28 June 08: European Commission proposes drastic cuts in mobile termination rates
The European Commission has published measures designed to drastically reduce how much mobile companies can charge for routing each others' calls. The wholesale charges that mobile operators levy for receiving calls on their networks - so-called ''termination rates'' - have been attacked by EU telecoms commissioner, Viviane Reding, as "guaranteed money" that creates "real distortions" in the EU single market. The average EU mobile termination rate is about 8 euro cents a minute, although the rates vary markedly between member states, and European mobile operators currently get about 15 percent of their revenue from termination charges. Ms Reding wants to see these rates reduced to between 1 euro cent and 1.5 euro cents per minute by 2012, to more accurately reflect the economic costs of terminating calls on mobile networks. According to the explanatory note accompanying the recommendation, ''regulators should construct models which set wholesale termination charges as close to marginal cost as possible.''
The initiative was also endorsed by EU Competition Commissioner Neelie Kroes, who said: "Truly cost-oriented termination rates will increase competition to the benefit of consumers and will also benefit large parts of the telecoms industry as it is likely to eliminate distortions of competition between fixed and mobile operators. It will also reduce the large sums for call termination which smaller mobile operators have to pay to large operators when they try to compete with the latter with the very popular flat rate offers."
High regulated termination charges have become increasingly controversial following the entry of smaller mobile operators in many European markets in recent years. Termination rates significantly above marginal cost exacerbate the incentives of large operators to charge high prices for ''off-net'' calls, making it expensive for mobile subscribers on one network to call subscribers on another network. This creates positive ''network effects'', encouraging customers to stay with the large incumbents who offer cheaper prices for "on-net" calls. The resulting distortions in prices discourage consumers from joining smaller networks, and can inhibit entry and long-run competition. The Commission's explanatory document notes that, ''high termination charges may be used to foreclose a new entrant network, where the majority of originated calls are off-net.'' According to a recent Morgan Stanley report, the proposed EU measures will result in ''larger operators losing market share to the smaller operators,'' potentially promoting entry and competition in these markets.
If termination charges are reduced sufficiently, mobile companies may even decide to adopt voluntary ''bill-and-keep'' arrangements, whereby no charges are levied for routing calls between networks, and they might also introduce retail charges for receiving calls. Such arrangements already exist in Hong Kong, Singapore, the USA and Canada and tend to result in lower overall call charges, and much more efficient use of mobile networks. As the Commission observes in its explanatory document: ''Given the two-sided nature of call termination, not all related termination costs must necessarily be recovered from the wholesale charge levied on the originating operator. Even if wholesale termination rates were set at zero, terminating operators would still have the ability to recover their costs from non-regulated retail services.''
Hutchison 3G has recently proposed that ''bill-and-keep'' style arrangements be adopted in the UK in its appeal of regulated termination charges before the Competition Commission (see here). The industry regulator, OFCOM, has vigorously opposed this proposal, backed by strong support from the four large incumbent operators in the UK: Vodafone, Orange, T-Mobile and O2. Termination charges are currently regulated by OFCOM using a fully allocated cost approach, resulting in rates in excess of 7 euro cents per minute. OFCOM maintains that such high charges are ''efficient'', although the majority of economists now argue for much lower charges.
The economic arguments in favour of adopting bill-and-keep arrangements are surveyed in the recent paper by David Harbord and Marco Pagnozzi, ''On-Net/Off-Net Price Discrimination and 'Bill-and-Keep' vs. 'Cost-Based' Regulation of Mobile Termination Rates'' (January 2008) available here.
The Commission's recommendations can be found here.
Some recent press coverage of this issue can be found here, here, here, and here.