What are termination rates?

, posted: 1-Sep-2009 09:42

So what is a termination rate?

It's the fee one network pays another network to connect a call.

If you call me on my mobile from your landline you pay your provider a fee per minute, say 37c/minute.

I, however, am not paying my mobile provider a cent to receive that call. Nothing. Not a jot.

Yet the cost of connecting that call is shared roughly equally between both network providers. And, let's face it, it's in the interests of both network providers to let customers of one call the other - the more people you can call, the more valuable the service is to you.

Iimagine being the first guy with a fax machine... how sad would that have been? But then, someone else bought one, and it was great. Then someone else, and the value doubled with each connection.

So the network operators got together and decided the calling network (the one that's earning the revenue) will share that revenue with the receiving network for "terminating" the call... and so termination rates were born.

There are four kinds of termination rate. Sorry about that.

1: Fixed to mobile (as in the above example);
2: Mobile to mobile (as above but between mobile network operators);
3: TXT messages (same thing but per TXT rather than per minute);
4: International originating calls (same again but complicated by having the other network based in another country).

Mobile to mobile termination rates are basically a wash. That is, Vodafone pays Telecom, Telecom pays Vodafone and they basically cancel each other out.

Fixed to mobile is another matter - Telecom has roughly what, 80% market share in fixed calling? Currently that means most of the fixed to mobile calls go out from Telecom to either Telecom or Vodafone. Vodafone makes money from this arrangement to the tune of 15c/minute. Cut that rate in half and it pushes Telecom's profit margin up by the extra 7.5c/minute. Will Telecom pass that saving on to customers? Probably - but it isn't required to do so. In the UK the pass through rate is around 65%. In Europe it's 50%. In Australia Telstra passes through on 16% and pockets the rest. Over the past five years that's amounted to around $700m in extra earnings for Telstra.

TXTing tends to balance out as well because TXTing is a conversation and it goes like this:

Person A: Wassup?
Person B: Not much. You?
A: Nothing. Am bored.
B: Wanna get a drink?
A: Sure. Where?
B: The place by the thing where we went that time.
A: OK, see you in five.
B: Chur.

International origination is a much smaller total amount but shouldn't be ignored. It follows the same trends as above.



Other related posts:
Of termination rates and regulatory holidays
Minister recommends regulation - Vodafone's response
Vodafone's response to the Commerce Commission's report








Comment by tonyhughes, on 1-Sep-2009 10:13

Good info. Nice visual design.

Chur.


Comment by althecat, on 1-Sep-2009 12:27

Hi Paul,

 

This is a great idea. There is a bit more useful background information here.

 

**Extract and link removed following Commerce Commission advice**

In terms of your summary Paul. You talked about the various rates. But left a bit of info out.

 

1. What is current the Mobile to mobile termination rate?

2. What is the current text termination rate?

3. What is the current international originating calls termination rate?

 

...and finally... because I assume its related. Are there also fixed line call termination rates? I assume that there aren't. But would be helpful to get it clear.

 

alastair


Comment by Sam, on 1-Sep-2009 12:34

If "Mobile to mobile termination rates are basically a wash. That is, Vodafone pays Telecom, Telecom pays Vodafone and they basically cancel each other out", why am I paying for them?

Cheers.


Comment by PaulBrislen, on 1-Sep-2009 12:53

Hi Sam,

the simple answer is: you don't pay it. Your telco does.

The longer answer is: of course you pay but in just the same way you pay for telcos spending on advertising, marketing, PR, network building, building building, HR, legal, OSH and so on... all costs are (one way or another) passed on to customers.

But you don't pay directly for the MTR. This is what's called a "two-sided market" which means we earn income from two sources.

Think of the newspaper market - newspapers make their money from two sources. From the cover price and from advertising. Having two sources of income doesn't mean you're getting ripped off by paying the cover price. Your cover price doesn't even relate particularly to the advertising price (perhaps to a degree, but not much).

However, if the Commission were to regulate the price of advertising ("From tomorrow you can only charge half what you charge today") it would dramatically impact the publishers' earning power and the publisher would have to do several things: reduce costs immediately; look for a new source of revenue; look to increase existing sources of revenue.

You can pretty much guarantee one of the outcomes would be to put up the cover price of the newspaper. It might stop the rollout of its web-edition (newspapers can be a tad short sighted when it comes to the web but that's another discussion). It would certainly cut back on staffing and investment spend. It would have to.

How's that?

Cheers

Paul


Comment by Sam, on 1-Sep-2009 13:08

Thats a sweet answer. Cheers Paul!


Comment by Sam, on 1-Sep-2009 13:09

Thats a sweet answer. Cheers Paul!


Comment by PaulBrislen, on 1-Sep-2009 13:26

Hi Alastair, thanks for the post...

