Lawyers, phones and money

Sarah Putt reports on the Commerce Commission's conference on Mobile Termination Access Service

On March 15 and 16 the telcos assembled their teams of lawyers and experts in a conference room at an Auckland hotel to argue before the Commerce Commission their case as to how they think mobile termination rates should be regulated.

The Mobile Termination Access Service conference was held to flesh out some of the arguments that the three commissioners – Ross Patterson, Anita Mazzoleni and Gowan Pickering – are considering as they work towards a final determination next month.

The issue has been debated in the New Zealand telecommunication industry since 2004. Mobile Termination Rates (MTRs) are the fee that a telco charges to terminate calls on their network. The fees are currently around 16.4c for voice calls and 9.5 c for SMS. In the Commission’s draft determination, issued in December, it is proposed the fees will fall to less than 4c by 2014 and there will be bill-and-keep pricing, sometimes described as zero cost pricing, for SMS.

Barrier to competition

The reason for regulatory intervention is that MTRs are considered by many to be a barrier to competition. The argument goes that high interconnection fees incentivise carriers to keep traffic on-net with attractive price plans in which customers are financially penalised for calling off-net. This makes it difficult for new carriers to attract customers. Measuring the amount of cross-net traffic that exists in a market is an indication of how competitive it is.

Commissioner Anita Mazzoleni began the conference by highlighting Commission statistics that point to low volumes of cross-net traffic. “Last year in the Schedule 3 using 2008 statistics we said that less than 20 percent of voice traffic was between networks. This is an average and we said that for some networks off-net traffic was much less than this. Now there is only on average 11 percent of cross-net voice traffic in the New Zealand market. This has reduced materially in a short space of time.”

SMS traffic has, according to Mazzoleni, also reduced – from 10 percent in 2008, to eight percent today. “Generally, cross-net traffic has reduced in a short space of time. It is now limited to on average to only 10 percent of all mobile traffic.”

That 10 percent figure was referred to throughout the two-day conference. But it was questioned by Vodafone head of public policy Hayden Glass, who claimed that Vodafone’s on-net calling is falling and that cross-net traffic is up 40 percent in the last year.

What’s at stake?

Vodafone has the most to lose through regulation of MTRs. Its general manager of corporate affairs Tom Chignell told the conference that MTRs made up 12 percent of the Vodafone’s revenue last year. He says the proposed rates will reduce Vodafone’s revenues next year by $141 million, and its profit before tax by $69 million.

Chignell questions the benefit to end users of slashing MTRs. “The value of this regulation to the economy is a maximum of only $4 million a year. This is in the context of total market revenues of $5 billion, and mobile market revenues of about $2 billion. It seems we have spent a great deal of time on something that is not very important at all to end-users.

“The key risk of this regulation is an anti-competitive transfer of value from mobile operators to fixed operators. This will advantage fixed operators, including Telecom and harm mobile operators like Vodafone and 2degrees. On the Commission’s own numbers that transfer is worth $62 million to fixed operators over the five years, with losses to mobile operators adding up to $105 million,” Chignell says.

2degrees chief operating officer Bill McCabe takes a different view. “Incumbents have enjoyed the benefit of 10 billion fixed-to-mobile minutes in the period from 1999 to 2009, and that gave them a fee, solely through MTRs of, by my calculation, $3.2 billion. The vast majority of that money has been paid by Telecom’s fixed-line customers. Why would a fixed-line operator be happy to pay such vast sums to mobile operators? I don’t thing we’ve heard a compelling reason from Telecom.”

But Telecom lines up beside Vodafone in fighting MTR regulation. General manager, industry and regulatory affairs, John Wesley-Smith says Telecom has introduced any-net plans for the XT network, despite MTRs in the market place.

2degrees doing fine

Vodafone’s Tom Chignell argues that 2degrees has acquired a significant customer base in a relatively short period of time – under the existing MTR environment.

However, Patterson pointed out that customer numbers is only one way of measuring success. “Wouldn’t traffic volume, minutes-to-minutes of mobile traffic actually be a more accurate market share measure when you are talking about effectively the cost of terminating traffic on a network?”

Chignell believes there are two measures of market share – customers and revenue.

In the week following the conference 2degrees announced it had 580,112 customers, around 11 percent of the market, since launching in August 2009. It won’t disclose its revenue share, although IDC put it at about six percent in December.

Non discrimination clause

2degrees is pushing to have the regulation extended to ban on-net/off-net pricing differences for 36 months (called a non-discrimination clause). Vodafone raised concerns about the impact this would have on their retail plans such as Best Mate. According to Glass, Best Mate accounts for a third of all minutes on the Vodafone network.

In formal submissions Vodafone, TUANZ and TelstraClear suggested that rather than impose a non-discrimination clause now, the market should be monitored. Telecom suggested at the conference the Commission wait two years following regulation.

Mazzoleni questioned if two years was too long to wait in the current market, especially “in relation to the small operator”, who she said is “bleeding cash already”.

Chignell claimed the use of the term “bleeding cash” was emotive. Then Mazzoleni asked TUANZ CEO Paul Brislen for his view on banning on-net plans. He replied that rather than trying to “shoehorn” the discussion into the conference, the Commission launch a separate investigation into the issue, to which Mazzoleni replied that the issue had already been fully canvassed in submissions and cross submissions.

Chignell labelled the proposed non-discrimination clause a “catastrophe”. “I don’t know how I am possibly going to explain this to the management team at Vodafone. I have been thinking this is some sort of joke that’s been going on just to wind us up.”

Graham Walmsley, CallPlus wholesale general manager, injected a dash of a realism.

“Just looking at the retail market, the fact of the matter is, the day after the same people are going to be on-net as were on-net the day before, and it will be many, many months before there’s even a significant movement to that. So it seems a little dramatic to assume that within 24 hours [there will be] doomsday scenarios.”

McCabe, from 2degrees, suggested that removing on-net pricing plans could benefit Vodafone’s customers.

“We’ve been accused of trying to ban a Best Mate product; that is not what we are proposing. We are proposing that, actually with Best Mate, you can open it up to any network and presumably customers would applaud that ... if termination rates are indeed cost-based there would be no impediment to doing that for them.”

Sidebar: Regional market breakdown

Is the New Zealand mobile market characterised by regional monopolies? According to Hayden Glass, Vodafone only dominates in the north. Here are the figures he gave for Vodafone’s regional market share:

Northland – 66 percent

Auckland – 68 percent

Waikato – 37 percent

Mid-North Island – 27 percent

Wellington – 34 percent

Tasman/West Coast – 32 percent

Canterbury – 21 percent

Otago/Southland – 35 percent.

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