I've just walked in to the Commerce Commission's conference looking into mobile termination rates.
The history so far (in a nutshell): The CC tried to regulate MTRs two years ago but the government of the day accepted legally binding Deeds of Undertaking from Vodafone and Telecom to reduce rates at a lower rate but to pass on all the savings to customers.
Those deeds were set to run for five years, but 18 months in, the Commission re-opened its investigation and has released a draft report that says it should regulate.
The meeting is being chaired by the telco commissioner himself, Dr Ross Patterson, and is well attended by practically every major telco in the land.
I have a brief on the opening statements taken by a colleague Lucy which I'll share with you here. Lucy's far more thorough than I am.
2-3 September 2009
1. Introduction and Opening Statements
• Draft report concluded termination rates significantly above costs.
• Regulation would increase competition.
• Conference intending to focus on clarification of differences between parties.
• Focussed on particular areas but b/c do not mention, doesn’t mean have reached a final view on any matter but just that we don’t need further information.
• Not adversarial. No cross-examination.
• May direct questions to specific individuals.
• Particular interest in hearing from experts.
• Discourage cross-comment between expert and parties.
• Encourage parties to keep comments to the issues and brief and poignant as possible so can use time efficiently.
• Do not wish to have repetition of what is in writing or a recital of arguments already made. Looking for direct answers to questions made.
• Written statements have been read so parties do not need to read their statements b/c we are aware of their content.
The “20c Conference”
By way of an introduction to Vodafone’s contributions to this conference, I wish to pose a few questions which I
believe go to the heart of the issue of mobile termination and help to explain Vodafone’s position.
Firstly, why is mobile termination so important to Vodafone?
Secondly, is there really a pricing issue in the mobile market?
And thirdly, is the mobile market competitive?
I will then summarise why Vodafone believes that the Commerce Commission has made errors in constructing
its draft report and why the Commission should not be concerned over the ability of a new entrant to compete in
the mobile market.
Why is the issue of mobile termination regulation so important to Vodafone New
Vodafone supports fair competition. However, the Commission is in danger of distorting the market and
undermining the gains of the last decade which we have worked hard to deliver and which are now too easily
taken for granted.
The potential for further regulation of wholesale mobile termination rates is a serious board level issue for
Vodafone for five reasons:
1. For Vodafone, a deal is a deal. The effect of the MTR Deeds was to deliver a better outcome for consumers
than regulation could have achieved. We and Telecom have honoured our side of the bargain. But here
we are today debating the prospect of throwing away this contract. This might have been a price worth
paying if there were large gains to be made. But the net gain for consumers is tiny and the negative
underlying wealth transfers are enormous. I call MTR the “20c issue” – because if you allocate the
suggested consumer welfare across consumers, by the Commission’s own calculations, it will benefit the
average person on the street to the tune of only 20c a month. It is that important.
2. Should the commission proceed with its recommendation, Vodafone’s future revenues and cash will be
impacted to the order of $40m in the first year, growing to a total of over $500m over five years. This is a
material impact to any business and will significantly reduce our ability to invest as a partner in the
government’s fibre broadband initiative.
3. MTR regulation leads to massive wealth transfer from our mobile customers and from Vodafone itself on
the one hand to fixed customers and fixed operators on the other hand. These fixed operators are our
competitors. Recent information supplied by the Commission and analysed by Covec tells us they will
pocket 70% of the termination rate reductions on offer. In Australia, Telstra pocketed 83%. It’s a great way
for them to increase margins. I should add that both Telecom and Vodafone are firmly outside this
grouping having followed through on their 5 year undertaking to pass through 100% of the reductions in
mobile termination rates in line with their MTR Deeds.
4. Our low income mobile consumers, will be unfairly impacted. For them, the termination revenues
contribute over 40% of their aggregate value to Vodafone and without it many of these customers would
cease to be viable. If, for example, we implemented a minimum spend of NZ$5 a month to offset lost
termination revenues, in line with what is done in other countries, 800,000 Vodafone customers would
have to pay more than they do today. One can only imagine that a further 800,000 Telecom customers
would fall into the same category. In other words, about 1.6m low income Kiwis would be paying more
than they do today.
5. And finally there is the issue of text spamming. At zero or low text termination rates that the Commission
is proposing we will see an explosion of text spamming. I do not want New Zealand to become the text
spamming capital of the world. This was a key reason why the only regulator in the world to follow
through with wholesale text regulation, namely the French regulator, decided on a rate of €3.5c or NZ7.3c .