In terms of your questions:

1. What is current the Mobile to mobile termination rate? 15c/minute (same as Fixed to Mobile - you don't want to have different rates as that's bad. I'll explain that in another post).

2. What is the current text termination rate? about 9c/minute (I think it's 9.13 but I'll just double-check that).

3. What is the current international originating calls termination rate? No idea, I'm afraid. That's something Telecom pointed out in its submission and I haven't dug into the detail but I will see what I can find about it.

As for fixed to fixed, yes there are but again I don't know what they are so I'll find out.

Cheers

Paul


Comment by simon14, on 1-Sep-2009 13:27

Hi Paul,

I just had to put forward my two cents on this matter… no offence intended.

I don’t think your analogy to the newspaper market can be compared to the mobile market…. It makes absolutely no sense to me (the newspaper market hasn’t been ripping us all off for the past 15 years)

So what you are saying is that if the Commerce Commission cut the MTR rate significantly, Vodafone would need to seek revenue from other sources and/or reduce costs.

Sure, this would be the case if Vodafone wanted to maintain their “current” levels of profits, but as all New Zealanders know, Vodafone and Telecom have had it too easy, for too long and it’s about time consumers got a better deal….. even if it means the big telcos profits are reduced as a result.

Of course Vodafone/Telecom are going to try their hardest to make high MTR rates sound better for us all….. but we all know their not. I don’t blame Vodafone at all for trying…. I would too if there was so much revenue at stake for the company I worked for. I just think consumers shouldn’t be fooled into believing what we are being told by the big guys….


Comment by PaulBrislen, on 1-Sep-2009 13:29

Alistair, the answer to fixed to fixed is: it depends...

local calls are different to national and again to international. Also, it varies between providers so ...

how long IS a piece of string?

International incoming calls falls into that camp too so unfortunately I can't really tell you.

Sorry about that. Good questions though.

Cheers

Paul


Comment by mikehayton, on 1-Sep-2009 13:46

This jogs a tidbit from the past.

Typically the rates a telco would pay to the outgoing telco (to terminate the call) would vary by whether the call originated in your network (cheap) or from international provider (more expensive). This all reminds me a telco outside of NZ that I believe was reoriginating some of their international call detail records (CDRs) in order to make more money.

I found this link http://www.billingworld.com/articles/archives/Using-SS7-for-Jurisdictional-Reporting-of.html - hopefully technology is in place these days to stop such fraud.


Comment by PaulBrislen, on 1-Sep-2009 13:48

Hi Simon,

Couple of points there:

1: "but as all New Zealanders know, Vodafone and Telecom have had it too easy, for too long and it’s about time consumers got a better deal….. even if it means the big telcos profits are reduced as a result."

It's not about reducing profit, it's about distorting the market so badly we end up giving the fixed line operators a huge amount of cash in the hopes that fixed-line customers benefit. That's the outcome of this kind of regulation.

Have we been making too much money? We've invested $3bn in New Zealand in the past decade. No other country in the OECD has two 3G networks covering 97% of the population... We've introduced a raft of things here that typically we wouldn't get because we're a small country at the end of the world. Things no other provider would be able to introduce because of the issue of scale (I'd name some handsets here but you get the picture).

The 3G Extend network alone cost $500m and yet we don't increase our charges for the extra speed or coverage.

In fact, we've reduced the price of calling 18% year on year for the past five years. If you have a look at your mobile bill from five years ago you'll find you were doing a lot less with your mobile than you're doing today.

So I'll have to disagree with you on "ripping people off for 15 years" I'm afraid.

Reducing termination rates will mean we have to charge some customers more (I'll cover that in another post later on) because they'll cease to be a revenue stream for us as termination rates dry up.

On top of that, it gives a huge windfall to the fixed line operators in the hope that they'll pass it on to customers. I really don't see that happening any time soon, do you?


Comment by bulk, on 1-Sep-2009 15:14

To quote you Paul

"Mobile to mobile termination rates are basically a wash. That is, Vodafone pays Telecom, Telecom pays Vodafone and they basically cancel each other out"

Hello.. why the need for mobile MTR's at all then!  Oh that's right, there's a new player in the market called 2 degrees who will be paying Voda and Telecom MTR's for every mobile call their customers make.  Nice little earner for the two fat cats!

Let's get rid of this MTR crap once and for all and allow real competition into the NZ mobile market.

Cheers
Keith


Comment by browned, on 1-Sep-2009 15:45

Comment by PaulBrislen, on 1-SEP-2009 13:48  - If you have a look at your mobile bill from five years ago you'll find you were doing a lot less with your mobile than you're doing today.

You may have reduced the price of calling, but what about txting? mms? video msg? browsing. All relatively new revenue streams that I doubt have ever reduced in price.

The comms industry in NZ looks bad for a reason, no point in trying make vodafone or telecom look good.


