Subject: [NEXTEL-1] The Perils of Outdated Regulations

From: Marcel <[email-masked]>
Date: Mon, 30 Dec 2002 01:56:55 -0500

GUEST COLUMN: The Perils of Outdated Regulations

  December 13, 2002 12:32pm

  By Jose F. Otero, Independent Consultant

  One of the most pressing lessons learned by Latin America's telecom industry during the
last several years is that a modern
  and non-partisan regulatory framework is necessary for growth. Throughout the region,
governments have recognized this fact
  and taken the necessary measures towards correcting outdated policies that impede or
even delay the adoption of
  telecommunications services.

  Recent months have seen Mexico receive most of the attention on this issue - mainly due,
among other things, to their
  ridiculous 49% restriction on fixed line telephony foreign investment - while the
regulatory barriers present in other markets have
  been almost completely neglected.

  Colombia provides the perfect example on how outdated regulations have created an
atypical scenario for mobile services where
  operators are constantly discouraged from investing in the market in order to
differentiate their services from those offered by
  their competitors.

  Colombia's cellular concession licenses require their holders to provide subscribers
with seamless migration among their
  networks without incurring any extra costs. In practical terms the enforcement of this
measure prevent cellular operators from
  putting a handset-lock in their mobile terminals. Hence, mobile service users could
shift from one operator to another without
  having to replace their original handsets.

  Originally intended to favor consumers, this requirement has had long-term damaging
consequences for the mobile sector, not
  initially contemplated by the local regulatory authorities. It is clear that under a
homogeneous network environment all 2G
  systems are TDMA 800 MHz; enforcement of the law is limited to impeding cellular
providers from putting a handset-lock into
  their terminals. But the shortsightedness of this clause did not contemplate the
possibility of cellular operators choosing
  different migration paths towards 2G+ as it would be almost impossible to guarantee
'seamless migration' of customers in a
  heterogeneous and technology agnostic environment.

  REVISTING AN OLD DILEMNA

  Handset locking refers to the practice of mobile services providers preventing their
subscribers' mobile terminals from being
  used in a competitor's network. This practice is common in markets where two or more
mobile operators have technologically
  homogeneous networks. Hence, in a technology agnostic environment, it becomes less of an
issue than in Western European
  markets where technology adoption and migration has been mandated by regulators. The
basic argument against handset
  locking is that since it is a barrier for switching mobile service vendors, its removal
would, in theory, benefit competition and
  consumers. But, as shown in Colombia, its effects on technology diversity could be
catastrophic.

  Mobile service providers have been forced to approach the prepaid segment of the market
as capacity sellers (i.e., prepaid
  minutes) as opposed to using prepaid solely as a customer acquisition strategy to
strengthen their position in the market and
  eventually migrate the higher income portion of these customers into more lucrative
contract plans. One of the most popular
  approaches is to increase the amount of minutes included on prepaid cards in order to
encourage customers to seek
  operator-specific cards and/or issue promotions for almost every 'special' date on the
calendar year (i.e., mother's day,
  Christmas, etc).

  Since prepaid cards from one operator are accepted on its competitor's network, customer
loyalty is not developed since
  consumers will tend to purchase either the cheapest prepaid card or, at the absence of a
choice, the card that is more
  conveniently available. So it is not uncommon to have a customer acquiring a prepaid
handset from BellSouth but purchasing
  prepaid minutes from Comcel.

  Operators have resorted to augmenting their distribution points for prepaid cards to
increase their reach and availability to
  consumer
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The Perils of Outdated Regulations - (Part II)

  December 20, 2002 4:46pm

  By Jose F. Otero, Independent Consultant

  (Part I of this column was published on Friday, December 13)

  GOOD INTENTIONS ARE NOT ENOUGH

  The main drawback of the 'seamless migration' requirement is its inconsistency with the
intended modernization of Colombia's
  mobile sector. The 'handset-locking' principle could have a better rationale on
homogeneous technology environments where a
  pre-established and uniform migration path exists for all mobile service providers.

  At the present time, only Western European countries fall under this category as
Colombia is moving from having only TDMA as
  its mobile platform, considering that iDEN is not a technology directed at the mass
market, to the introduction of CDMA and
  GSM/GPRS platforms. But, due to the incompatibility of handset-locking with a technology
agnostic market the cellular
  operators migration plans are facing unnecessary legal paper work. This only serves to
demonstrate that this out-of-date
  requirement is both inappropriate and unsustainable under the new characteristics of the
Colombia mobile market.

  Contrary to what was originally believed by the Colombian government, forcing cellular
operators to allow seamless migration
  among their network may prevent them from aggressively investing in the market. In a
market with customer loyalty almost
  exclusively limited to contract subscribers, cellular operators may find little
incentives to differentiate themselves from their
  competitors as they will not introduce more expensive (i.e., higher subsidies)
specialized handsets and the specific services
  that could be offered through them. Let's not forget that BellSouth's introduction of
Nokia's 5120 and 5125 models was met with
  a lawsuit against the cellular operator since it had locked those handset models. The
result: a constant delay on service and
  equipment innovation.

  Although currently there is no empirical data demonstrating the impact of removing the
handset-locking requirements, it could
  be argued that it would have a tremendous economic effect on cellular operators prepaid
revenues. Comcel's recent legal action
  against BellSouth highlighted the importance of seamless migration for America Movil's
local subsidiary. In a market where
  prepaid subscribers amount to more than 80% of all mobile users, halting network
'mobility' of this segment would adversely
  affect cellular operators emphasizing prepaid minutes sale, Celcaribe and Comcel,
instead of expanding their contract
  subscriber customer base.

  One of the most visible disadvantages of handset-unlocking is the price increase of
mobile terminals. Cellular operators are
  apprehensive of controlling subscriber acquisition costs and any measure that increases
the risk of not recouping their initial
  investment will trigger a cutback on Cost of Goods Sold (COGS) or simply stated a
decrease on handset subsidies. Operators
  argue that handset-locking diminishes churn risk leaving operators better positioned to
recoup their investment.

  Lastly, the lack of handset-locking facilitates the mobile terminal activation after it
has been stolen. Although measures against
  this practice like operators sharing of stolen handsets' unique IMEI numbers with each
other, as recommended by the Cellular
  Operators Association (ASOCEL) on a pan-Andean basis, exist it does not deter growth of
domestic/international handset
  black market.

  LOOKING INTO THE FUTURE

  The lack of a modern regulatory framework is slowing the growth of the Colombian
telecommunications industry. There is a
  need for revision of pre-conditions that have been made obsolete by the technological
advances of the industry. Not allowing for
  the insertion of a 'lock' into cellular operators handsets had a negative impact on the
market as it minimized operators'
  incentives to differentiate their service from their competitor's. As a result,
customers saw very little difference in price among
  the service plans offered by the mobile operators.

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