

Debate

How should an appropriate regulated rate for call termination be calculated?

Is the drive towards ever lower mobile termination rates, especially in Europe, a productive and appropriate activity for regulators?

Once termination rates have fallen below a certain threshold, is continued regulation productive?

What is the long-term role of regulated termination rates in an all-IP environment?

“Intervening in a competitive market is far more complex and challenging than the traditional utility regulation of the kind normally applied to monopolies in gas, electricity and fixed-line telecommunications. With mobile, every action is more finely calibrated. The benefits of intervention are more ambiguous and the error costs larger.”
– Stewart White, former Group Public Policy Director, Vodafone

Industry Position

Regulated mobile termination rates should accurately reflect the costs of providing termination services.

Evidence suggests that reductions in MTRs are not beneficial after a certain point. The setting of regulated MTRs is complex and requires a detailed cost analysis, as well as careful consideration of its impact on consumer prices and, more broadly, on competition.

MTRs are wholesale rates, regulated in many countries, where a schedule of annual rate changes has been established and factored into mobile operators’ business models. Unsignalled, unanticipated alterations to these rates have a negative impact on investor confidence.

The GSMA believes the setting of MTRs is best done at a national level where local market differences can be properly reflected in the cost analysis. Extraterritorial intervention is therefore not appropriate.

Resources

Vodafone Report: The Impact of Recent Cuts in Mobile Termination Rates Across Europe

GSMA Report: The Setting of Mobile Termination Rates: Best Practice in Cost Modelling

GSMA Report: Comparison of Fixed and Mobile Cost Structures

Net Neutrality

Background

While there is no single definition of net neutrality, it often refers to issues concerning the optimisation of traffic over networks. Advocates assert that all traffic carried over a network should be treated equally, but others contend that offering different service levels for different applications enhances the user experience.

Where this flexibility exists, mobile operators can offer a bespoke, managed service to providers of new connected products, such as autonomous cars. This could not exist without constant, high-integrity connectivity. Operators can also enter commercial arrangements with content and application providers that want to attract users by offering free access, for example, by zero-rating their content so mobile subscribers are not “charged” for data usage. These kinds of arrangements support product and service innovation, deliver added value to consumers and generate new revenue for operators, which face constant pressure to enhance, extend and upgrade their networks.

Mobile operators face unique operational and technical challenges in providing fast, reliable internet access to their customers, due to the shared use of network resources and limited available spectrum. Unlike fixed broadband networks where a known number of subscribers share capacity, the capacity demand at any given cell site is much more variable, as the number and mix of subscribers constantly changes, often unpredictably. The available bandwidth can also fluctuate due to variations in radio frequency signal strength and quality, which can be affected by weather, traffic, speed and the presence of interfering devices, such as wireless microphones.

Not all traffic has equal demands on a network. Voice traffic is time sensitive while video streaming typically requires large amounts of bandwidth. Networks need to be managed in a way that accommodates all types of traffic and supports innovations with 5G and IoT. The principle of the open internet and allowing operators to offer their customers a variety of service options are not mutually exclusive. As the net neutrality debate has evolved, policymakers have come to accept that network management plays an important role in service quality.

Statement

Just as content providers offer differentiated services such as standard and premium content for different prices, mobile network operators will offer different bandwidth products to meet different consumer needs. Customers are benefitting from these tailored solutions; only those who want to use premium services will have to pay the associated costs.
— GSMA

Debate

Should networks be able to manage traffic and prioritise one traffic type or application over another?

For mobile networks, which have finite capacity, should fixed-line rules apply?

In some cases, net neutrality rules are being considered in anticipation of a problem that has yet to materialise. Is this an appropriate approach to regulation?

Industry Position

Mobile operators need to be able to actively manage network traffic to meet the different needs of consumers.

It is important to maintain an open internet. To ensure it remains open and functional, mobile operators need the flexibility to differentiate between different types of traffic.

Regulation that affects operators’ handling of mobile traffic is not required. Any regulation that limits their flexibility to manage quality of service from end to end and provide consumers with a satisfactory experience is inherently counterproductive.

Regulators should recognise the differences between fixed and mobile networks, including technology differences and the impact of radio frequency characteristics.

Consumers should have the ability to choose between competing service providers by comparing performance differences in a transparent way.

