Tuesday, 1 April 2008

Operators down on Mobile terminating fees fear

Bloomberg is reporting that stocks in Vodafone, Telefonica, Portugal Telecom, and Deutsche Telekom dropped sharply yesterday. Morgan Stanley has written a report warning that the EU may sharply drop Mobile Termination Rates. If this would happen, than it would open up the market to price competition and would seriously reduce the income gathered from incoming calls from fixed networks. Morgan Stanley sees drops to €0.025, in line with a presentation from ARCEP.

In my opinion there is also a serious possibility that the EU will advice to equalize termination fees from mobile-mobile and fixed-mobile to the same level as mobile-fixed and fixed-fixed. For The Netherlands this may mean a reduction of 80% all the way down to 1 cent per minute. This may not be in the very short run, but in the longer run.

Mobile operators would be wise to oppose any cut in termination rates as it would seriously impact their business. Not only would less money flow in, but it would also mean that there is no force stabilizing prices in the sector anymore. No competitor will price under the termination rate at the moment as this might mean that the customer becomes a bleeder. When termination rates drop to 1 cent, operators may just offer unlimited calling plans, like in the fixed line world. This leads to price competition and the erosion of margins.

Regulators are seriously looking into providing symmetry between Fixed Terminating Rates and Mobile Terminating rates. The ERG has had a draft common position online suggesting as much. In India termination fees are already symmetrical between fixed and mobile networks and growth doesn't seem to be a problem with 8 million new subscribers per month.

One thing that amazed me is that there is no mention of abolishing termination fees altogether in the ERG draft common position. This sounds rather novel, but is common practice in the internet world, where it is known as peering and transit and also in the United States and Singapore. The European Commission has a report out on this subject written by WIK consulting. It would allow regulators to step back from the market and not have to regulate it anymore at all, just like the case is in the internet world.

One benefit of sticking to termination fees, but dropping them sharply by equalizing them is that it takes away the "paying for incoming calls"- argument by the mobile telco's. They have consistently argued that abolishing terminating rates would require them to charge the subscriber for both incoming and outgoing calls, something customers fear (justly with todays prices in the EU). With a termination fee of 1 cent this argument wouldn't hold as strong.

To find some info look at my previous rant and posting the subject. Also have a look at the Encore Workshop on April 22nd in Amsterdam on the subject, where Carlo Cambine, Stephen Littlechild and Scott Marcus will speak. I plan to attend the session too.

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