Let’s not allow spamming to spill over from the internet into the text market.
Vodafone New Zealand | Opening Speech to MTAS Conference - FINAL 6
Is there a mobile pricing issue that we need to address?
Over the last two years we have seen a sustained lobbying campaign challenging the value mobile operators
deliver to their customers.
We say the facts do not support this claim.
From 2004 through to today we have been aggressively driving prices down and usage up. BestMate, TXT2000,
TXT600, Family, Free Weekends, TalkZone, Mega, Texter, Talker and Easy plans are all examples of value
offerings we have delivered.
Over the last five years we have driven voice per minute pricing down by 15% per annum and text pricing by a
huge 29% per annum.
In 2009, New Zealand consumers are getting prices that rank in the cheaper half of the OECD, using the Teligen
benchmark which is the yardstick that pricing is measured on. Our own internal benchmarks which divide our
revenue by the usage on the network support this by showing that our voice pricing is better than our sister
companies in markets we are often compared to.
Comparison with Australia
Now, I hear you say, “ Hang on Russell, what about prices in Australia, they offer better value? In Australia, I can
get a Megacap plan offering AU$150 of value for AU$29.95 which is better than what is on offer in New
My answer to that is that we have done the comparisons of plans, and in line with the results of our internal
benchmarks, I can tell you that New Zealand consumers are in fact getting better value.
And if we compare the two countries for casual prepay prices for a minute long call, Kiwis are getting a great
deal. In Australia, you pay between AU$1.08 per minute and AU$1.25 c per minute for the first minute which
includes a AU30 to 35c flagfall charge. This compares to New Zealand customers who pay 89c per minute on
Vodafone or just 44c on 2degrees. The Aussie prepaid customers are paying a whopping 50% to 250% more
than their Kiwi cousins.
And before I forget, in Australia you have SIM locking, monthly expiry of prepaid top ups and 12 or 24 spend
commitments, even on prepay plans.
Fixed to mobile pricing
And finally, you may claim that the real issue is that we are paying too much for calls from fixed to mobile
In Australia during 2008, consumers paid on average AU36c (=NZ44c) for fixed calls to mobiles whereas New
Zealand consumers paid NZ31c. So Aussie consumers paid a 40% premium, even though mobile termination in
Australia has been regulated and lower than New Zealand rates for some time.
Is the state of competition in the mobile industry a concern?
If prices are not a reason to regulate then perhaps the issue is lack of competition.
We made a decision back in 2004 to actively support market entry through commercial solutions for wholesalers
and potential builders alike. The result is today we have three mobile networks and six MVNOs that can offer you
a mobile pricing package for 4.3M people which compares very favourably to three networks and five MVNOs for
22M people across the ditch.
Is bundling anti-competitive?
Having said this, one competitor, namely 2degrees, having already entered the market is claiming that it cannot
compete effectively without further regulatory support. 2degrees has been running a campaign to say that the
industry’s offerings such as BestMate, Family, TXT2000 and free weekends are anti competitive.
This couldn’t be further from the truth. Our bundles are precisely how we compete, innovate and deliver value to
our customers based on real customer insights.
The concept of bundling to create value is not unique to our industry:
MacDonalds has the value meal and combo approaches,
Hallensteins socks are cheaper if you buy the three pack,
Six packs of beer or wine are cheaper than by the bottle, and
Microsoft Office pack is better value than the components parts.
There is nothing anti competitive about our approach to pricing. To illustrate, let me suggest to the Commission
and 2degrees how a new entrant could compete effectively with our value bundles.
It is simple. In the voice market, launch some value bundles of your own. You only have to win 2 customers at a
time to make a BestMate bundle work, or two to four customers to make a Family bundle work .
Likewise, in the text market, launch some on net or any net bundles. We know that for every text you send, on
the whole you can expect one will come back, meaning text termination costs largely balance themselves out.
The Commission should research the entry of Telecom with $10TXT into the text market in September 2003.
All of a sudden, and very cleverly, Telecom who had a very small share of the text market, launched its 500 any
net text bundle. The effective retail price per text dropped to 2c whilst the interconnect rate at the time was 14c.
We initially calculated that Telecom would lose around $35 each month for every $10TXT customer due to the
volumes of off net texts incurring interconnect costs.