Mobile operators compete in many areas, including pricing of service packages and devices, different calling and data plans, innovative applications and features and network quality and coverage. The high degree of competition in the mobile market provides ample incentives to ensure customers enjoy the benefits of an open internet.

Resources

GSMA Net Neutrality website

Deeper Dive

Traffic Management is an Efficient and Necessary Tool

Traffic growth, the deployment of next-generation technologies and the emergence of new types of services are presenting mobile operators with a huge challenge: how to manage different types of traffic over a shared network pipe while providing subscribers with a satisfactory quality of service that meets different consumer needs and service attributes.

The finite capacity of mobile networks means they can experience congestion. Mobile operators use traffic management techniques to efficiently manage network resources, including spectrum, and to support multiple users and services on their networks. Congestion management is essential to prevent the network from failing during traffic peaks and to ensure access to essential services.

Traffic management techniques are applied at different layers of the network, including admission control, packet scheduling and load management. In addition, operators need to cater to different consumer preferences so that customers can access the services they demand. Traffic management is therefore an efficient and necessary tool for operators to manage the flow of traffic over their network and provide fair outcomes for all consumers.

Mobile operators need the flexibility to experiment with and establish new business models that align investment incentives with technological and market developments, and to create additional value for their customers. As the operational and business models of networks evolve, a host of innovative services and business opportunities will emerge.

The current competitive market is delivering choice, innovation and value for money for consumers, which means no further regulatory intervention in the provision of IP-based services is necessary. The commercial, operational and technological environment in which these services are offered is continuing to develop, and any intervention is likely to impact the development of these services in a competitive context.

Traffic management techniques are necessary and appropriate in a variety of operational and commercial circumstances:

  • Network integrity: Protecting the network and customers from external threats, such as malware and denial-of-service attacks.
  • Child protection: Applying content filters that limit access to age-inappropriate content.
  • Subscription-triggered services: Taking appropriate action when a customer exceeds their contractual data usage allowance or offering charging models that allow customers to choose the service or application they want.
  • Emergency calls: Routing emergency call services.
  • Delivery requirements: Prioritising real-time services, such as voice calls, and considering the time sensitivities of services, such as remote alarm monitoring.

Over-the-Top Voice and Messaging Communications Apps

Background

The combination of mobile broadband access, smartphones and internet technology has led to the emergence of a new breed of consumer mobile voice and messaging communication services provided by internet-based companies, often referred to as over-the-top service providers (OTTs). These services are providing consumers with additional choices in how they communicate with each other.

OTT communications services are typically offered in competition with, and as direct substitutes to, the circuit-switched voice and SMS services provided by mobile operators, but they are typically not properly considered in the market analysis carried out by regulators.

Due to the global nature of the internet, and because they have not been considered as equivalent to traditional communication services, many OTT communications services sit outside the scope of sector-specific national or regional regulatory and fiscal obligations (e.g., e-privacy, legal interception, emergency calls, universal service contribution, national specific taxes, consumer rights and quality of service) that have been put in place to protect consumers and ensure that all providers make a fair and proportionate contribution to local economic growth through investment, employment and tax.

As OTT communications services become more and more popular, they increasingly render a number of regulations designed to address alleged network bottlenecks, such as termination and roaming, unjustified.

Debate

Should OTT services be subject to the same regulatory obligations that apply to calls and messages carried over the PSTN?

Does the fact that OTT players currently sit outside the scope of sector-specific regulations provide them with a competitive advantage over traditional telecoms providers?

Industry Position

The mobile industry supports and promotes fair competition as the best way to stimulate innovation and investment for the benefit of consumers and to spur economic growth, and believes both objectives will be best served by the principle of ‘same rules for the same service’. The growth in competition between different types of service provider calls for a move towards shared rules that are lighter touch than those applicable in less competitive environments.

The principle of same rules for the same service maintains that where regulation is considered to be necessary, all equivalent consumer voice and messaging services should be subject to the same regulatory and fiscal obligations, regardless of the underlying technology, geographic origin or whether they are delivered by a mobile operator or OTT service provider. This will help to improve consumer confidence and trust in using internet-based services by ensuring a consistent approach to issues such as transparency, quality of service and data privacy. Consistent application of regulatory obligations will also support legitimate law enforcement and national security activities.

