The Group’s operating companies are generally subject to regulation governing the operation of their business activities. Such regulation typically takes the form of industry-specific law and regulation covering telecommunications services and general competition (anti-trust) law applicable to all activities. Some regulation implements commitments made by governments under the Basic Telecommunications Accord of the World Trade Organisation to facilitate market entry and establish regulatory frameworks.
The following section describes the regulatory framework and the key regulatory developments at the global and regional level and in selected countries in which the Group has significant interests. Many of the regulatory developments reported in the following section involve ongoing proceedings or consideration of potential proceedings that have not reached a conclusion. Accordingly, the Group is unable to attach a specific level of financial risk to the Group’s performance from such matters.
World Radiocommunication Conference
During October and November 2007, the World Radiocommunication Conference of the International Telecommunications Union met in Geneva to consider changes to the Radio Regulations. The next such Conference will be held in 2011. The Conference establishes, by means of international treaty, the basis upon which radio frequency bands may be used in the signatory countries (which include all markets in which Vodafone has interests). Such agreements are required to prevent interference between users in different countries and to facilitate the development of scalable technologies such as GSM or UMTS. The most important outcome of the 2007 conference for Vodafone was the identification of additional spectrum in the UHF band for mobile services and, in particular, the identification of spectrum in the 790-862 MHz range for mobile services in Europe.
The EU Regulatory Framework for the communications sector (“the EU Framework”) was adopted in 2002 and has been implemented by all EU Member States although there remain both ongoing and new infringement proceedings against a number of Member States for late or inadequate implementation.
The EU Framework consists of four principal Directives outlining matters such as:
- the objectives to be pursued by national regulatory authorities (“NRAs”);
- the way in which telecommunications operators are to be licensed;
- measures to be taken to protect consumers; and
- ensuring universal provision of certain telecommunications services and the terms and basis upon which operators interconnect and provide access to each other.
The EU Framework seeks to align the techniques for defining where sector specific regulation may be applied, and the threshold for when such regulation can be applied, with those already employed in EU competition law. It is also intended to ensure consistency of approach amongst NRAs within the Member States. All NRAs are required to take utmost account of a list of markets which are specified by the European Commission (the “Commission”) in a Recommendation when deciding which markets to investigate. The second such Recommendation was published by the Commission in November 2007 and for the mobile industry includes only the market at a wholesale level for ‘voice call termination on individual mobile networks’. Two markets included the first Recommendation, one for the ‘wholesale national market for international roaming’ and the market for ‘access and call origination’ on public mobile networks, have been removed. NRAs may still review other markets subject to satisfying certain tests.
Under the EU Framework, regulation can only be applied to undertakings with significant market power (“SMP”), either individually or collectively, in the relevant markets, subject to the Commission’s consent. SMP under the EU Framework accords with the concept of “dominance” under existing EU competition law. For individual dominance, this generally implies a market share of at least 40%, although other factors may also be taken into consideration.
In November 2007, the Commission published proposals to amend the EU Framework (“the review”). Any changes to the EU Framework would become effective following their transposition into national law from around 2010. Not all of these affect Vodafone directly. The proposals that may directly affect Vodafone include:
- the proposed creation of a new European regulatory authority;
- the extension of the Commission’s powers so as to allow it, rather than national regulators, to determine remedies where SMP is found;
- the addition of functional separation as a remedy subject to certain conditions being fulfilled;
- fundamental changes to the licensing of spectrum, introducing more flexibility, trading and market-based approaches;
- some ‘net neutrality’ provisions to address the concerns that the services of some internet service providers (“ISPs”) will be blocked or otherwise discriminated against by network operators;
- proposals that number portability be completed in one day on all networks in the EU;
- various measures to address concerns about network security; and
- various measures to address the provision of services for the disabled.
The proposed changes are now being debated in the European Parliament and the Council of Member States and this process is expected to continue for most, if not all, of 2008. The impact of the review on Vodafone will depend on the changes actually adopted by the EU, the manner in which revised directives are subsequently implemented in Member States and how the revised regulatory framework is then applied by the respective NRAs and the Commission.
In February 2007, the Commission published a communication on its plans to introduce greater flexibility in the use of spectrum in selected bands, including 2G and 3G bands, through the use of Decisions agreed with the Radio Spectrum Committee (an EU level committee comprising the Commission and Member States). These reforms are expected to take place in advance of the review. The first proposed measure is a replacement of the GSM Directive by a decision to allow the deployment of UMTS services using 900 MHz and 1800 MHz spectrum (“refarming”). The Commission submitted formal proposals for such a decision to the European Parliament in July 2007.
