Commission conference: The Second Hour...

, posted: 2-Sep-2009 10:38


Q: Will reducing termination rates reduce retail prices?

2D, Kordia, CallPlus all say yes.
Telecom, Vodafone both say no because some customers will be forced to pay more.

Those customers who are net receivers of calls become uneconomic for telcos and are charged accordingly (eg Bill and Keep in the US).

2D says Termination rates set a price floor below which you cannot sell to customers.

Vodafone points out Telecom introduced $10TXT in a market despite high TXT termination rates because it's a two-way market - customers could have just TXT'd out and cost Telecom a fortune. Instead, the incoming TXTs balanced out.

Customers are considered in terms of retail AND termination rates. Dropping termination rates will impact on which customers are wanted by a provider.

Q for Nera, Telecom's analysts.

Commission's assumption is that regulating MTR would remove barrier to entry and increase competition. Telecom's submission is that this can't be taken as simply a good thing - it has to be considered that perhaps there could be too many network operators in NZ.

Dismissed by Commissioner at this stage as not relevent at the moment. The issue becomes how much benefit will be seen rather than whether there will be benefit or not at all.

UPDATE: 11.45am

Fixed to mobile

how do termination rates affect competition in market.


Artificially high allows to cross-subsidise other markets, eg broadband fixed line, bundles of products that customers typically buy.

Q: To what extent do you consider above cost FTM rates constrain a non-integrated player to compete in the market.

Covec, Vodafone's analyst.

not all players can or even want to offer everything. Cautions against automatically assuming regulation will solve this "problem". Unreasonable to regulate below TSLRIC standard but not unreasonable to price below TSLRIC.

Q from Commissioner: Costs above TSLRIC seen as "late entrants subsidising early entrants". Is that appropriate?

Covec gets nervous when talk turns to subsidy because of definitions. Commiss offers "tax" as alternative.

2D says there are a few things that can happen. Intramodal competition (fixed - mobile or mobile - mobile calling is OK). Customers don't care so long as price/service is the same.

Firms compete on their merits. Above cost FTM rate creates a distortion when a mobile carrier can price on net pricing without regard to termination fee. Fixed carrier has to think about a real cost to them. Two types of carriers are forced to compete on uneven footing. Not sure I understand that point.

Second point, argument has been made that higher FTM rate increases competition in mobile market (more revenue available, carriers compete more strongly). 2D has problems with this as meaningful argument. Lower FTM rate means the fixed player will compete differently, adjust pricing. May see a pass through of more than 100%. May adjust other prices and cross-subsidise.

Accepts that change the inputs and you'll see a difference to the way incentives will impact market.

Telecom/Nera says if costs drop you would expect to see an increase in output in the fixed market (ie lower prices). But is that enough to justify regulation? Question should be will that change lead to some sort of intensity in competition... different thing.

One of the beauties is competition between business models - if one non-fully integrted firm finds it is struggling, that may be the most efficient outcome. Nobody has applied a proper price-squeeze test to FTM. Commission's report didn't address this. Price squeeze test should be applied for average customer (as per the Act), whereas FTM in Commission report uses a corporate customer.

Q from Commissioner: goes to relativity between FTM and MTM rates. What are the consequences for competition/consumers and what behaviour will you see if fixed to mobile termination rate remains as is and mobile to mobile were substantially lowered.

Covec/Vodafone says: splitting the rates would subvert whatever the regulation was trying to achieve (eg fixed operator calling through a mobile gateway to get the better rate, skewing market).

If you think about a cost standard there's no difference in cost between fixed and mobile networks so they should be same.

It would alter the conduct of players if termination rates were substantially lowered. Different customers would have different levels of desirability.

2D: two aspects to it. 1: is there a good reason to differentiate (eg FTM higher than MTM)... he doesn't appear to think so. And 2: would competition between mobile carriers also be distorted if one player is small and two are very large, two largest would terminate many more calls than the small player would. New entrant would have to compete more fiercely to attract customers. Artificially grant incumbents a market boon.

Telecom/Nera: Are the costs the same? Probably they are. If so, termination rates should be the same for both FTM and MTM.