Comment by Shadowfoot, on 1-Sep-2009 15:54

Paul, can you please confirm the text termination rate is per minute? How many multi-minute text messages are there?


Author's note by jointhedebate, on 1-Sep-2009 16:05

Just a note - I've had a call from the Commerce Commission relating to the NBR story on the commercial deal between Vodafone and Two Degrees. They've asked that I remove the information posted as the Commission believes the information is covered by a confidentiality agreement as part of the Commission process.

I've taken it down in the short term - I'll double check with the team here to see what's what.

Can I ask that we refrain from posting the details at least until I get some advice on this? I'll have to take it down again in the short term if it does re-appear.

Cheers

Paul


Author's note by jointhedebate, on 1-Sep-2009 16:18

Hi browned,

yes, all of those have reduced.

TXT has reduced even more steeply than voice. Average revenue per TXT is down by 75% per customer over the past four years. It's a huge drop in price and the usage has increased as well. I'll put up a post about these stats so I can include a chart.

Think about TXT2000, TXT600, BestMate and Family and Free Weekends - customers aren't paying the headline rate for most of their TXTs and that reduces their total TXT bill.

As for data, we've reduced the price by about 90% over the past couple of years. $1/10MB, $10/100MB, $40/512MB... you can pay $80/month and get 6GB of data on our mobile network. Until Vodafone Australia dropped its 5GB bundle rate we were the cheapest in the Vodafone world for data and we're still right up there.


Author's note by jointhedebate, on 1-Sep-2009 16:22

Hi Shadowfoot - termination rate per TXT is 9.5 cents per TXT for most. The Two Degrees deal offers a much better rate than that but I can't tell you about it.

Not sure what you mean about multi-minute TXT sorry...

Cheers

Paul


Comment by browned, on 1-Sep-2009 16:24

Comment by PaulBrislen, on 1-SEP-2009 13:48  - If you have a look at your mobile bill from five years ago you'll find you were doing a lot less with your mobile than you're doing today.

You may have reduced the price of calling, but what about txting? mms? video msg? browsing. All relatively new revenue streams that I doubt have ever reduced in price.

The comms industry in NZ looks bad for a reason, no point in trying make vodafone or telecom look good.


Comment by simon14, on 1-Sep-2009 16:35

Keith,

Sure, most of 2D’s calls will be to Vodafone/Telecom customers so 2D have to pay MTR rates for almost every call…. But the same can be said the other way around; most calls to 2D will be from Vodafone/Telecom so they have to pay 2D, it still all evens out.

MTR rates don’t matter if it’s between mobile to mobile providers if they pay the same MTR rate (assuming traffic is relatively the same in each direction, which there isn’t any reason why it wouldn’t be…. even for a new player in the market.)

Where MTR’s matter is for fixed line toll providers, eg Orcon Tolls, Slingshot Tolls etc… the termination rate they pay Vodafone is higher than Vodaofne have to pay them (because calls to a mobile network cost more than calls to a landline)


Comment by sbiddle, on 1-Sep-2009 16:43


Until Vodafone Australia dropped its 5GB bundle rate we were the cheapest in the Vodafone world for data and we're still right up there.


Your broadband rates aren't exactly competitive with the rest of the group now though Paul.

Lets look what the mothership offers

50p per day buys you 25MB
£5 per month buys you 500MB with no contract 
£20 per month buys you 5GB with no contract

Not only do these represent significantly better value than what's on offer in NZ they're also cheaper than NZ when converted back to $NZ!

Pop over to Ireland and you get 10GB for €19.99 per month on a 12 month plan with free data card.

Our rates aren't exactly expensive but they're certainly no no means the cheapest in the group..


Author's note by jointhedebate, on 1-Sep-2009 17:29

Hi Steve, We're still one of the cheapest in the group - certainly not at those levels but I'll tell you now none of those rates are the result of regulation, they're the result of competition...

and on that score, NZ has three networks for four million people, plus a further seven or eight MVNO partners. That's a huge number of providers per head of population.

Give that time to get itself organised and you'll see prices come down. Most of them have only been offering service for a matter of weeks (if not days!) yet the Commission says lack of competition is the problem. If it is, problem solved!

And let's not kid ourselves here - we're not going to see four, five or six national networks in New Zealand unless our population starts to head rapidly towards what, 30m?

Australia can't sustain four networks and it's got 21m. How can we expect to with 4m people?

cheers

Paul


Author's note by jointhedebate, on 1-Sep-2009 17:32

Hi Keith/bulk,

my apologies, I missed your post... But what Simon says is true - there's a symmetry in networks that mean mean while most of 2Ds calls will go off-net, most incoming calls will be FROM off-net, balancing out.

