Mobile call termination charges to decline on 1st January 2007

Paris, 25th July 2006

These declines should result in some €200 million being transferred from mobile operators to fixed operators and, ultimately, to their customers in 2007 alone.

(*) consumption profile 75% peak hours and 25% non peak hours for the "intra-interconnection area" service

ARCEP considers that:

ARCEP considers that for the convergence period of call termination process towards the underlying reference costs, a temporary pricing difference in favour of Bouygues Telecom will allow this operator to correct the perverse effects caused by high voice call termination levels with respect to costs and by Bouygues Telecom's late arrival on the market.

Maintaining the current gap of 1.74c€/min between Bouygues Telecom and SFR and Orange France is consistent with the observed cost gaps, which are caused primarily by lower scale effects given the lower levels of traffic using Bouygues' network.

ARCEP cannot currently clearly determine the cost differences between the operators, or identify the factors determining these differences related to costs of scale, differences in efficiency or divergences in the cost accounting methods chosen.

So, ARCEP proposes maintaining the current level for 2007 in absolute value, keeping the gap between the CT level of Bouygues Telecom and that of SFR and Orange France as a precaution, until the cost differences can be re-examined in the next market analysis of wholesale voice call termination on the network of each of the Metropolitan mobile operators and the obligations imposed because of it. This new market analysis process will be held in 2007 and will bear on the period 2008-2010.

ARCEP will re-examine all the cost elements in its possession in the next 12 months, compare them with a technical and economic model in order to measure the temporary gap introduced to Bouygues Telecom's advantage and define the convergence process towards pricing symmetry. This time period will also allow us to evaluate the degree of fluidity on the retail mobile market in France by taking into account the effects of the number conservation process improvement expected for early 2007. The degree of fluidity of the retail market is essential for specifying the duration of the convergence period towards symmetrical mobile voice termination rates. The French market is currently not very fluid because of the poor conditions of number portability and the very common use of minimum commitment clauses, which at any time are imposed on close to 75% of customers using post-paid offers.

In a first analysis, ARCEP considers that the short-term negative impact on fixed-to-mobile traffic for the mobile operator on financial results should be equal to the decline in income from fixed-to-mobile interconnection charges.

The short-term impact of the pricing framework set for 2007 on mobile-to-mobile traffic is indeed much lower, as each operator will see a decline in its call termination, but will enjoy a comparable reduction in interconnection charges resulting from a decline in the call termination charges of its competitors.

So, given the volume of about 10 billion minutes represented by fixed-to-mobile traffic, the decline imposed by ARCEP will represent a transfer worth about €200 million from Orange France, SFR and Bouygues Telecom to fixed operators and ultimately to their customers.

Given the weight of mobile call termination in the retail price of fixed-to-mobile calls, ARCEP estimates that the decline in mobile voice termination rates should allow a corresponding decline of about 12% in the retail prices of fixed-to-mobile calls, to the benefit of end customers. The gain for customers calling from residential or business fixed lines will be about €200 million.

The impact of this decision on the retail mobile market will result from an increased competition between players on the retail mobile market and on the wholesale access and call origination market on which mobile virtual operators MVNO) buy. This impact will take longer to appear given the low degree of fluidity on this wholesale market and on the underlying retail mobile market. Although we cannot currently evaluate the impact, ARCEP will remain attentive to the positive effects that the decline in MTR tariffs might have on the financial conditions granted to MVNOs.

This draft decision has been notified to the European Commission and to all national regulatory authorities (NRAs). It is also being submitted for public consultation until 5 September 2006. Once these two stages have been completed, ARCEP will be able to take its final decision and publish it before the end of September 2006, in accordance with the timetable it had initially established in decision nos. 04-0937, 04-0938 and 04-0939.

Note to the buyers of fixed-to-mobile voice calls within major private and public customers

Paris, 25th July 2006

ARCEP wishes to draw the attention of major public and private buyers which hold calls for tender when purchasing high volumes of fixed-to-mobile calls and/or services over several years.

"Mobile boxes", also known as "GSM gateways", are equipment which can be connected to a switch and which route traffic to mobile networks, using two wireless local loops (WLL) instead of one. The first WLL routes the call from the "mobile box" to the mobile operator's network, while the second routes the call from the mobile operator's network to the mobile phone of the called party.

Some mobile operators sell these products directly to end users (especially large corporations or public bodies). When fixed operators are no longer able to offer mobile boxes, ARCEP considers that it will be appropriate for mobile operators to stop offering fixed-to-mobile services, while not signing new contracts or renewing current ones. It is important that the fixed-to-mobile call market be based on classic interconnection once more, and that as a result, the only offers on this market will be made by operators using interconnection.

ARCEP draws the attention of mobile operators and their customers, especially major customers, to the risk of disputes before the Conseil de la concurrence against such contracts if they were to persist. ARCEP reminds readers that any practice involving proposing to "major customers" retail fixed-to-mobile offers at prices lower than the call termination charge might be considered to distort the play of competition since it might force third party operators off of the market.

Mobile call termination charges represent a major share of the costs borne by operators in routing calls from fixed phones to mobile networks. Future levels of call termination charges beyond end 2007 are not known at this time by the operators or by ARCEP. When calls for tenders for multi-year contracts including calls to mobiles are held by major customers, the possibility that these charges may decrease in coming years is of major importance to both the buyer and the tenderer.

ARCEP wishes to inform major customers, which buy large volumes of fixed-to-mobile calls through multi-year contracts, of the impact of the measures imposed on candidates concerning the format of the prices tendered for these calls.

While firm multi-year prices offer the advantage of knowing how much calls will cost for the entire lifetime of the contract, they do not allow the buyer to fully benefit from the effects of competition on prices and may expose the provider, and in the end the buyer, to disputes regarding the offer.

On the one hand, because of the risks run by basing prices on an uncertain expectation of lower costs, the prices proposed might turn out to be less advantageous than prices based on current charges onto which future decreases in MTRs would be applied as they come into force.

On the other hand, this practice creates a competitive bias in favour of players which are horizontally integrated on the fixed and mobile markets, making them less subject to this risk because of their integration, and which reduces the effects of competition on the prices proposed in calls for tenders. Indeed, not all operators enjoy the same financial capacity and, although competitive, some are not able to offer prices which would generate losses at the beginning of the contract period or to risk not recovering their costs over the entire contract period. Moreover, in order to reduce the risk of loss, operators are pushed to underestimate future charge decreases. Finally, the risk of disputes against excessively low offers is high and would penalise ultimately the buyer which would be required to seek another supplier.

In order to fully benefit from the effects of competition and to avoid exposing oneself to the risk of disputes, it is preferable for public or private "major customers" buying fixed-to-mobile calls to require that candidates base their offers :