Issue: 30/08

ACMA FMC and FMS Reports

August 06, 2008

ACMA has released a new report, Fixed-Mobile Convergence and Fixed-Mobile Substitution in Australia, which examines these two trends in Australia and the implications for the communications environment.

The substitution of mobile services for fixed line is established and growing in Australia. However, ACMA reports that prospects for convergence of fixed-line and mobile services into a single seamless service - apparent in some overseas markets - are low in the short term.

The development of fixed-mobile convergence and fixed-mobile substitution is being influenced by a variety of factors, including the increasing rate of fixed-line access decline, the mobile price premium, consumer attitudes to fixed and mobile services and the structure of the mobile industry.

Fixed-mobile convergence and fixed-mobile substitution development have a number of implications for the Australian communications environment. Most importantly for ACMA, as the technological and commercial boundaries between fixed and mobile services become more fluid over time, the regulatory delineations between the two will become increasingly problematic.

As more traffic moves onto mobile networks, new operators and services will emerge, more operators will be able to offer full voice and data services and products and services offered by operators are likely to be increasingly complex.

Fixed-Mobile Convergence and Fixed-Mobile Substitution in Australia is available on ACMA’s website.

ACMA undertook this research as part of its regulatory responsibilities to report on and make available information about developments in the telecommunications industry. It is important for ACMA, as an evidence-based regulator, to understand the changing nature of the communications industry.

Fixed-Mobile Convergence

ACMA’s report identifies three types of fixed-mobile convergence:
• Service bundling.
• Dual-mode services.
• Network convergence.

1. Service bundling
FMC in Australia is in the early stages with activities limited to service bundling.

This type of fixed-mobile convergence requires no actual convergence at the network or handset level. Rather, it is a commercial arrangement that offers cost savings or more convenience to users. At the simplest level, this can be a bundle of fixed and mobile services at a reduced cost or with other benefits. In the next stage of service bundling, the offer is more sophisticated than simple bundling and offers some elements of a converged service.

One reason for the lack of development of other forms of Fixed Mobile Convergence in Australia is that there has not been the same level of decline in fixed-line access compared to international experience.

In Australia, fixed line access has declined by six per cent since its peak in 2004. In the US, fixed lines peaked in 2000 and declined nine per cent between 2000 and 2005. In Canada, fixed lines peaked in 2001 and experienced decline of eight per cent between 2001 and 2005.

The earlier decline in access in these countries may be due to the earlier introduction of:

• Broadband
• Naked DSL; and
• More aggressive mobile phone plans

In addition while new services that will impact fixed-line voice services, such as naked DSL and Voice over IP have been introduced into Australia, they are yet to be broadly accepted by residential customers.

2. Dual-mode services

This type of fixed-mobile convergence requires a dual-mode handset that can carry calls over the mobile network and the network used for fixed calls. Initial versions of these services were not able to provide seamless handover and often supplied separate fixed and mobile numbers. In more recent versions, customers have received a single number and seamless handover between networks. This means that, for example, a user can start a conversation at home on one network and then get in his or her car and continue the conversation with a seamless handover to the mobile network (and vice versa).

These services are generally provided using cellular/WiFi connections. The user makes calls on the cellular network outside the home, and fixed calls over the WiFi connection at home and, depending on the package the carrier provides, possibly at other WiFi hotspots. In some cases, these services rely on a connection back to the PSTN for the fixed-line access.

3. Network convergence

In this type of fixed-mobile convergence, fixed and mobile services share a common IP transport network. Convergence comes from core next generation networks improving interconnection with mobile networks and through wireless infrastructure in the access networks improving access to IP services. A number of major operators have initiated Next Generation Networks (NGN) projects with the aim of saving costs and extending the coverage of new services. Incorporating NGN functionality and service delivery options will be a core objective for operators in the medium-term.

Fixed-mobile substitution

There are two types of fixed-mobile substitution—access and usage

1. Access fixed-mobile substitution

Consumers of access fixed-mobile substitution only use a mobile service and have no fixed-line access. There are two sub-types of access substitution—‘cut the cord’ and ‘straight to mobile’.

Users who have ‘cut the cord’ previously had access to both fixed and mobile services, and have chosen to relinquish their fixed-line access and use their mobile services exclusively. ‘Straight to mobile’ users have never had fixed-line access; their first and only experience of communications is through mobile services. This option can be popular among students or young people who move out of home and only use their mobile phone. Their families may have had fixed-line access but this group has never been a bill payer for a fixed-line access.

2. Usage fixed-mobile substitution

Usage fixed-mobile substitution refers to users with both fixed and mobile access using their mobile phone to make calls increasingly at the expense of fixed-line usage. Consequently, users are still retaining their fixed-line access, but the rate of fixed-line usage is declining because consumers are using other devices to communicate.

Usage FMS has a strong presence in the Australian communications sector. Between 2005 and 2007 the number of mobile minutes increased by 48% while fixed minutes decreased by 10 per cent over the same period for an overall increase of 10 per cent for all voice minutes. Mobile traffic is substituting for the decline in fixed-line traffic.

Mobile operators offer a variety of packages that aim to increase mobile phone usage at the expense of the fixed-line by reducing consumer perception of the mobile price premium. Pricing strategies can include offering large buckets of minutes for a set fee, unlimited or flat-rate tariffs and capped call tariffs (where customers pay a certain amount for allotted minutes, after which a call is free).

Implications

According to ACMA, FMC and FMS trends in Australia will have an important influence on the communications sector and could give rise to:

• Fluid boundaries – the boundaries between fixed and mobile services will blur making distinctions between these services less relevant and the sector more difficult to regulate over time

• New commercial models – these changes will have implications for industry dynamics in terms of participants and the emergence of new entrants

• Changing roles – access FMS results in mobile providers taking on roles traditionally provided by fixed-line operators. An increasing number of operators will be able to provide full voice and data services to consumers

• Traffic trends – potentially more traffic will move onto mobile networks, increasing the importance of mobile services at the expense of fixed-line services. At the same time FMC services that connect back to a broadband network (rather than the PSTN) will further erode voice traffic over the PSTN.

• Changing industry structure – FMC and FMS trends will result in new operators and new services.

• Increased complexity – it will be more difficult for consumers to be well informed. It will be important to monitor consumers understanding of available services and their ability to evaluate different products and plans. Consumer decision-making about voice services is explored in ACMA report on Consumer attitudes to take-up and use – see Report #1 at http://www.acma.gov.au/WEB/STANDARD/pc=PC_9058

This report raises issues of relevance to three areas ATUG has been working on, on behalf of members:

• Development of Australia’s National Broadband Network and its implications for competition, choice and prices for end users;
• The Minister’s encouragement of a stronger voice for end users of communications services into the decisions of significance over the next decade, and
• Prices for mobile voice and data services when traveling internationally. Pricing structures should deliver fair value from converged networks and services for end users.