Analysis

Do mobile termination rates rule operator revenues?

Jennifer Scott

Everything Everywhere today announced its results for the first quarter of 2012, showing a 2.5% drop in service revenues.

The joint venture between T-Mobile and Orange claimed its results call would have shown a rise of 2.9%, but the forced reduction in mobile termination rates (MTRs) from regulator Ofcom lost it the all-important advantage.

MTRs are the wholesale fee operators charge other phone companies to complete a call. They had risen to around the 4p mark, meaning operators got 4p per minute for each call a user made to a phone on its network. Following an Ofcom consultation and final ruling in March last year though, the regulator decided to set up a system to drop the price year-on-year until it reached less than 1p by 2015.

The decision had mobile operators up in arms at the amount of revenue they would lose from phone calls and led to O2 and Vodafone joining Everything Everywhere to try and get the decision reversed.

Ofcom stuck to its guns and the challenge failed. The case is still with the Competition Appeal Tribunal, with the firms hoping the “guide path” of how quickly the prices drop will be slowed down. However, the death of MTR rates is inevitable.

How much damage can this really cause to an operator though and is Everything Everywhere crying over a relatively small figure, considering its profits still broke records in the first quarter of 2012, hitting £1.5bn?

A spokesman from Everything Everywhere told Computer Weekly it was no small number, with the company estimating it had lost over £300m in its last four quarters since the ruling. He also claimed the benefits were not being passed onto the user, as it was forcing operators to make cuts elsewhere.

“When we had the revenue stream of MTRs, we were able to offer more affordable pay as you go plans,” he said.  

“We could give big subsidies for relatively infrequent users, providing handsets and a cheap price and making our revenues when they made the calls.”

The spokesman claimed most of these deals have now had to be withdrawn: “We make so little money from the calls.”

Ofcom and landline companies argued the customer benefit would come in elsewhere, for example when making calls to mobiles from fixed lines.

BT claimed to have a leading role in the campaign to “Terminate the Rate” and said Ofcom’s ruling allowed it to cut prices of its landline calls to mobiles from 13p to 11.3p in the daytime – a reduction of 13% - and from 7p to 5.3p in the evenings – an even bigger reduction of 24% - because it didn’t need to pay such large fees to operators for taking its calls.

However, the reduction Ofcom made Vodafone, O2 and Everything Everywhere make in the first year alone was closer to 36% showing that, despite its cuts, consumers are still not reaping the full benefits and the profit – albeit a smaller one – has been passed onto landline operators.

Also, the most current prices from Virgin Media stand at 19.35p per minute in the day and 14.25p per minute in the evening, with the company admitting it hadn’t dropped its prices in the past year.    

Ofcom does not have the authority to regulate on retail prices, but at the time of its statement around MTRs back in March 2011, it did seem optimistic the companies would make reductions.

“Lower termination rates reduce the cost to landline companies of passing calls to mobiles,” it read. “Ofcom expects these savings to be passed on to consumers in the competitive UK landline market and some operators have already promised to lower their charges.”

A spokeswoman from Ofcom said the regulator stood by the statement.

Neither BT and Virgin Media would comment on whether they would be dropping their landline to mobile call charges in line with this percentage and would continue to do so over the next three years, like MTRs.

The one thing the mobile operators cannot complain about is being treated unfairly, as each faces the same reduction in MTRs and they are all reporting the difference it makes to their figures each quarter.

When the system will be fair is when the extra wealth generated isn’t going into the pockets of shareholders at either landline or mobile companies, but when it is going towards building up networks.

“The UK is the least profitable market in Europe when it comes to mobile,” concluded the spokesman from Everything Everywhere. 

“Some would argue this leads to less investment in UK networks and some would argue it means it is the worst network as a result.

“With the MTR cuts, it again takes another revenue stream , which means operators are unable to invest.”

So it remains to be seen if there is enough revenue in a £1.5bn company – earned in three months – to put some cash into building up mobile networks and infrastructure across the UK, and that the landline companies will be putting their extra share into the pot too.          


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