While the same rules should apply to the same services, these are not necessarily the rules that apply today to telecommunications services. There is a need for a forward-looking regulatory framework for communications services that is fit for purpose for a digital world. This framework must be driven by clear policy requirements around consumer protection, innovation, investment and competition.

By adopting a policy framework built around same rules for the same service, and properly recognising the competitive constraint imposed on mobile network operators by OTTs currently playing by different rules, national governments and regulators will be enabling an environment of fair and sustainable competition that promotes the best interests of consumers and fosters economic growth.

Resources

Ovum: OTT Messaging Forecast: 2016–20
Juniper Research: OTT Messaging Users to Hit 4.2 Billion by 2021

Everybody knows today that with telecom service providers and OTT [players], there are unbalanced relations and we have to find a better balance.
— Andrus Ansip, Vice-President for the Digital Single Market, European Commission, 2015

Passive Infrastructure Providers

Background

Many mobile operators share infrastructure on commercial terms to reduce costs, avoid unnecessary duplication and expand coverage cost-effectively in rural areas. The most commonly shared infrastructure is passive infrastructure, which may include land, rights of way, ducts, trenches, towers, masts, dark fibre and power supplies, all of which support the active network components required for signal transmission and reception.

Infrastructure sharing is arranged through bilateral agreements between mobile operators to share specific towers, through strategic sharing alliances, through the formation of joint infrastructure companies between mobile operators or via independent companies providing towers and other passive infrastructure.

Increasingly, independent tower companies provide tower-sharing facilities to mobile operators. Several countries have established regulatory frameworks based on registration that encourage passive infrastructure-sharing arrangements and provide regulatory clarity for network operators and independent passive infrastructure providers. While regulatory authorities in almost all countries support passive infrastructure-sharing arrangements, there is a lack of regulatory clarity in some countries, particularly in relation to independent tower companies.

Debate

What benefits do independent tower companies offer to mobile operators?

Should passive infrastructure sharing ever be mandated by the regulatory authority?

What steps should regulators take to provide clarity to tower companies and mobile operators?

Industry Position

Licensed network operators should be able to share passive infrastructure with other licensed network operators and outsource passive infrastructure supply to passive infrastructure providers without seeking regulatory approval. Sharing passive infrastructure on commercial terms enables operators to reduce capital and operating expenditure without affecting investment incentives or their ability to differentiate and innovate.

Infrastructure sharing provides a basis for industry to expand coverage cost-effectively and rapidly while retaining competitive incentives. Regulation of passive infrastructure sharing should be permissive, but should not mandate such arrangements.

In markets with licensing frameworks that do not already provide for the operation of independent tower companies, regulatory authorities (or the responsible government department) should either permit independent passive infrastructure companies to operate without sector-specific authorisation or establish a registration scheme for such companies. The scheme should be a simple authorisation that provides for oversight of planning-related matters while making a clear distinction with the licensing framework applicable to electronic communications network and service providers.

Registered providers should be permitted to construct and acquire passive infrastructure that is open to sharing with mobile operators, provide (e.g. sell or lease) passive infrastructure elements to licensed operators and supply ancillary services and facilities essential to the provision of passive infrastructure.

Mobile operators should be permitted to use infrastructure from passive infrastructure companies through commercial agreements without explicit regulatory approval. Infrastructure-sharing agreements should be governed by commercial law and, as such, be subject to assessment under general competition law.

Public authorities should provide licensed operators and passive infrastructure providers with access to public property and rights of way on reasonable terms and conditions. Governments, seeking to support national infrastructure development, should ensure swift approval for building passive infrastructure, and environmental restrictions should reflect globally accepted standards.

Taxation and fees imposed on independent tower or passive infrastructure companies should not act as a barrier to the development of this industry, which makes more efficient, lower-cost forms of infrastructure supply possible.

Resources

AT Kearney Report: The Rise of the Tower Business
Reuters News: Bharti Airtel to Sell 3,100 Telecom Towers

Public-Private Partnerships (PPPs)

Background

A public-private partnership (PPP) is a legal arrangement between two or more private and public sector parties to deliver a service via mutual investment. PPPs are common in infrastructure sectors such as telecoms where upfront investments are high and payback periods long.

