The state of mobile – why regulation is required

Mobile termination rates are a roadblock to true mobility, argues Sarah Putt

How many of us carry around two mobile phones, with at least one of those on a prepaid account?

I ask the technician who’s fixing the air conditioning in the office. He tells me he has three phones; a Telecom mobile for work, another Telecom mobile because his girlfriend gave it to him and a Vodafone prepaid mobile (he’s on Best Mate and for $20 he can phone and text three nominated “mates” as much as he likes every month and send 2,000 texts).

I ask the soccer Mum standing next to me on Saturday morning. She tells me she has two mobile phones — a Telecom and a Vodafone — because she is careful to send on-net only texts to family and friends. Sometimes we carpool but she never calls to ask if I can take her son to soccer practice. She always texts. It usually takes about six messages between us to ensure we get the right time and place. But she would never use her mobile for a voice call. Why? “Can’t afford it,” she tells me.

Such anecdotal evidence suggests the reason for over 100% penetration in the mobile market is, for many users, because it’s an economic necessity. The cost of calling and texting anyone that isn’t on the same network is becoming prohibitive for some.

This is why the Commerce Commission’s issues paper into mobile termination rates is so important and so timely. TUANZ has responded with a submission to the report, recommending that the Commission launch an investigation into whether termination rates — the price mobile network operators charge to accept a call on their network — should be regulated.

High termination rates prevent a competitive market

Last year, the Telecommunications Commissioner Ross Patterson told TUANZ that overseas evidence suggests that the entry of a third player in the mobile market is proven to reduce prices by 20%.

Yet, one of the biggest disincentives a third entrant faces in today’s market is the prospect of paying large termination fees to established competitors. According to the Commission’s report the fee is 16 cents per minute, well above what it actually costs the network owner to accept the call.

This is a major issue for a new entrant, but it isn’t the only hurdle.

On-net pricing plans are popular with customers on both mobile networks. Vodafone’s Best Mate plan means prepay customers can choose up to three other Vodafone customers to text, phone and video call for a flat rate of $6, $12 or $18 a month depending on how many “Best Mates” they add to their plan. Telecom’s Freedom plan enables CDMA customers to make unlimited calls between their home line and up to five other CDMA nominated customers for $10 a month.

The Commerce Commission calls these plans “closed networks”. They are marketed at a discount to encourage on-net traffic, but the reality is that they are really a surcharge on any user wanting to call off-net.

It also means that a new entrant faces the prospect of trying to win a subscriber away from a plan that is cheaper because it is effectively part of a group deal.

Effect on fixed line operators

Until LLU players, such as Orcon, are in a position to offer competitive wholesale rates to ISPs and therefore challenge Telecom Wholesale for its customers, the profit margins that broadband providers currently receive are very low. This is why ISPs work hard to sign up customers to plans that include national toll calling.

However, most users have regular calling patterns so this means on-net mobile deals such as Best Mate and Freedom make it more attractive to call friends and family who live out of town by mobile, and effectively reduce the revenue to fixed line operators.

But many fixed line operators are more nervous about bundling offers in the future — when cheap mobile offers become part of a plan that offers landline calls and broadband connectivity. A mobile network owner that has fixed-line infrastructure (as is the case with Telecom and Vodafone) is automatically in a better position to dominate the fixed-line market.

User pays

At the end of the line it is always the user that pays. Smaller service providers are charged high termination rates and, in order to stay in business, pass these on to customers. Larger players have no incentive to cuts costs — or they may be afraid to offer plans that are too low for fear of attracting unwanted attention from the regulator.

But unregulated mobile termination rates don’t only keep regular calling prices high, they have an effect on services such as the 0800 or “free calling” numbers that large users offer their customers. TUANZ has been told by its members that some have elected not to accept mobile calls on 0800 numbers to customer service centres because of their high cost.

There are issues around transparency in the 0800 service too; that’s because mobile termination rates are negotiated between carriers, savings may not be passed on to users.

Major users are also concerned about the high cost of wholesale SMS services. Some have claimed that this prevents them from offering text updates to their customers because of the excessive tariffs.

So what kind of services would these users like to offer?

A good example is Vodafone’s new online billing system announced this month, where customers can receive a text message alerting them to their bill due date and amount. They can then go online to the Vodafone website and download “a more detailed and comprehensive tax invoice”.

TUANZ members would also like to use text messaging to contact their customers, but we’ve been told that even companies with significant buying power can only afford a limited roll out of SMS communications or are forced to recover SMS costs from their customers.

These members believe a third entrant would see a dramatic improvement in SMS pricing, but this cannot be achieved without a significant reduction in mobile termination rates.

Three or four cents per minute or ‘bill and keep’

So, what’s a reasonable mobile termination rate? There are two international situations worth considering.

This first is outlined in the Commerce Commission’s issue’s paper. It cites proposals by the European Union Commissioner for Information Society and Media to cut mobile termination rates across the EU.

“The Commissioner announced that the EU wants to see a decrease in termination rates to between one and two Euro cents (NZ2-4 cents per minute) and signalled that the EU is also considering steps to cut the costs for data (termination) services such as SMS and browsing.”

Another option is the “bill and keep” scenario — effectively an end to termination rates on both mobile and fixed lines. This offers the benefit of competitive neutrality and administrative simplicity. Examples of this can be found in the US, Canada and Singapore where operators set their own termination fees and often choose to set them at zero.

Given the detrimental effect that mobile termination rates are having on pricing, and the appalling lack of competition in the market, “bill and keep” could be what’s required.

But at the very least, if mobile termination rates are to be charged, they should be done so per second, not with the first minute being charged and only then billed by the second. There are plenty of calls that users make which are significantly shorter than a minute, such as checking messages.

Regulation is required

For many years Vodafone and Telecom have avoided regulation on mobile termination rates — most recently there was the deal on fixed-to-mobile termination rates that was done by the then Minister of Economic Development Trevor Mallard last year.

But industry solutions have not produced a competitive, innovative mobile market. TUANZ believes the time has come for a regulated mobile termination service.

• The TUANZ submission to the Commerce Commission Issues Paper on the Telecommunications Act 2001: Schedule 3 Investigation into Regulation of Mobile Termination is available at Putt is policy and communications manager at TUANZ.

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