In November 2007, the European Commission made a policy announcement on the 800 MHz ‘digital dividend’ spectrum (to be released following the transition from analogue to digital TV). It urged Europe, and the Member States in particular, to create new harmonised bands of spectrum for mobile broadband services and mobile TV. The need for action on the digital dividend has been supported by leading European Parliamentarians, and the Member States are expected to respond with a statement at the EU Telecoms Council in June 2008.
In June 2007, a regulation (the “roaming regulation”) under Article 95 of the EU Treaty came into force requiring mobile operators to offer a ‘euro-tariff’ under which the cost of making calls within the EU is capped at 49 eurocents per minute and the cost of receiving calls within the EU is capped at 24 eurocents per minute. Customers who had not otherwise already opted for another roaming tariff, such as Vodafone Passport, were automatically opted onto the euro-tariff. The roaming regulation also requires that wholesale roaming charges within the EU are capped at an initial average rate of 30 eurocents per minute and that operators provide certain tariff transparency services to customers when they roam. The level of the retail and wholesale caps will fall in a further 12 and 24 months following the application of the regulation, which will terminate after three years.
The Commission is required by the roaming regulation to consider whether voice roaming should continue to be regulated beyond the expiry of the current regulation and, if so, what form such regulation might take. In addition, the Commission is required to review SMS and data roaming and to consider whether regulation is required, and if so, what form this might take. The Commission is consulting on these matters, with a view to publishing conclusions in late summer or early autumn of 2008. The Commission indicated in February 2008 that it would consider regulation in the event that SMS retail roaming prices did not approach justified levels, which it considered to be not more than 12 eurocents per SMS. The Commission urged the industry to adopt more predictable and transparent tariffs for data roaming services, and suggested that wholesale data roaming pricing should fall to around 35 eurocents per megabyte.
At 31 March 2008, the termination rates effective for the Group’s subsidiaries and joint ventures within the European Union, which differs from the Group’s Europe region, ranged from 6.40 eurocents (5.09 pence) to 11.84 eurocents (9.42 pence), at the relevant 31 March 2008 exchange rate.
The Commission is studying the regulation of call termination and is expected to consult upon and then issue a Recommendation in the autumn of 2008. The Commission has indicated that it is concerned by what it considers to be the unjustifiably wide range of regulated rates set by NRA’s in the EU and by their level relative to its view of cost. The NRAs are required to take utmost account of the Commission’s recommendations, but may depart from them in justified circumstances.
Vodafone’s 900 MHz licence was extended to 2016. In April 2008, the NRA published the rules for auctioning further 2.0 GHz, 2.6 GHz and 1800 MHz spectrum, with auctions expected in 2009.
In April 2008, the German Supreme Administration Court rejected lawsuits filed by the four mobile network operators against the NRA’s decision to regulate mobile termination rates on an ex ante basis. The German Competition Authority has commenced an investigation into the use by Vodafone Germany and T-Mobile Germany of on-net pricing.
During the year, the NRA reduced Vodafone’s termination rate by 9.8% to 7.92 eurocents, valid until March 2009.
The NRA launched a public consultation for the assignment of 900 MHz, 1800 MHz and 2.1 GHz spectrum and on the implementation of 900 MHz refarming. The Italian Ministry of Communications assigned 5 MHz of 900 MHz spectrum to Wind on a temporary basis in 16 main cities. The NRA published proposals to licence DVB-H services.
The Italian National Competition Authority (“NCA”) closed its investigation into alleged anti-competitive practices by mobile network operators, including Vodafone Italy, in relation to network access for MVNOs and other matters. Undertakings in relation to network access were submitted by Vodafone Italy and accepted by the NCA, and the case has been closed without sanction for Vodafone. A new law was enacted prohibiting fees or other charges in addition to airtime for prepaid services and introducing measures to enable consumers to terminate contracts without penalty. The Italian NRA published guidelines requiring operators to reimburse or transfer any remaining prepaid airtime of customers switching networks.