How wrong we were! The reality was there was no perceptible change in the balance of text traffic between our
two networks, meaning the higher interconnect text costs were not a barrier for the smaller text player.
Telecom took significant market share and it took us two years to respond.
And finally, the good news for 2degrees is that not all our customers buy text bundles. Our TXT2000 and
TXT600 bundles have less than 450,000 customers. This leaves 80% of our customer base, of which 1.5m are
prepay customers, without text bundles open for offers from 2degrees and others.
The Commission’s analysis has errors and leads to the wrong conclusions
Let me move on to some facts on the Commission’s analysis of mobile termination, retail pricing, and
competition in the industry.
We believe the Commission has made four fundamental errors – any one of which, if corrected, would eliminate
the case for regulation.
The first is the assertion that so called “above cost” termination rates represent some sort of barrier to
entry for 2degrees and others.
The second is the Commission’s new and radical approach to “international benchmarking”.
The third are the Commission’s heroic assumptions for pass through to fixed to mobile retail pricing.
And the fourth is the Commission’s position on the waterbed effect.
I have dealt with the first issue already. The facts are that mobile termination rates are not a barrier to a new
The fourth issue is rather technical and worthy of debate between the economists amongst us. All I would say is
that for Vodafone the waterbed is real.
I would like to cover benchmarking and pass through.
The benchmarking method employed is absolutely critical to the regulatory decision. For reasons that are not
explained or justified, the Commission has chosen to completely change its approach to benchmarking. This has
resulted in selecting a benchmark which is half (7.2c) of what it would have been (14.3c) had it continued with its
best practice approach deployed in the first investigation in 2006.
Furthermore, Analysys Mason, the global expert which developed 7 of the 9 models the Commission has used in
its benchmarking, states that the Commission’s approach is fundamentally flawed. These observations from the
world’s leading expert in this field cannot be ignored if the Commission aspires to produce a quality
recommendation to the government.
We say, return to best practice benchmarking.
The Commission has assumed that pass through of reductions in mobile termination rates will climb from 85% in
year 1 of its model to 100% in year 5. We say, there is no evidence to support his.
The evidence is that pass through is more likely to sit at about the 40% level.
That is why the MTR Deeds were so attractive to Trevor Mallard and the government at the time. The Deeds give
certainty of 100% pass through which cannot be guaranteed through regulation.
So, in summary, Vodafone argues that it is a fallacy that 2degrees will struggle to compete in the market underthe current interconnect arrangements.
In 2009 the mobile market is competitive and delivering prices which are of great value to consumers by
any measure, be it the OECD benchmark, our internal benchmarks, or in comparison to similar markets.
Further, there are clear opportunities for a new entrant to compete. The fact we have had six new mobile
entrants in the last year proves this to be the case. Don’t dismiss the ability of the market to compete on
the claims of one player.
If corrected, the Commission’s benchmark will show that the current MTR deeds should be honoured
through to their expiry in early 2012 which is just one year after the earliest date that regulation could
come into effect.
Once the undertaking or new Deeds are in place, we would appeal to the Commission and government to
leave well alone for their 5 year term so that all the parties can get on with what really makes a difference –
competing in the market to the long term benefit of consumers.
• 18 submissions, made 5 diff offers in the form of commercial offers, deeds, undertakings. One accepted.
• Fairly protracted investigation which suggests uncertainty. Competition problem?
• Complete uncertainty about what efficient cost is. Self-regulation to this uncertainty.
• Deeply complex and time consuming issue.
• May not advance the commercial interests to quite the place they would prefer but is a better solution than proposed regulation.
• Less risky and quicker resolution.
• Go back to last MTR investigation in 2006 – efficient cost = 15c a min. Significant conclusion reversed 3 years later. If plug today’s rates into that model – get diff result – don’t regulate.
• It should be instructive about how we analyse those things today. With due caution. Cost benefit analysis of only one service. Internally inconsistent waterbed effect.
• Uncertainty about purpose of this investigation.
• Redistribution between service providers and end users.
• What is going to promote competition and end users as a whole. While heard a lot of substantive purposes. Mired without exception in the short term. In the short term, can find justification for regulating almost any price but not in the long term.
• Pushing down on mobile termination rates is simply not going to water the relevant positions of competitors.
• Easier for 2degrees to expand. In practice, unclear to reduce on-net differentials. XT does not currently differentiate.
