Decision on whether the sales promotion practice, “a handset paired with a number”, by mobile telecommunications providers is in violation of the Fair Trade Law

Chinese Taipei

Case:

Decision on whether the sales promotion practice, “a handset paired with a number”, by mobile telecommunications providers is in violation of the Fair Trade Law

Key Words:

mobile phone, discounts for loyal customers, subsidy

Reference:

Fair Trade Commission Decision of April 17, 2003 (the 597th Commissioners' Meeting)

Industry:

Telecommunications (6000)

Relevant Law:

Article 10(ii), 19(iii), 19(vi) and 24 of the Fair Trade Law

Summary:

1. In an addendum to the 1 August 2002 decision of the 560th Commissioners' meeting regarding the “Complaint against Taiwan Cellular Co., Ltd. alleging needless delays in canceling leasing agreements in violation of the Fair Trade Law,” the Fair Trade Commission (FTC) stated: “on the question of whether mobile telecommunications providers' promotional practice of pairing handsets with mobile phone numbers involves a violation of the provisions of the Fair Trade Law, a report shall be made to the FTC upon further study and analysis,” and it consequently conducted a study on the relevant issues of the Fair Trade Law. Domestic mobile telecommunications providers are currently competing with offers of handset/phone number packages, mostly involving subsidies paid by the mobile telecommunications provider for the purchase of a handset at a relatively cheaper price. End users, on the other hand, are required to use the phone number provided by the mobile telecommunications provider and agree to continue use of the mobile telecommunications provider's services for a specified period of time (commonly known as a tie-in agreement), while the mobile telecommunications providers collect line charges and monthly line leasing fees to make up the cost of the handset subsidy. Generally speaking, subsidies provided by mobile telecommunications providers as part of their handset/telephone number promotional packages range from NT$1,000 to NT$2,000; those amounts may vary, however, depending upon the type of handset, length of the contract period and billing structure. Mobile telecommunications providers ordinarily require a tie-in agreement of around two years. In the event the end user breaks the contract, they must reimburse the mobile telecommunications providers the difference for the subsidy payment.

2. The domestic market for mobile telecommunications was opened in 1996 and there are currently six mobile telecommunications providers: Chung Hwa Telecom Co., Ltd. (Chung Hwa), Taiwan Cellular Co., Ltd. (Taiwan Cellular) Fareastone Telecom Co., Ltd. (Fareastone), KG Telecom Co., Ltd. (KG), Mobitai Telecom Co., Ltd. (Mobitai) and TransAsia Telecommunications Co., Ltd (TransAsia). Chung Hwa holds a full-coverage GSM900/1800 license, Fareastone holds a full-coverage GSM1800 license and a single-coverage GSM900 license (covering northern Taiwan), Taiwan Cellular and KG hold full-coverage GSM1800 licenses, Mobitai holds a single-coverage GSM900 license (covering central Taiwan) and TransAsia holds a single-coverage GSM900 license (covering southern Taiwan). Current market shares for the six providers are as follows: Chung Hwa 31%, Taiwan Cellular 25%, Fareastone 18%, KG 17%, Mobitai 3% and TransAsia 6%. Mobile telecommunications providers employ “handset/telephone number package” promotions as a marketing incentive for the following reasons: (1) They increase consumer acceptance: “Handset/telephone number packages” reduce the expense of handsets for end users, helping to increase consumer acceptance of mobile telecommunications and raise the market penetration of mobile phones. (2) They expand the scale of their end user group, as the mobile telecommunications business is characterized by its “network externality” and its “demand-side economies of scale,” and mobile telecom end users tend to select the network with the greatest number of end users so that mobile telecommunications providers therefore actively seek to expand their base of end users as an economic incentive to attract even more end users. (3) They reduce interconnection fees paid to other mobile telecommunications providers: Mobile telecommunications providers must pay interconnection fees when one of their end users dials the mobile phone number of an end user of another mobile telecommunications network (so-called “off-net calls”) whereas such interconnection fees are avoided when an end user calls another end user on the same network, thus there is an economic incentive for providers to encourage end users of other networks to join their network so that all calls are made within the same network and off-network interconnection fees are avoided. (4) They prevent end users from switching to other mobile telecommunications providers: Mobile telecommunications providers can use handset/telephone number packages and fixed-term contracts to restrict users from switching to other mobile telecommunications providers by increasing the switch cost, thus avoiding a loss of end users.

