Updated: Challenger 2degrees withdraws termination undertakings

Vodafone says it will lose $50 million in revenue immediately if undertakings kick in next year

The Commerce Commission has released further revised undertakings for mobile termination rates, from Vodafone and Telecom and made the surprising announcement that 2degrees has withdrawn all of its earlier undertakings. Bill McCabe, chief commercial Officer at Two Degrees, says the third mobile network operator withdrew its undertakings as the termination rate proposed in them was in line with the commission’s benchmarking, 6.5 cents a minute. McCabe says the commission indicated to 2degrees that it was likely to be accepting a much higher rate of 12 cents a minute, as proposed by Vodafone and Telecom, leaving the newcomer to charge a much lower termination rate than the two big telcos. The large disparity in termination rates would put 2degrees, which has a lower customer base than Vodafone and Telecom, at a further competitive disadvantage, according to McCabe. “We cannot understand how the commission arrived at the higher rate,” McCabe says. He says that while the principle of reaching an industry agreement is good, it shouldn’t disadvantage competitors. Taking a swipe at the slow-moving regulatory process, McCabe says he cannot understand why the commission just can’t get on with adjusting termination rates, as the authorities in other countries have done. “It’s been going on for four years already”, McCabe says and points to the large amount of documentation and submissions amassed in the process over time. He says he printed out the Commission web page a few days ago, and noted it contains twelve pages’ worth of document titles alone. McCabe also labels the ten-month undertakings process as part of the termination rate investigation and submissions procedure, as “disturbing” due to the length of time it’s taken. Asked how the New Zealand regulatory procedure compares to other jurisdictions, McCabe says ours is “an odd process”. “The voluntary undertakings aren’t something I’ve seen before,” McCabe says. According to McCabe, they don’t work in a market with multiple players, only in ones with single monopolies. Undertakings are built into the Telecommunications Act 2001. McCabe says that telecommunications is one area that has to be regulated and that you “can’t let people do what they want”. Also, in other markets “the regulator has some teeth” McCabe says, and is able to make decisions for the long-term benefit of the market and competition whereas in New Zealand the Commission makes a recommendation to the minister in charge after investigation and submissions process. “Ultimately, this turns it into a political process,” McCabe says, and adds that this is at odds with how regulation is conducted in other jurisdictions. The undertakings from Vodafone and Telecom could mean the MTAS regulation process will come to an end next year. Vodafone’s general manager of corporate affairs, Tom Chignell, says the commission has indicated that the aligned undertakings from the two big telcos are acceptable to the regulator. A final report will be issued to the minister in charge in February 2010 by the commission. Chignell expects a decision by the minister whether or not to accept the commission’s recommendations will be made in April or May next year. Vodafone will see an immediate $50 million revenue reduction if its MTAS undertakings kick in next year. Throughout the regulatory process, Vodafone, with mainly a mobile telephony business, has expressed concern that reductions in MTAS rates won’t be passed on to retail customers, and only benefit other fixed-line telcos. This is “bad for us, but OK if it the money gets passed on to customers instead of going into the pockets of fixed-line operators,” Chignell says. At the moment, Vodafone says it doesn’t know if there will be a pass-through of the reduced termination rates, and Chignell says the commission doesn’t know either. However, Chignell says that the commission has a “bullish view” on pass-through, despite there being no cost-analysis made by the regulator. As for the reduced rates in the undertakings, Chignell pointed to two areas of potential confusion. One is the starting dates: Telecom proposes April 1, 2010, Vodafone October 1. The commission’s assumption is January 1, 2011, for regulation, but in all instances, the “glide path” for termination rate reduction spans five years. By December 31, 2013, Telecom’s proposal has call termination rates down to 6 cents a minute, a figure that Vodafone will reach on January 1, 2014. The second area of confusion is the change to per second billing, from today’s rounding up to the nearest minute, says Chignell. To compare the two, Chignell says the industry practice is to reduce per-second rates by 23 percent. This means by next year, the current 14.4 cents a minute rate will have come down to 9.8 cent in today’s terms, or 12 cents a minute on a per-second basis. Towards the end of the five-year period, termination rates will be 4.9 cents by today’s measure, Chignell says. A hybrid bill and keep model is proposed by Vodafone and Telecom for SMS text messages. The model says that where the volumes of messages transmitted between networks differ no more than seven percent, telcos won’t charge one another. If there’s more than seven percent difference in volume but less than twelve percent, the termination rate will be two cents per message. For traffic twelve percent larger in volume the rate will be four cents per message for the traffic difference. The hybrid bill and keep model is proposed to combat SMS spam, Vodafone says.

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