PPPs can be an interesting mechanism to facilitate investment from different stakeholders and support the extension of network coverage in areas that are otherwise risky investments with limited commercial potential. Governments view PPPs as a way to drive investment in uncovered areas and leverage the expertise of the private sector. In turn, private companies benefit from the certainty of a viable business model thanks to the investment and guarantees provided by the public partner. Large-scale PPPs often attract the interest of multilateral organisations, which recognise the potential economy-wide benefits of such projects and are willing to support private companies and governments that lack the financial means to get these projects off the ground on their own.

In the telecoms sector, PPPs are found across all network segments:

  • First mile: submarine cables, satellite hubs, Internet Exchange Points (IXPs).
  • Medium mile: fibre backbone and backhaul.
  • Last mile: radio access networks and wired local loops.

1An illustrative example is the ACE submarine cable along the coast of West Africa, one of the largest PPP investments in the ICT sector. The ACE submarine cable initiated operations in 2012 and now connects 23 countries, some of them for the first time, to international fibre infrastructure. It is enabling increases in speeds and decreases in prices for internet access. The World Bank financed part of the ACE submarine cable. Sources: World Bank, Private Participation in Infrastructure Database, 2018; World Bank, Implementation completion and results report, 2018

Debate

Are PPPs an effective way to accelerate the deployment of infrastructure and drive digital inclusion?

What alternatives do governments have to use their resources to catalyse investment?

What are the characteristics of a PPP that maximises positive impacts while minimising negative consequences?

Industry Position

PPPs can be an effective way to deploy and operate network infrastructure in areas that do not have the economic potential to attract private investment. Public and private resources may support network deployment to deliver communications services directly to customers or provide the infrastructure to deploy commercially viable networks.

Governments should only consider PPPs in the most remote areas. Engaging with mobile operators and considering their roll-out plans is an essential part of the scoping phase, as it prevents public investment from being wasted in areas where operators could have deployed networks on their own. Service delivery and customer engagement should be left to the private sector, which can provide the full suite of products and services to support digital inclusion.

Governments should only consider PPPs after exhausting all other policy and regulatory measures to maximise coverage through market-driven mechanisms. Creating an investment-friendly policy framework should be the first step in a coverage expansion strategy. As a second step, governments should consider giving mobile operators the same preferential conditions PPPs often enjoy, such as subsidies, no-cost access to public infrastructure or less stringent quality-of-service obligations. This may be sufficient to create a favourable business case in remote areas.

When implementing a PPP, governments should avoid the Single Wholesale Network approach. SWNs are PPPs that do not observe the best practices outlined above. SWNs have a geographic scope that overlaps with commercial networks and monopolises important resources, such as spectrum. They create an uneven playing field, use valuable public resources inefficiently and have multiple implementation challenges (see the “Single Wholesale Networks” section for more details).

[2] “Todo Chile Communicado” is a typical example for the first case, where a PPP was created to bring mobile connectivity to 1474 rural communities in Chile.

Source: GSMA, Closing the coverage gap, 2016

[3] The ACE submarine cable is a good example of infrastructure that enabled faster and cheaper internet connectivity across 22 countries in Africa.

[4] European Commission, The broadband State aid rules explained, 2013

[5] See GSMA, Unlocking rural Coverage: Enablers for commercially sustainable mobile expansion, 2016

Resources

European Commission Guide: The Broadband State Aid Rules Explained: An eGuide for Decision Makers: An eGuide for Decision Makers

Quality of Service

Background

The quality of a mobile data service is characterised by a few important parameters: speed, packet loss, delay and jitter. It is also affected by factors such as mobile signal strength, network load and user device and application design.

Mobile operators must manage changing traffic patterns and congestion, as these normal fluctuations result in customers experiencing different qualities of service.

Connection throughput is viewed by some regulatory authorities as an important attribute of service quality. However, it is also the most difficult to define and communicate to mobile service users. Mobile throughput can vary dramatically over time, and throughput is not the only product attribute that influences consumer choice.

Debate

Is it necessary for regulators to set specific targets for network quality of service in competitive markets?

Is it possible to guarantee minimum quality levels in mobile networks, which vary over time according to the volume of traffic being carried and the specific, local signal-propagation conditions?