• Empirical evidence doesn’t support that linked to MTR rates. 400-500% penetration, what are an extra couple of cents going to achieve.
• Condition of expansion rather than barrier to entry.
• Conclusion – quantitative and qualitative so sensitive to a number of assumptions that it is a line call. ON basis of analysis done today, don’t know what the efficient cost is. Don’t know how far can push rates until push to serious impacts on dynamic efficiency. Around world, no consensus on what rates should be or the measure.
• Disconnect between recommendations and analysis. Proposal to implement most extreme force of regulation. Can’t reconcile. It is mainstream international regulatory practice to institute a glide path. Potential for interventions put forward will distort market in significant way. UK – efficient termination rates – double.
• Even in France, most extreme regulation, glide path imposed.
• In that context that Telecom put forward their revised undertaking. Asked ComCom and industry to make this process work.
• Pragmatic, commercial offer which mitigates shock.
• We’ve put it forward in good faith.
• ComCom DR: Com proposed regulation extreme end of spectrum. Measured approach needed. Fundamentally altering pricing structures, not without consequences. When look at mainstream international practice – glide path, pricing principles with discretion to most efficient termination rate, informed rather than dicitated wth LRIC model.
• Benchmark more in line with reality. Aus, France don’t use their hypothetical model, why should we.
• AM report.
• What international evidence shows, Com has to use its judgment as to how modelling should inform the rate.
• WE want industry solution that is based on registered undertakings. Vodafone, 2degrees step up with realistic undertakings, Com role in supporting that. Have to give undertakings process real chance of success.
TUANZ – Ernie Newman
• Remind the Com, 17 July 2003, TUANZ wrote to Minister to investigate MTR. Six years without an outcome. Not because of uncertainty but b/c of gaming by duopolists. Scare tactics. Millions dollars transferred because of varstly overpriced.
• Delay partly result of the Commission.
• Single biggest outstanding regulatory issue.
• Mischief caused by these rates. Transfer of wealth – demand side to carriers.
• As the market evolved, real focus on third entrant, see issue far more as health of industry.
• Creates closed user groups.
• Matter of regulation removing distortion already there.
• People chose their network not because of benefits but b/c of network their friends are on. Especially the case at price sensitive end of the market. Not what competition supposed to deliver. Support Eric Hertz – any to any connectivity.
• SIM swapping, so many people carry two phones.
• Thanks to the Commission’s work – fixed providers.
• What we want, as users, break out of market manipulating monopoly.
• Incumbents have had plenty of opportunity to set aside profits for a “rainy day”. No glide path needed.
• Underlying cost of SMS so low that immediate migration to BAK should be made.
• Urge Commission not to be distracted by overseas retail rates. People at the OECD and Teligen have an impossible job of creating viable models. Only a loose guide.
• It is the practice in this industry to use confusion as a marketing tool.
• Transfer of wealth among carriers – unfortunately the carriers tend to be centre stage. Long term benefit of end user – regulation to occur broadly along lines of draft report.
• Paid far too much for too long.
Scott Bartlett – Orcon/Kordia
• FTM substitution – effects, cost drives to fixed line operators
• Bundling – limits ability to compete
• FTM substitution – telecoms market evolves fast. Differences between mobile and fixed becoming more hazing as time goes on particular for the consumer. Femtocells, Homezone, look-a-like services. Integrated FTM operators bundle – excessive termination charges distorting competition.
• More and more mins moving to mobile network – incentive to keep terminating calls high.
• Driving costs into the fixed operator’s business. Limits ability to compete.
• Mobile market more seductive.
• Bundling – FTM operators offering discounts at rates well below the equivalent costs that fixed operators pay. Concern under undertakings regime. Effects ability to compete in market place. See this already. Not a lot we can do while mobile termination rates are where they are.
• Cross-subsidisation. Ability to give discounts on BB, undoubtedly assisted by increased mobile termination rates that others pay them. We subsidise VF and Telecom to find more customers. A reduced rate would reduce this differential and allow fixed operators to compete for customers.
• Com should ensure that interests of consumers are served. Termination rates fall significantly and quickly.
Graeme Walmsley – CallPlus
• Serious problem. Severe market failure. Don’t want to dwell but market failure lead to “I can’t talk now, I’m on my mobile”. TXT market huge. Two phones carried.
• FTM markets are inextricably linked.
• 2degrees has just built a mobile network.