The danger is that we regulate the mobile sector in a way that does nothing but provide the fixed sector with bigger margins in the HOPE that it'll pass those savings on to customers. That doesn't happen and in NZ Covec says the average pass through rate is around 30%. The Commission believes it will start at 85% and RISE to 100%. It gives no rationale for this, other than its model needs that level or regulation becomes more expensive than the savings it creates.

Cheers

Paul


Comment by freitasm, on 1-Sep-2009 18:27

Paul said:

"... NZ has three networks for four million people, plus a further seven or eight MVNO partners. That's a huge number of providers per head of population."

A bit out of the MTR context, but I believe MVNOs are something that will fail in the due course. Not enough for them to make it a living.

Competition in my view is only coming from true network providers - currently Vodafone, Telecom and 2 degrees.

"Give that time to get itself organised and you'll see prices come down. Most of them have only been offering service for a matter of weeks (if not days!) yet the Commission says lack of competition is the problem. If it is, problem solved!"

How long have Vodafone and Telecom provided SMS and prices still haven't come down from $0.20 per message out of bundles?

How long have Vodafone and Telecom provided mobile data and prices still haven't come down as fast as a lot of people would like - at least enough to justify a richer environment where developers can seriously think of creating mobile applications?

Competition is there. Just slow.


Comment by Paul Brislen, on 1-Sep-2009 19:24

Oh don't be too quick to right off MVNOs. Some of the world's biggest and most dynamic telcos are MVNOs.

Three examples:

Virgin Mobile - nowhere in the world does Virgin own a network. It's MVNO all the way. In Australia, it uses Optus and generally gets higher customer satisfaction scores than Optus does.

BT. That's right, British Telecom that was doesn't own a network. It sold off its entire cellphone network, customers and all after the ruinous 3G spectrum auctions.

These days it piggy backs off Vodafone UK's network.

And my favourite: Tesco. Tesco UK will sell you a mobile or landline, or broadband. They'll sell you TXT and voice calling and they'll sell it to you cheaply.

MVNOs can disrupt a market in a way that network operators can't because they have no embedded overheads (eg $500m to build 3G out to 97% etc). That's huge when it comes to getting capital to invest.

Our MVNOs have only just started to operate. CallPlus/Slingshot has a history of being aggressive and that's not going to change in mobile. And can you see TelstraClear sitting by letting someone else get customers when it's trying to gain a foothold in a market?

Early days yet. Don't destroy their market by giving Two Degrees a massive leg up (yet another massive leg up, I should say).

Cheers

Paul


Author's note by jointhedebate, on 1-Sep-2009 19:54

And as for "prices still haven't come down" well yes, they have. By a huge margin. I'll post about it tomorrow with charts but when you count in customer use of Best Mate, Free Weekends, TXT2000/600 et al and Family, the average price a customer pays on Vodafone is 21c/minute. TXTs are also very low compared with the headline rate.

We don't typically reduce the headline rate but add in the value in these bundles. It's a marketing move designed to give people price certainty.

"I want to call [my partner] and talk to him/her as much as I want for one price" was a common call in our research, so that's what we introduced. Best Mate - $6 once a month, call and TXT as much as you like.

Simple, easy to use, sells like hot cakes.

What we haven't done is tell anyone about the value inherent in that kind of deal. That was a definite failure.

Cheers

Paul


Comment by freitasm, on 1-Sep-2009 20:27

Virgin Mobile sold their U.S. MVNO last month to Sprint-Nextel. That was the last MVNO in the U.S...

Of course they don't have the cost of establishing a network, but this reduces only the entry barrier. They still have to pay for the network access and if the incumbents price it too high there isn't any margin left for the MVNO to operate after all the overheads and costs are factored in...


Comment by oxnsox, on 1-Sep-2009 23:08

freitasm... With ref to American MVNO's
Am not sure its valid to compare US networks with Australasian and Euro networks, not because of their technologies, which may have been a factor in Virgin retiring from the market
..but because of their (reversed) call structures to users.
In NZ I see TelstraClear and 2Deg as MVNO players but with some skin in the game, Telstra on the fixed and 2Deg on the mobile side.  Their own infrastructure investment, whilst incomparable to VF and TNZ, gives them more room to move across the traditional MVNO competing models.
And despite the skinny margins in the MVNO pool their are plenty of good reasons for VF and TNZ to want to keep it open even if there are only a few other swimmers.


Comment by Shadowfoot, on 2-Sep-2009 10:04

Hi Paul

The reason I questioned about test/minute was #2 in your comments at 13:26
2. What is the current text termination rate? about 9c/minute

I'm glad to know you meant per text, not per minute.


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Paul Brislen
Auckland
New Zealand


You’ll have heard about mobile termination rates and how the Commerce Commission is investigating whether or not to regulate them. But what is a mobile termination rate, how does it work and why is it so important?

In this blog, we’ll try to answer your questions, tell you a bit about what we think and keep you up to date with the Commerce Commission and its process.


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