Which regulatory approach will protect the interests of mobile service customers while not distorting the market?

Industry Position

Competitive markets with minimal regulatory intervention are best able to deliver the quality of mobile service customers expect. Regulation that sets a minimum quality of service is disproportionate and unnecessary.

The quality of service experienced by mobile consumers is affected by many factors, some of which are beyond the control of operators, such as the type of device, application and propagation environment. Defining specific quality targets is neither proportionate nor practical.

Mobile networks are technically different from fixed networks since they make use of shared resources to a greater extent and are more traffic sensitive.

Mobile operators need to deal with continually changing traffic patterns and congestion within a finite network capacity, where one user’s traffic can have a significant effect on overall network performance.

The commercial, operational and technological environment in which mobile services are offered is continuing to develop. Mobile operators must have the freedom to manage and prioritise traffic on their networks. Regulation that rigidly defines a particular service quality level is unnecessary and likely to affect the development of these services.

Competitive markets with different commercial offerings and information that allows consumers to make informed choices deliver the best outcomes. If regulatory authorities are concerned about quality of service, they should engage in dialogue with the industry to find solutions that strike the right balance on transparency of quality of service.

Resources

GSMA Reference Document: Definition of Quality of Service Parameters and their Computation

GSMA Latin America Brochure: The Quality of Mobile Services in Latin America

Deeper Dive

A Network of Interconnections

Offering a dependable quality of service is a priority for mobile operators as it allows them to differentiate their internet access service from their competitors and meet customer expectations. However, mobile operators have little control over many of the parameters that can affect their subscribers’ experience.

Factors beyond an operator’s control include:

  • The type of device and application being used;
  • The changing usage patterns in a mobile network cell at different times of day;
  • The movements and activities of mobile users, such as travel, events or accidents;
  • Obstacles and distance between the terminal and antennae; and
  • The weather, especially rain.

In addition, the quality of internet access that users experience depends on the quality provided by each of the data paths followed. The internet service provider (ISP) only has control over the quality of service in their section of the network.

Factors affecting mobile quality of service

For these reasons, regulation on the quality of mobile internet service can be counterproductive. Regulation that does not consider the nature of mobile networks and the competitive workings of these services can be an obstacle to their development, widening the digital divide and promoting inefficient use of the capital invested in networks.

BE_Quality_of_service_img1

Single Wholesale Networks

Background

Policymakers in some countries are considering establishing single wholesale networks (SWNs) or wholesale open access networks (WOAN) instead of relying on competing mobile networks to deliver mobile broadband services. Most of these proposals specify at least partial network ownership and financing by the government.

While there are variations in the SWN proposals discussed by different governments, SWNs can generally be defined as government-initiated network monopolies that compel mobile operators and others to rely on wholesale services provided by the SWN to serve and compete for retail customers.

SWNs would represent a radical departure from the approach to mobile service provision favoured by policymakers over the past 30 years – namely, to license a limited number of competing mobile operators, which are usually under private ownership.

In 2000, there were almost as many countries served by a single mobile network as there were countries served by multiple competing networks. Today, however, only about 30 markets are served by a single mobile network. Many are small islands with populations in the thousands and, in total, represent less than two per cent of the world’s population. During the same period, network competition has produced unprecedented growth and innovation in mobile services, particularly in developing countries. The number of unique mobile subscribers has now surpassed five billion. This success has fuelled innovation and helped increase speeds, improved network coverage and cut costs.

Supporters of SWNs argue they can address some concerns better than the traditional model of network competition in some markets. These concerns generally include inadequate or lack of coverage in rural areas, inefficient use of radio spectrum and fears that the private sector may lack incentives to maximise coverage or investment.

Debate

Are SWNs likely to increase the quality and reach of next-generation mobile broadband, compared with the existing approach of network competition?

What alternative policies should be considered before adopting a monopoly wholesale network model?

Industry Position

SWNs and WOANs are likely to lead to worse outcomes for consumers than network competition. Although some supporters claim they provide greater network coverage than network competition, this is often because there are public subsidies and other forms of favourable support for SWNs that are not available to competing mobile operators, making it an unfair comparison. Commercial networks can deliver coverage even in areas where duplicate networks are not economical. This can be achieved in many ways, including through voluntary network sharing among operators.