The use of handset/telephone number promotional packages by mobile telecommunications providers, however, may also give rise to the following anti-competitive concerns: 1. Predatory pricing: Mobile telecommunications providers with a leading market position may seek to eliminate other competitors through offering end users subsidies amounting to a purchase of an excessively cheap or even free handset while tying them in to long-term usage agreements; however, given that the line between ordinary price competition and anti-competitive predatory pricing is often blurred, the enforcement authority should not regard “handset/telephone number package” promotions as predatory pricing practices except in cases where the amount of the handset subsidies offered by a market leading mobile telecommunications provider exceed the amount that could be recouped by the provider through monthly line lease and interconnection fee revenue over the period of the contract, which would constitute a predatory pricing practice. 2. Discounts for loyal customers: “Handset/telephone number package” promotions first provide the consumer with the discounted purchase of a handset but require the consumer to patronize that mobile telecommunications provider continuously and for an extended period of time, thus “locking” the user into a specific mobile telecommunications provider, increasing impediments to market participation and decreasing the level of competition. 3. Tie-in practices: Mobile telecom services and handsets are distinct from one another as commercial services and commercial goods. In the event that a mobile telecommunications provider forces its trading partners to purchase a handsets and mobile telecom services (namely, telephone numbers) jointly, this could potentially involve tie-in practices.

3. With respect to the violation of the Fair Trade Law by domestic mobile telecommunications providers' current sales promotion practices “handset paired with telephone number”, the criteria of market shares for monopolistic enterprises as provided in Article 5 of the Fair Trade Law are not met. Furthermore, there is no specific evidence indicating that the “handset/telephone number” promotional packages offered by the mobile telecommunications providers involved “pricing below cost” or other predatory pricing practices. As such, it is difficult to find that the “handset/telephone number” promotional packages constitute a “predatory pricing practice” in violation of the provisions of Article 10 of the Fair Trade Law. On the other hand, while the promotional packages may be intended to increase the switch costs of mobile telephone users, thereby preventing a loss of customers to a competing network, it has to be decided on a case-by-case basis whether the discount offered by mobile telecommunications providers appeals to a potential customer's unreasonable profit-seeking and thus influences his/her ordinary decision making about goods or services. Not all “handset/telephone number” promotional activities should be pre-judged as involving anticompetitive discounts for loyal customers.

In any event, if the consumer is fully aware of and understands the relevant trading terms (such as the required accompanying telephone number, the contract period, and the relevant fee structure), the consumer is able to rationally decide whether or not to accept the contractual obligation of the telephone number with a long-term contract. Finally, the “handset/telephone number” promotional packages do not force potential trading partners to purchase a handset before they may get a telephone number, nor are they required to get a telephone number before they may buy a handset, consequently there has been no restriction on the trading counterpart's freedom of choice, or creation of restraints on competition or barriers to free competition. Therefore, it is difficult to find these practices as constituting tie-in practices. Despite the lack of specific evidence at this juncture indicating that the “handset/telephone number” promotional packages are in violation of the Fair Trade Law, however, to ensure the function of market competition and the rights and interests of consumers, the FTC referred to Oftel of the United Kingdom and their handling of the use of “fixed user identity cards” by mobile telecommunications providers and drafted the “Principles Against Improper Marketing Practices in the Domestic Mobile Telecommunications Market”, which requires that mobile telecommunications providers provide full disclosure of all trading information when employing “handset/telephone number” package promotions so that consumers may make a rational decision.

Appendix:

Chung Hwa Telecom Co., Ltd.'s Uniform Invoice Number: 96979933

Taiwan Cellular Co., Ltd.'s Uniform Invoice Number: 97176270

Fareastone Telecom Co., Ltd.'s Uniform Invoice Number: 97179430

KG Telecom Co., Ltd.'s Uniform Invoice Number: 16085840

Mobitai Telecom Co., Ltd.'s Uniform Invoice Number: 16088614

TransAsia Telecommunications Co., Ltd.'s Uniform Invoice Number: 16086398

Summarized by Liao, Hsien-Chou; Supervised by Hou, Vh-Hsien