The Italian NRA and Government commenced discussions with Telecom Italia about proposed voluntary separation of the Telecom Italia fixed network. Vodafone currently purchases certain services from Telecom Italia in order to provide fixed broadband services in the Italian market and it is possible that both existing and future arrangements between Vodafone and Telecom Italia would be affected if such proposals were to be implemented.
During the year, the NRA reduced Vodafone’s termination rate by 11.0% to 9.97 eurocents, with the NRA foreseeing further reductions to 8.85 eurocents in July 2008, 7.70 eurocents in July 2009, 6.60 eurocents in July 2010 and 5.90 eurocents in July 2011.
The NRA commenced a review of the wholesale market for SMS termination. The Spanish Competition Authority commenced an investigation against the three largest mobile operators in Spain, including Vodafone, alleging that the firms colluded when setting call set-up charges. A new law was passed requiring telecommunications operators to retain certain data for a 12 month period and requiring operators to register the identity of new prepay customers and to register the identity of existing prepay customers within a two year period. The NRA commenced a review to determine the operators obliged to contribute to the national universal service fund and the criteria for distribution of the fund.
During the year, the NRA reduced Vodafone’s termination rate by 15.3% to 9.61 eurocents. In April 2008, the NRA reduced the rate to 8.74 eurocents, with reductions to 7.87 eurocents in October 2008 and 7.00 eurocents in April 2009.
An auction of 2.6 GHz spectrum is expected to commence in September 2008 and the NRA also proposes to auction 112 MHz of digital dividend spectrum in the 550-860 MHz range during 2009. The NRA published proposals to allow refarming of 900 MHz spectrum, but proposed that Vodafone, and O2, first release 2 x 7.5 MHz each for reallocation to other parties. Following consultation, the NRA has decided to reconsider these proposals.
The appeal by certain stakeholders against the NRA’s decision on setting call termination rates until 2011 is being considered by the UK Competition Commission and Competition Appeal Tribunal. Vodafone UK filed an appeal against the proposals of the NRA to reform the number portability processes and reduce porting times to two hours.
The NRA announced that it will withdraw certain regulatory obligations from BT in relation to the provision of wholesale broadband services in certain parts of the UK market where it considers that BT no longer has SMP, a result of competition from other fixed unbundlers and cable operators. Vodafone purchases certain fixed wholesale services from BT.
Vodafone’s average termination rate for the 2008 financial year was 5.70 pence. Rates declined by 3.2% below the retail price index in April 2008 and will decline by 2.5% below the retail price index in the April 2009 and April 2010.
In January 2007, Vodafone Greece was fined €76 million as software foreign to the network and capable of intercepting calls had been installed without Vodafone’s knowledge in the network software. Vodafone Greece has paid the fine but is appealing the decision before the Council of State and a hearing is set for October 2008. In March 2008, Vodafone Greece was fined €19 million by the NRA for violations of telecommunications legislation and provisions of licences in connection with the interception incident. Vodafone has appealed the decision. Vodafone Greece appealed a finding that the three largest mobile network operators colluded in setting retail SMS prices and won. The NRA then appealed this decision before the Council of State.
During the year, the termination rate reduced by 15.6% to 9.91 eurocents.
Vodafone Ireland has obtained a trial licence to deploy UMTS in 900 MHz spectrum. In March 2007, a 3G licence was awarded to eircom.
In March 2007, Vodafone Netherlands’ 900 MHz licence was extended for three years to 2013. The NRA is expected to consult upon compliance with 3G coverage obligations in 2008. Auctions of 2.6 GHz spectrum are also expected in 2008.
An appeal by one stakeholder against the NRA’s decision setting call termination rates was heard and a decision is expected in the coming months. During the year, the termination rate reduced by 9.1% to 10.00 eurocents. The NRA proposes to reduce termination rates to 9.00 eurocents in July 2008 and to 7.00 eurocents in July 2009.
The NRA decided to implement technology neutrality for 900 MHz spectrum, paving the way for refarming. The NRA proposed to allocate, through a public tender, 450 MHz spectrum for mobile services.
A new law concerning unfair commercial practices was enacted in April 2008 that prohibits the rounding up of charges and introduced a series of associated tariff transparency measures.
During the year, the NRA published a proposal for future termination rates. This proposal is yet to be finalised and the termination rate applied in Portugal remained unchanged at 11.00 eurocents during the year.
The NRA issued a call for tenders for a fourth 3G licence by July 2007. No licence has been awarded to date. The NRA authorised refarming of the 900 MHz and 1800 MHz bands.