The benefits of network competition go beyond coverage. Innovation is a key driver of consumer value at the national level, and this occurs in networks as well as services and devices. While mobile technologies are typically developed at the international level, the speed at which they become available to consumers depends on national policies and market structures. In practice, government-mandated wholesale networks have been much slower to expand coverage, perform upgrades and embrace new technologies.

Rather than use public funds to create a separate network to deliver coverage in areas where commercial networks have not found it viable to cover, an alternative approach is to consider how public funds might be used to subsidise a commercial network provider to expand coverage to these areas.

Resources

GSMA & Frontier Economics Report: Assessing the case for Single Wholesale Networks in mobile communications
GSMA Report: The risks associated with Wholesale Open Access Networks

Deeper Dive

The risks of Single Wholesale Networks

Governments often have ambitious goals when they mandate the creation of an SWN or WOAN instead of relying on the market, especially competing mobile networks, to deliver mobile broadband services in their country. However, research shows that of the five countries seriously considering this option, only Rwanda and Mexico have rolled out a network (as of mid-2018). The lessons from all five countries highlight the significant challenges associated with SWNs and WOANs.

For example, the public-private partnership project in Rwanda set ambitious goals, but has encountered several difficulties in meeting them. While an LTE network has been rolled out, connectivity is generally not being delivered in areas where operators are not already providing 3G coverage. The network is also competing directly with existing mobile operators rather than selling services to them on a wholesale basis. Pricing remains a concern because levels are so low that they are undercutting existing mobile operators, leaving little room for reinvestment.

In the other four countries, efforts to roll out networks have either been significantly delayed or abandoned altogether.

The roll out in Mexico was marred by delays and the scope of the project has been reduced. In May 2015, the government announced the investment target had been reduced from $10 billion to $7 billion. It also estimated that the number of cell towers built for the network will be closer to 12,000 than 20,000.

In 2016, the Altán consortium, as the sole remaining bidder, was granted access to 90 MHz of valuable spectrum in the 700 MHz band to build an LTE-based wholesale network. In mid-2018, the network had reached its first coverage target of 32 per cent of the population.

However, as with the project in Rwanda, the cost structure is a major concern. The government is not receiving any revenue from the licence for this valuable spectrum, and Altán is paying much-reduced annual spectrum fees. This is distorting the market since existing operators must still pay for their spectrum licence and full annual spectrum fees while also finding funds to reinvest in their networks.

The Altán consortium has yet to prove their service is a valuable offering for Mexican consumers and businesses, as the network is only available in areas that already have coverage. Consequently, uptake among the large operators, which would help increase the impact of the project, has been slow. This makes the goal of reaching 92.2 per cent of the population by 2024 look very optimistic.

In other countries, projects have been abandoned or made little progress. In Kenya and Russia, the push stalled due to complicated negotiations with key stakeholders. As of September 2018, a Ministerial Policy Directive in South Africa to assign high-demand spectrum to a WOAN and to other electronic communications network service licensees simultaneously was the subject of a public consultation process.

Improving rural coverage is something the mobile industry works on tirelessly. Instead of going down the wholesale monopoly route, the GSMA recommends governments conduct a comprehensive consultation with all stakeholders to address coverage gaps.

While it is often a fiercely competitive industry, mobile operators are not shying away from cooperation to expand coverage. The connectivity gap can only be overcome through close collaboration between the telecoms industry and governments. The basic building blocks are:

  • Cost-effective access to low-frequency spectrum;
  • Support for flexible spectrum use (e.g. refarming and technology-neutral licences);
  • Support for all forms of voluntary infrastructure sharing;
  • Better use of government Universal Service Funds (USF)/subsidiaries to incentivise extended coverage;
  • Elimination of sector-specific taxation on operators, vendors and consumers;
  • Non-discriminatory access to public infrastructure;
  • Support for streamlined planning and administrative processes;
  • Relaxation of quality-of-service requirements;
  • Context-appropriate competition policy, especially concerning market structure; and
  • Support for multisided business models, such as zero-rated and sponsored data.

Taxation

Background

The mobile telecommunications sector has a positive impact on economic and social development, creating jobs, increasing productivity and improving the lives of citizens.