• Mobile devices to make fixed calls. Blurring of distinctions.
• Multiple services from single provider.
• Distortions in market.
• Deficiencies of undertakings.
• Static documents. Need regulatory framework that moves with the times.
• Telecom and VF have you believe that artificially high termination rates to overseas carriers, better off.
• AS we matured, 24 points of presence. Interconnect with all existing operators. Ultimately offer our consumers a better deal. Benefit from wholesale competition.
• Reduce cost of terminating wholesale calls.
• Sell termination to international carriers. Bi-lateral arrangements. Artificial arrangements in undertakings don’t allow CallPlus to pay for investments in NZ.
• Telecom and VF’s argument ignores fact that globally not the practice.
• John raised question about what a few cents means – means ability to win customers.
• Arguing for cost based termination for 2004. No more, no less.
• Interesting dynamic. Common bottleneck PSTN interconnection and FTM.
• PSTN interconnection at cost based prices is a non-issue.
• Continues to be investment and benefits flown through to downstream users.
• Mobile termination in contrast. Not clear whether benefits flowing through.
• Pass through from fixed users. Does occur. In two ways. Services sold as bundles. Taking narrow view ignores commercial realities. In respect of bundles most parties offer them. No active toll bypass market. Providing compelling consumer proposition. One part is FTM termination. Above cost termination is an impediment to down stream markets.
• Realistically in the business market, compete for bundled packages where FTM below wholesale rate. My concern is that if the analysis narrowed down you miss narrow downstream markets.
• What has been the practical impact of PSTN interconnection and compare to FTM termination.
• Excessive mobile termination rates are damaging to productivity, competitors
• Incumbents public threats to delay innovation are a form of coercion and to confuse mobile customers
• Exciting benefits to come in for consumers which will result in sustained competition
• Our ownership and future prospects – new money 2007 – TA 2006 – investment in this market
• Thank staff
• Length harms us, competition and consumers, process delay
• My competitiors have not tried to address the question of what it costs to terminate calls on their network
• Amazed incumbents gaming of this process but not surprised as has been effective
• Fact is NZ is falling further behind. Please don’t be fooled, NZ is an outlier. Most have some form of regulation or low mtr rates.
• Lack of regulation lead to consumers missing out.
• Not asking for favours, just want international best practice.
• Not asking for free ride on incumbents infrastructure.
• Want to compete aggressively for competitors by having interconnect at zero.
• Extremely high levels of on network calling b/c artificially expensive.
• Support designation of MTAS.
• Mobile termination exclusive bottleneck service. Overwhelming incentive to price highly.
• No justification for glide path.
• No credible justification for termination above cost.
• Must have BAK, cost of termination of SMS, destroys connectivity.
• Undertakings far too far above cost.
• Anti-competitive abuse of power. In telecoms networks is greater than other industries b/c of interconnectivity.
• Only 3 OECD countries without regulation. No one can tell me why NZ unique.
• When termination prices so far exceed cost, artificially high floor of off-net costs. New entrants pay a tax to the incumbents. Vodafone admits this – “these consumers generate large termination revenues”.
• WE are not asking for a favour. However, it does appear that our incumbents are. Employing “marketing” “PR”. Revealing of weakness of own position.
• Artificial basis for users calling users on other networks. Expensive, artificial penalties to call users on other networks. Anti-competitive, abusive, exclusive.
• Our competitors are effectively saying regulation will mean less investment over time. 2degrees happy to take those customers. Will not innovate less.
• Technology innovation is critical for e.g. for broadband. NZ is lacking technology innovation.
• If proper regulation – proper cost based pricing will have impacts across markets and will force all players to develop new products and invest in a sustainable way.
• Myth that permeates all discussion – it’s a small market and two players are enough. 5 times penetration should be the position. What we’re building is multiple devices that do multiple things.
We're now on to the substantive part of the conference - currently looking at Competition and whether there's a competitive market in New Zealand. I'll post that separately in a moment. It's probably a good idea to break these posts along the lines the Commission is taking.
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 Steve M, on 8-Sep-2009 16:04
A more honest / accurate (and less biased) account of what actually happened can be found here: http://www.comcom.govt.nz//IndustryRegulation/Telecommunications/Investigations/MobiletoMobileTermination/ContentFiles/Documents/MTAS%20Conference%20Transcript%20-%202%20September%202009.pdf
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