The French Competition Council has issued a Statement of Objection to SFR concerning on-net pricing in certain tariffs.
The NRA concluded an analysis of the market for access and call origination on mobile public networks, concluding that no operator had SMP.
The Government commenced a process to issue a sixth mobile licence in the 410-415 MHz band. Mobile number portability is expected to be implemented in October 2008.
The Government undertook an auction of 2.1 GHz licences in August 2007. The auction was subsequently revoked and no licences were issued. The NRA may recommence the award of 3G licences in late 2008 or 2009.
The NRA has applied certain restrictions on the on-net retail pricing practices of Turkcell, which are subject to appeal by Turkcell. Mobile number portability is expected to be implemented in the autumn of 2008.
Middle East, Africa and Asia
The NRA extended Vodafone Egypt’s 2G licence until 2013 and its 3G licence until 2022.
The third entrant, ETISALAT, launched GSM services in the Egyptian market in May 2007. ETISALAT was awarded an International Gateway Licence in October 2007. Mobile number portability was introduced in Egypt in April 2008.
The NRA has issued recommendations to the Department of Telecommunications (“DoT”) on the licence terms and capping the number of licensees. The DoT has permitted CDMA operators to apply for GSM spectrum to enable them to provide GSM services alongside their CDMA operations. It has revised the customer number threshold at which licensees become eligible for incremental spectrum allocation, with the threshold being made significantly more stringent. The DoT has also issued new licences for up to seven new licences in each licence area. It has commenced the process of allocating GSM spectrum to these new licensees, with Vodafone Essar being awarded initial GSM spectrum in seven service areas in the 2008 financial year.
The DoT issued guidelines to permit active infrastructure sharing between licensees. It has issued guidelines on mobile number portability, which is to be launched in four Metro cities by the fourth quarter of the 2008 calendar year, before being extended nationwide. The DoT has also issued broad guidelines on 3G mobile services and broadband wireless access.
The NRA has recommended the abolition of the Access Deficit Contribution, a 0.75% charge levied on adjusted gross revenue of operators.
The Kenya Communications Amendment Bill 2007 was withdrawn by the Government.
The NRA has granted Telkom Kenya a licence for the provision of Mobile Cellular Services. It is expected that Telkom Kenya will roll out GSM services during 2008 under the Orange East Africa brand. The third Kenyan mobile licence has been awarded to Econet Wireless, which plans to roll out its GSM services during 2008.
The NRA is proceeding with the implementation of the Electronic Communications Act (“ECA”) of 2006 and the associated licence conversion process. The NRA plans to issue service licences by July 2008 and complete regulations before the end of 2008.
Vodacom has announced its commitment to a transaction in 2008 under the South Africa Government’s programme of Broad-Based Black Economic Empowerment (“BBBEE”). The Information Communications Technologies BBBEE Sector Code (“Code”) was submitted to the Minister of Trade and Industry in March 2008 for approval. To date, the Minister has not published the Code for the 60 day public comment process required before the Minister may give his approval. Vodacom remains subject to the generic Department of Trade and Industry Codes of Good Practice until the Code is approved. As part of the implementation of the ECA, the NRA is consulting on the process of determining wholesale and retail regulations (i.e. interconnection, facilities leasing and essential facilities). The NRA is expected to conclude this by the end of June 2008.
Call termination remains under investigation by the NRA. In January 2007, the NRA issued proposals to declare Vodacom, MTN and Cell C as having SMP mobile call termination on individual networks.
In December 2007, a consortium comprising Vodafone and the Qatar Foundation for Education, Science and Community Development was named as the successful applicant in the auction to become the second mobile operator in Qatar. The licence is expected to be granted by 30 June 2008 and will be owned by Vodafone Qatar, which is required to complete a public offering of 40% of its shareholding on the Doha Securities Market for Qatari nationals. The public offering is expected to complete in the 2008 calendar year.
The NRA is currently consulting on Qtel’s status and whether to impose dominant service provider obligations.
Vodafone sold 2x 5.8 MHZ of 900 MHz spectrum to the third mobile entrant in March 2008. Vodafone retains 2x 15 MHz until 2031, subject to payment of a renewal fee. Vodafone has entered into a national roaming agreement with the third entrant, as a result of which the NRA has concluded an enquiry without taking further action.