Sector-specific taxes are levied on mobile consumers and operators in many countries. These include special communication taxes, such as excise duties on mobile handsets and airtime usage, and revenue-share levies on mobile operators. These taxes have created a tax burden on the mobile sector that exceeds the burden on other sectors.

Some countries have applied a surcharge on international inbound call termination (SIIT), which can have the effect of increasing international call prices and acting as a tax on other countries’ citizens.

There is growing consensus around the world that for tax systems to be effective, they should follow internationally recognised best practice principles.

Debate

Do sector-specific taxes deliver short-term government income at the expense of longer term additional revenues that could be accrued through increased economic growth?

Industry Position

Governments should reduce or remove mobile-specific taxes because the social impact and the long-term positive impact on GDP (and hence tax revenues) will outweigh any short-term reduction in contributions to government budgets.

Taxes should align with internationally recognised principles of effective tax systems. In particular:

  • Taxes should be broad-based. Different taxes have different economic properties and, in general, broad-based consumption taxes are less distortionary than taxes on income or profits.
  • Taxes should account for sector and product externalities.
  • The tax and regulatory system should be simple, easily understandable and enforceable.
  • Dynamic incentives for the operators should be unaffected – taxation should not disincentivise efficient investment or competition in the information and communication technology (ICT) sector.
  • Taxes should be equitable and the burden of taxation should not fall disproportionately on lower income members of society.

Discriminatory, sector-specific taxes deter uptake of mobile services and can slow adoption of ICT. Lowering such taxes benefits consumers and businesses and boosts socio-economic development.

Governments often levy special taxes to finance spending in sectors where private investment is lacking, however, this approach is inefficient. Fiscal policy that applies a special tax to the telecommunications sector causes distortions that discourage private spending and prevent the positive spillovers of mobile throughout the economy, ultimately diminishing social and economic welfare.

Emerging economies need to align their approach to taxing mobile broadband with national ICT objectives. If broadband connectivity is a key social and economic objective, taxes must not create an obstacle to investment in broadband networks or consumer adoption and use of mobile broadband. Lowering the taxation burden on the sector increases mobile uptake and use, creating a multiplier effect in the wider economy.

Taxing international calls has a negative impact on consumers, businesses and citizens abroad, damaging a country’s competitiveness.

Resources

Mobile operators have repeatedly raised concerns that their customers shoulder an undue tax burden, compared to other goods and services. The taxation and fees burden on the mobile sector consists of a wide range of charges. On the consumer side, this includes taxes on handset purchases and connection activation, as well as calls, messages and data access. High taxation makes mobile services less affordable and can also have wider negative effects on productivity and economic growth.

In addition to consumer-facing charges, mobile operators also face a range of other charges, including licensing fees, corporation tax, revenue charges and many more. Taxes and fees that specifically target the mobile sector affect the willingness of operators to invest in rolling out networks. The extent to which these charges fall on operators or consumers depends on individual market conditions. Some taxes may be absorbed by operators in the form of lower profits while others may be passed on to consumers as higher prices, or a combination of both.

Research conducted by Deloitte for the GSMA revealed that:

  • Mobile operators paid $32 billion in 2015 in 27 nations surveyed. Sector-specific taxes accounted for around $8 billion of this total. Sector-specific excise duties were present in 81 per cent of surveyed nations, as were spectrum fees.
  • A little less than a third (28 per cent) of operator revenues were spent on taxes, excluding non-recurring payments such as spectrum auction fees.
  • In eight countries, including Brazil, Chad and Democratic Republic of Congo (DRC), taxes accounted for 40 per cent or more of sector revenue.

Of the countries surveyed, it was only in South Africa and Italy that the sector’s tax contribution as a proportion of the total tax take closely matched its contribution to the entire economy. In four countries the sector paid more than double, in three others more than triple and in three others more than four times.

Taxes and fees on mobile services affect the affordability of mobile access and usage, and may have a disproportionate impact on lower income consumers since mobile services account for a larger share of the annual income of poorer households. In the DRC, the most extreme case, these fees represented 21 per cent of gross national income (GNI) of the bottom 20 per cent of income earners.

