|Latin America IV 1998
|Legal and Regulatory Implications of Prepaid Cellular Service
|Judith D. O’Neill
|Partner and Chairman, Communications Practice Group
|Thelen Reid & Priest, Washington, D.C., USA
Most countries of the developing world had seized upon cellular architecture for rapid, relatively inexpensive, and immediately accessible means of communications where basic hard-wire networks were inadequate or simply absent. Cellular penetration and the market share of cellular operators began to expand exponentially with the introduction of prepaid cellular service. Here, Judith O’Neill looks at the legal and regulatory issues and highlights the added challenges when one contemplates the convergence issues.
The cellular services market has exploded around the world. Commencing in the mid 1970’s as a speciality service to add mobility to communications in countries with rather developed telecommunications infrastructure, cellular service began as a service accessible to a small market of people of means. It responded, however, and simultaneously to a regulatory urgency to conserve the use of electromagnetic spectrum. Thus, by reducing the transmission power to cover a rather small radius, in contrast to high-powered urban microwave transmissions, the same frequencies could be used many times simultaneously at short separations from each other, which are called cells. The mobility factor required a separate, data network to signal to the handset the continuous change of frequency as the handset moved from cell to cell. The extra signalling network increased construction cost, and thus cost to the user. Introduction of New Applications By the early 1990’s, most countries of the developing world had seized upon cellular architecture for rapid, relatively inexpensive, and immediately accessible means of communications where basic hard-wire networks were inadequate or simply absent. This propelled the expansion of cellular service, but only to the relatively small percentages of emerging economy populations who could afford to pay for the service. In 1993, a new application of cellular architecture was introduced into the market, which addressed not only the technological deployment issues of the original innovation of cellular service, but the economic factor of the service as well. Cellular penetration and the market share of cellular operators began to expand exponentially with the introduction of prepaid cellular service. How Prepaid Cellular Service Works Prepaid cellular services function very similarly to prepaid calling card services. A consumer buys a card, which allows a certain number of minutes of use, for the face value of the card. Often, prepaid cellular cards contain a number of free minutes to get the user started. The card is programmed with a cellular number, which belongs to the owner of the card for the life of the card, and on which number the user may make or receive calls. If the consumer has his own cellular handset, it can be configured for use by the prepaid card. Otherwise, the consumer can lease one for the life of the card. Prepaid cellular service avoids contracts, open-ended financial commitments, connection fees, credit-worthiness qualification, and generally activation fees. Once activated, a card often stays ‘live’ for a minimum of 60 days from the last transmission or receipt of a call. Nationally, like all commercial products, the features of a prepaid calling card vary by supplier. Proliferation of Use The first markets to develop robustly in prepaid cellular service were in Western Europe. Italy, in particular, showed significant explosion. Telecom Italia Mobile (TIM) went from 570,000 to over 3 million subscribers from 1997 to 1998 by adding the pre-paid application to its cellular service. The Venezuelan market jumped 20% in cellular subscribership with the introduction of prepaid cellular; Baja Cellular of Mexico increased its subscribers by 45% with prepaid service; and Vodacom, the South African affiliate of Vodaphone of the UK, sold over 300,000 prepaid cards and one million recharge segments in South Africa between its 1997 introduction of its service and mid 1998. Previously in South Africa, more than 40% of Vodacom’s applicants were denied cellular service for lack of credit-worthiness. In the US, the market is expanding to universities, where one network marketer is introducing pre-paid cellular service in over 100 universities. Legal Issues Related to Prepaid Cellular While the market is demanding the new cellular application, attention needs to be paid to the legal issues attendant to this new service application. These issues break down into four basic categories. Disclosure These issues include advertising requirements, representations on the cards or other promotional materials, and representations on point of sale posters. These laws are controlled either nationally by a federal authority or regionally by state, region or other political subdivision. · Laws of General Application: Many countries have the equivalent of so-called Truth in Advertising Laws, which may form part of a larger body of consumer protection laws. These laws define the accuracy required of marketing information, and make it a civil or criminal offence to transgress the requirements of the law. Other truth in advertising laws apply to the disclosure of content of foods and drugs sold at retail, the performance capability of products, and the like. Even the accurate cost of credit often falls under these laws. Such laws’ application to prepaid cellular service might be the responsibility for an accurate statement of charges, ‘free’ minutes, connect and disconnect time, etc. For example, if the card specified on its face that it comes with an initiation of 20 free minutes of calling time, but in fact an analysis of one’s calling practice and card balance revealed that a different per minute rate applied, a violation might have occurred. · Telecommunications Disclosure Laws: Some jurisdictions have laws applicable to the telecommunications sector relevant to disclosure. In the US, for example, such laws are done at the State rather than the Federal level. The State of Florida is the most active regulator of disclosure procedures and requirements through the Florida Public Utilities Commission. In that State, there are requirements as to how per minute charges must be represented on a prepaid card; how other charges such as connection charges or pay telephone surcharges and the like must be disclosed; where on the card and in what size type certain disclosures must be made; as well as what needs to be disclosed on the mandatory tariff filing which must be done by each carrier before being able to provide a prepaid card service. These rules change from time to time, and it is the responsibility of the service provider to ensure that it is in compliance with the most current rules. Legal Commercial Relationships A service provider must be careful to define its relationships with regard to the sale or lease of the handset, software licensing, joint venture arrangements and supply and interconnection contracts. · Sale or Lease of Handset: Service providers of prepaid cellular service offer the customer use of its own handset from an existing subscriber cellular service, or to lease a handset