Ofcom proposal a significant threat to mobile operators' termination revenues

Pritpal Warner, Consultant

On 13 September 2006, Ofcom proposed new controls over mobile termination rates (MTRs) that would come into effect when the current regulation expires in March 2007.

The proposed controls stipulate that:

• the average termination charges of O2, Orange, T-Mobile and Vodafone should be reduced to approximately 7.8 euro cents (5.3 UK pence) at today's prices across 2G and 3G networks by 2010/11
• the average termination charge of H3G should be reduced to approximately 8.8 euro cents (6.0 UK pence) by 2010/11.

Ofcom's proposal will worry the mobile network operators (MNOs) for several reasons. Firstly, there is the magnitude of the proposed price decreases:

• O2 and Vodafone (900MHz MNOs): 6% decrease to 7.8 euro cents (5.3 UK pence) from the current regulated average level of 8.3 euro cents (5.6 UK pence)
• T-Mobile and Orange (900/1800MHz MNOs): 16% decrease to 7.8 euro cents (5.3 UK pence) from the current regulated average level of 9.3 euro cents (6.3 UK pence)
• H3G: 48% decrease from the unregulated August 2006 average rate of approximately 17 euro cents (11.6 UK pence).

Deviating from its previous approach, Ofcom has equalised MTRs for 900MHz MNOs and dual 900/1800MHz MNOs on the basis that its analysis shows that the costs of providing mobile termination on these networks should converge by 2011. H3G will obviously be smarting a lot more than O2 and Vodafone, which have got off lightly. Its current regulatory obligations with respect to MTRs are to give Ofcom advance notification of 2G MTR changes and details of call volumes.

Secondly, the proposal will affect 3G revenues. Previously, the termination of 3G voice traffic was not regulated on the basis that, at the time (2004), the amount of traffic was insignificant - only H3G, representing 1% of all terminating traffic. However, such traffic is no longer insignificant - the other MNOs terminate up to about 10% of their voice traffic as 3G. At present, the MNOs' billing systems do not differentiate between 2G and 3G termination. One MTR is charged by the terminating MNO, which is a blend of the regulated 2G MTR and the unregulated 3G MTR. This blended MTR is higher than the 2G MTR, and under the current regime it would continue to increase as the proportion of 3G terminating traffic increases. As such, Ofcom's proposal will significantly reduce the voice call termination revenues of 2G/3G MNOs. Thus, although Ofcom's proposal is for a relatively small reduction in the regulated termination rates of 2G operators, it will cover all termination traffic, and so will significantly reduce the voice call termination revenues of 2G/3G MNOs.

Thirdly, there is the issue of how Ofcom intends to implement the proposed price decreases. Its proposal discusses a number of glide path approaches. As shown above the MTR reduction is more drastic for some MNOs than others. In deciding the appropriate approach to adopt for each MNO Ofcom intends to consider:

• how best to address the best interests of consumers
• the ability of the MNO to comply with imposed MTR control
• approaches which will prevent it from becoming embroiled in protracted legal appeals.

In addition to the potential of the new MTR price controls to affect the MNOs' voice termination revenues, their SMS revenues may also be under threat, as Ofcom intends to review the SMS termination market in 2007.

Pritpal Warner is a consultant within the Ovum Regulation team.