Eight Steps Governments Can Take to Rebalance Taxation and Promote Digital Inclusion

  1. Phased reductions of sector-specific taxes and fees can be an effective way for governments to signal their support for boosting connectivity.
  2. To enable more users to afford mobile services, governments should choose to lower so-called “luxury” taxes on devices and connections.
  3. Uncertainty over future taxation reduces investment because the risk of tax hikes is priced into investment decisions. Governments should seek to limit unpredictable tax and fee changes and streamline how taxes and fees are levied.
  4. The spectrum award approach needs to balance the relationship between ex-ante and ex-post fees in a transparent way, to ensure operators do not pay twice for access to the same resource.
  5. Eliminating import duties for mobile network equipment and other local taxes levied directly on mobile sites has the potential to boost investment in networks.
  6. Governments should avoid disproportionate taxation of services such as mobile money, as it puts a wide range of positive externalities at risk.
  7. Removal of surtaxes on international incoming calls can ease barriers to regional and international trade by lowering the cost of international communication. It can also make it more affordable, enabling more consumers to reap the benefits of mobile services.
  8. Governments should apply fees on profits rather than revenues to prevent discouraging investment and innovation. These fees require the same payment from an operator regardless of whether they retain their profit or use it to invest in new infrastructure and services.
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Universal Service Funds

Background

Universal service, characterised by a telecommunications service that is available, accessible and affordable, is a policy goal of many governments.

Several countries have established universal service funds (USFs) to extend coverage in areas that are not commercially viable for the private sector. USFs are typically funded by levies on telecommunications sector revenues and the funds are disbursed either through direct subsidies or competitive bidding. USFs can also provide non-financial support to connectivity initiatives.

Despite these goals, USFs often perform poorly, and countries with USFs have typically not experienced stronger internet growth. Studies by the GSMA and the ITU show that disbursement rates remain very low across the world and that many funds have been unable to distribute any of the levies collected.

When not administered effectively, USFs can be counterproductive. By effectively taxing communications customers, services become less affordable.

Debate

What policies and processes need to be in place to ensure USF financial resources are transparent and used efficiently?

What alternative strategies can governments take to enable the private sector to expand connectivity?

How relevant are USFs in mature markets?

Industry Position

USFs should only be considered once all policy and regulatory measures to maximise coverage through market-driven mechanisms have been exhausted and after careful assessment of alternative mechanisms, such as coverage obligations and reverse spectrum auctions.

Reducing costs and regulatory barriers are critical to expand the reach of mobile connectivity. Importantly, governments can help by removing sector-specific taxes, stimulating demand and developing infrastructure.

In markets where they already exist, USFs should be targeted, time-bound and managed transparently. Alternative funding mechanisms should be considered to ensure a broad base of stakeholders contribute to USFs, not just mobile operators. The allocation of funds, in consultation with the industry, should be competitive, technology neutral and target projects with the greatest possible impact. USFs should adhere to the following best practices:

  • Clear targets that ensure effective and timely disbursement of funds;
  • Continuous evaluations, annual reporting and regular independent audits of government administration to ensure transparency in fund financing, disbursements and operations;
  • Solid, clear and transparent underlying legal frameworks that support flexible services and technology neutrality;
  • Based on an independent fund structure to avoid political interference;
  • Administered effectively to avoid excessively bureaucratic structures or insufficient oversight;
  • A thorough analysis of investment gaps and the impact of introducing levies on affordability and adoption to set appropriate USF levies;
  • Consideration of a pay-or-play model by which mobile operators can choose to make a financial contribution to the USF or implement projects that meet the fund’s goals;
  • Consultation with mobile operators to ensure investments in coverage are targeted efficiently, include operational expenditure subsidies where necessary and avoid duplication of infrastructure; and
  • If USFs cannot be managed efficiently within a reasonable time frame, a plan should be implemented to phase them out.

Resources

A4AI Report: Universal Service And Access Funds: An Untapped Resource to Close the Gender Digital Divide (2018)

GSMA Report: Survey of Universal Service Funds, Key Findings (2013)

GSMA Connected Society: Are Universal Service Funds an effective way to achieve universal access? (2016)

Press release: GSMA, Vodafone and GIFEC Partner to Deliver Connectivity to Rural Communities (2019)

ITU Report: Universal Service Fund and Digital Inclusion for All (2013)

UN ESCAP Working Paper: The Impact of Universal Service Funds on Fixed-Broadband Deployment and Internet Adoption in Asia and the Pacific