A brief moment of cohesion as the entire industry appears to shudder at the idea of having different rates for FTM versus MTM. They're now fiercely agreeing with each other.

Commissioner asks:

an incredibly complex question that involves a white board, theoretical numbers regarding market share and on net/off net pricing which leaves the economics experts scrabbling for calculators and everyone else looking puzzled except the Commissioners who say it's quite straightforward. There will be a short pause while I put my shoes and socks back on having removed them to double my maths ability.

I'd try to explain it all but I fear my ability would fail me. It appears the Commission has put up a strawaman argument that would suggest 2 Degrees can never survive and will be crushed by a bug unless regulation is introduced.

The economists are suggesting that the limited static example of the market shows a particularly negative picture of what could happen at one point in time.

Two Degrees and CallPlus both suggest it's entirely accurate and they need regulatory intervention or they won't succeed.

CallPlus suggests the fixed line market has been "competitive" for 15 years and nobody has any more than single figure percentage share other than Telecom. That's a tad disingenious given the difference between fixed and mobile markets (fixed = one network, recent regulatory involvement. mobile = two and a half networks plus 9 wholesale partners and has never been regulated at that level).

And we break for lunch.


Now discussing externalities and whether a report released by Vodafone internationally a couple of years ago has any relevence in this current proceeding.

I have no comment on that.

Q: if termination rates are lowered, what will happen to Prepay customers?

2D: we will lower prices and take more customers.

Telecom: There will be a different set of tarrifs set for Prepay customers. We will chase profitable customers but the days of chasing customers regardless of whether they're profitable or not but if customers tip from being profitable to being not or less profitable that will impact how we target them.

Vodafone: There's a myth that everyone carries two phones. This is untrue. The only data offered to the Commission on this is from Two Degrees and says there are only 3% of customers surveyed who carry a phone on two networks (and there's no mention of why that is. Business/personal perhaps?).

Vodafone would have to compete but would certainly consider how it tackles prepay customers in the future.

TUANZ: Doesn't believe there's a waterbed effect but believe the customer will be better off if the evil of termination rates are removed.

Surprised to learn that Prepay customers are net receivers of calls and perhaps if termination rates are reduced the network operators will then have lower prices to make calls from Prepay and that will benefit customers.

Commission staff ask Vodafone how free local calling skews the market o/seas.

Vodafone: No real research but in NZ low SMS cost and high usage combined with free local calling skews the market in NZ.

Commission staff ask Two Degrees: Vodafone says it has small calling circles, what do you say.

Two Degrees: No such thing as closed caller groups, they're a web. Bill might be Emma's best mate but Emma won't be Bill's. Why pay for it twice. Instead a mesh effect takes place.

Vodafone: Quite a few people have reciprocal best mates and a large percentage have no other best mate leading to small calling circles. Also, such offers are a small percentage of user base.

Commission staff asks if mobile termination rates were cost based are there any other factors in retail market that would impair or limit competition in downstream market.

Vodafone: there is only one ubiquitous player in the fixed space, Telecom. Contrast with the mobile market where there are three players. Structurally there are the conditions in place to be more competitive.

The contention is that FTM is the last "barrier" to overcome and that if we drop FTM to a lower level that this will unlock competition in the fixed space that will lead to pass through. If competition in the fixed space is lacking, changing FTM won't solve that problem.

2D: outbound calls in the US - 443 minutes per month. In the US it's almost universal - no area that doesn't have a regulated fixed line phone price where you receive all local calls free. The point being that despite having free local calling in NZ it may not skew traffic volumes in mobile in NZ.

There endeth the Competition discussion. Next post: Final Pricing Principles.

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 16:06

A more honest / accurate (and less biased) account of what actually happened can be found here:

Author's note by jointhedebate, on 8-Sep-2009 16:24

Steve, now you're calling me a liar and saying I'm being dishonest.

Could you please refrain from personal attacks and just stick to playing the ball, not the man? I'm happy to debate any of it but just leave the abuse out of it. You shouldn't need it. I'm already here, happy to discuss the issue.

I blogged live from the event as it was happening. Everyone who read the posts knows who I work for and will take that bias into account. There's no need to call me "dishonest".

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Paul Brislen
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.

Recent comments

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