for the prepaid service. In the case of the latter, the lease of the handset itself may be a separately documented transaction. The lease of the handset itself in most cases would be simply an equipment lease, and not be tantamount to the provision of service. When the prepaid card expires, the handset must be returned. Our questioning of prepaid service providers as to any loss suffered from failure of prepaid customers to return the handsets has not revealed a commercial problem in this regard. · Software Licensing: Another level of the transaction might be the licensing of the software to a customer to allow that customer to provide the prepaid cellular service within its company, or to third parties outside of the company. The legal issues attendant to this type of relationship are the traditional intellectual property issues, wherein most rights to the intellectual property remain with the licensor. The licensing of software necessary to the prepaid cellular system is discussed further in the section below dealing with degrees of ‘providing service’ in a regulatory sense. · Joint Venture Arrangements: The combination of equipment, including platforms, software and service may be achieved by a combination of parties with each one of the required skills or inventories. This would be a traditional joint venture, in which each party would make his contribution to the venture in accordance with a legally binding agreement, which articulates the rights, duties and obligations of each respective party in the joint venture. The caution here, other than normal commercial negotiating clarity and prudence, is to be sensitive when the joint venture becomes a service provider, in and of itself, which requires licensing in the jurisdiction in which the service is to be provided. · Contracts: Throughout the arrangement and provision of a prepaid cellular service, like any other service, a series of contracts may be entered into. These would include supplier contracts, the joint venture agreements mentioned above, contracts for the lease of circuits for operators seeking access to switches or lines of other operators, commercial leases, etc. This category of legal documentation is the same as any other commercial transaction. Legal Regulatory Relationships One of the most important of these issues is knowing whether one is a cellular service provider or not. In the progression of setting up or participating in the prepaid cellular business, one must be sensitive to the point at which one’s involvement becomes the provision of service in a regulatory sense, which requires licensing. For example, if a private party leases or buys a platform from anyone of a number of platform vendors, and one leases or buys one’s own switch and sets up access arrangements with local carriers, it is likely that such person has become a ‘service provider’ under the regulatory scheme which controls licensing of service providers. On the other hand however, if one buys a turn-key system from a package vendor of such systems, and simply sells the prepaid cards and administers the distribution, activation and deactivation of the cards, it is likely that that person would not be considered a service provider in law. Identifying Cellular Service Providers National and local laws control the types of service one is authorised to provide. However, areas are grey. Private businesses have now purchased the services of third parties to supply prepaid cellular service to the company. One company, however, set up a prepaid cellular platform for company use, and then sold individual cards and handsets to its employees. Others have purchased components or simply a full turn-key kit. This requires only the purchase or lease of circuits from a facilities-based operator. Still others, like a former real-estate developer, have purchased their own switch. Finally, in addition to the relatively black and white scenarios, there are many grey scenarios in which private parties assume some or many of the attributes of service provision without considering themselves to be operators. It is these grey areas that are most likely to yield regulatory disconnections – where the regulator views the entity as a service provider requiring licensing, while the entrepreneur is not sensitive to licensing issues. Impact on Other Services Convergence of Cellular Architecture and Basic Telephony Service The above regulatory issues compound when one contemplates the convergence issues. For example, it is commonly accepted that wireless services are an expeditious, cost-effective, and technologically available manner of deploying telecommunications infrastructure, not only for speciality mobile services, but for basic services throughout a country. Thus, the Second National Operator of Uganda, for example, has begun the mandatory deployment of lines required by its basic services license, by building a GSM cellular network. The network is enhanced with software which alerts the system and the subscriber to when it is in the ‘home’ cell, which equates to the basic service location in which the government’s prescribed tariffing regime (price cap for example) prevails. When the customer leaves the ‘home’ cell, it is alerted, as is the system, and the service’ switches’ to a cellular service, which is provided and tariffed differently than the basic service. The cellular network, however, is the same. This type of reality extends one step further the ‘functional’ use of cellular service as basic service for those in infrastructure-poor environments who had the means to use cellular service as a substitute for deficient basic service. The net result is that there is less and less functional, and thus regulatory, difference between a mobile cellular service and a basic service. This, of course, would apply whether the cellular service was on a subscriber basis, or was provided by way of pre-paid cellular cards, similarly to pre-paid basic service long distance cards. The regulatory result is a heightening of the need to be aware of when one’s prepaid cellular business becomes a functional service, which requires licensing. Then, analysis is required as to what type of licensing is required. Obsolescence of Paging There are those who claim that the convergence of mobile services with basic and other services will bring about the obsolescence of paging services. This is because, it is argued, one’s personal cellular or basic services mobile handset both allows the subscriber to know that a call is being received, as well as to know (in the digital systems) from where the call is generated, and thus allows the receiver to elect to immediately take the call, take a recorded message, or deal with it at a later, more convenient time. With a handset the size of a pager, and the immediate ability to take or return a live voice communication, or to allow it to revert to a paging function, it is considered that pricing alone will keep the paging business viable. Conclusion As the price per minute of mobile services declines, the argument becomes more and more persuasive. That is, if for a relatively similar price, and the same size hand set, one may use one’s cellular handset as a basic service, cellular service, or pager function, independent paging services are likely to lose market share.