Pass through

, posted: 9-Sep-2009 08:56

Let's assume the market is regulated and that termination rates are dropped to half today's rate.

What happens to that money?

Remember, mobile to mobile (MTM) and TXT are mostly a wash - there's about 10% variance at most.

But suddenly the price mobile companies charge fixed companies to connect a call to a mobile phone will be slashed in half.

In effect, the fixed line operator then has a decision to make: what to do with the money.

This is where pass through enters the debate - pass through is fixed line operators passing through the savings to customers.

The Commerce Commission has produced a simple model for FTM regulation that includes pass through rates starting at 85% and rising over time to 100%. That is, every penny of the saving fixed line operators see will be passed on to customers.

How does this work internationally? These figures are taken from the Covec report into termination rates presented to the Commission as part of Vodafone's submission.

In the UK the average pass through rate is 65%.

In Europe, the average pass through rate is 50%.

In Australia, Telstra passes through 16.6% of its savings.

Ironically, in New Zealand the two main players, Telecom and Vodafone, pass through 100% because of the Deeds of Undertaking signed with the government.

The Deeds are legally binding agreements with the Crown that in order to avoid regulation of fixed to mobile termination (the only bit that was under review last time round), both companies would voluntarily lower termination rates and agree to pass all the savings on to customers.

The benefit to the Crown was simple: the Deeds would kick off immediately and customers would see the benefit directly. The Crown chose that option over a two-year investigation that wouldn't necessarily see the savings go to customers in the end.

Each year on April 1 the two companies lower their rates for fixed to mobile calls.

But Telecom and Vodafone aren't the only players in the fixed line market. There are others, albeit smaller operators, that aren't bound by the Deeds of Undertaking.

The Commerce Commission process sees companies give the Commission staff commercially sensitive material that they don't want other operators to see. The submitters, however, do want to study the overall market, which can be tricky if you can only see your numbers. So the Commission allows certain economic experts to have access to the full range of information on the basis that they don't pass it on to the companies they represent. Covec undertook this role for Vodafone.

Covec looked at the retail rates from the other operators and uncovered a pass through rate of only 30%, which is some way off from the Commission's required 85% rising to 100%.

On top of that, Telecom has signalled to the Commission that it won't guarantee any level of pass through at all. Telecom says if the Commission wants pass through we already guarantee 100% under the Deeds - something that will cease the moment the Commission recommends regulation.

The Deeds were supposed to run for five years, terminating in 2012. The Commission itself has said the new regulation, should it recommend regulation, won't take effect until 2011 at the earliest.

At the Conference, I was amused to hear the Commissioner ask the fixed-line telcos present if they pass through their savings to customers. Of course we do, they said. It's just invisible. You can't see it because it's included in bundled offers. Hand on heart.

In Australia, Telstra passes through only 16.6% of its savings. The rest goes into a big fat margin on the price of fixed line calls. In fact, it's recently put UP the price of calling a mobile from a landline. Vodafone estimates over the past five years, Telstra has pocketed A$700m.

So let's look at the market in Australia over the past five years. Has there been an increase in competition in the fixed line world? I'd have to say no - Telstra was and remains the dominant carrier with a higher market share than Telecom has here.

What about the mobile space - remember, the money has flown out from the mobile market to the fixed market (and supposedly on to customers). Australia used to have four network operators and now has three. There has been a reduction in competition in the mobile space.

And what of the customer - is he/she better off? Telstra isn't passing on the savings to the customer - it's giving it to its shareholders. You could argue that Telstra has built a fantastic mobile network, mostly off the back of these savings, and that's good for the consumer. But the cost is a lessening in competition that frankly doesn't sit well with me.

The Australian regulator has been so unimpressed with Telstra's pass through rate that it says it will look more closely at (irony again) the New Zealand market with our Deeds of Undertaking. That at a time when we're looking to ditch them and move to straight forward regulation.

What happens to the Commerce Commission model if pass through is only 30% in New Zealand? Or 40% as Covec estimates it will become? The cost of regulating far outweighs the benefits of regulating.

In fact, pass through has to be at least 65% for regulation to break even.

But don't take my word for it - there's a handy Excel spreadsheet that on the Commerce Commission site.

The Covec MTAS quantitative model shows you what will happen if pass through falls to 40% (you need to look at the "consumer surplus" and "total surplus" numbers, which should be positive (that is, the benefits of regulation outweigh the costs).

It's part of the "submissions on the draft report and undertakings" section. Can't link to it directly, sorry.

Pass through is critical. If you're going to regulate for the betterment of customers, surely the customers should get the money? That way we can try to get you to part with your extra cash with new products and services.

Giving it to the fixed line market in the hopes that they'll pass it on to you just isn't going to work at the level the Commission wants. It hasn't worked out like that anywhere in the world and the Commission doesn't explain how it will happen here, it just says it will.

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

Permalink to Pass through | Add a comment (35 comments) | Main Index

Comment by Chris, on 9-Sep-2009 10:42

Here we go again Paul! You do seem to have a lot to say for yourself on this issue. I don't think it concerns you

Comment by sbiddle, on 9-Sep-2009 10:56


I don't see what your problem is. All Paul is doing is putting facts in front of people.

Passthrough is a very significant issue. If MTR reductions occur and anything less than 100% passthrough occurs then the full benefit is not being passed on to customers, it's simply a transfer of margin from the mobile carrier to the fixed line carrier.

Comment by Chris, on 9-Sep-2009 11:10

@sbiddle the only thing I worry about is being charged for incoming calls/texts but so far it is only that stupid Vodafone company that come up with that shit, I'm with Telecom On Account so all good. And vodafone my only charge there Prepay customers for incoming calls/texts.

Comment by Madmax77, on 9-Sep-2009 11:13

Please explain chris why this issue would not concern Paul (who represents Vodafone...a telco who have quite a bit to do concerning MTR).
If he was blogging about stem cell research, then it probably wouldn't concern him (at least not under the Vodafone banner)

Comment by Chris, on 9-Sep-2009 11:16

I just think that Vodafone have done there dash here made there money and I feel they should sell up and piss off

Comment by stevenz, on 9-Sep-2009 11:21

Why would a profit making company just give up?

And it's "their money", not "there money".
I think it's quite interesting to get inside-insight relating to telecomms issues.

Comment by sbiddle, on 9-Sep-2009 11:27


There are plenty of mobile customers in this world under MPP that pay for incoming calls and SMS's. Under CPP this doesn't happen.

Under MPP however this does happen. There is no country that has ever moved from CPP to MPP or moved to BAK for voice and sms.

CPP, MPP and BAK all have significiant pros and cons. There is NO model that does't suffer from serious downfalls in one way or the other.

Since you obviously know everything maybe you'd like to explain what the perfect charging model is for mobile and what the precise costs should actually be?

Comment by Paul Brislen, on 9-Sep-2009 11:33

Hi Chris, feel free to stop reading. There's really no reason why you have to - I'm certainly not making you. Cheers Paul

Comment by Steve M, on 9-Sep-2009 11:41

To all readers of this blog: - This blog is one-sided. You only get Vodafone's self-interested side of the story. And that's cool, it's a Vodafone blog and Paul's just doing his job... - However, if you're genuinely interested in the issue of passthrough and you would like a honest explanation of all parties thoughts on the matter, try reading the transcript from the ComCom conference. - Warning PDF: - The relevant section is pages 36 - 42

Comment by Chris, on 9-Sep-2009 12:05

@ sbiddle I don't see why in the hell anyone should have to pay for people to call/text it should be the person who initiates the call, thats just wrong, why should I have to pay for someone to call me and maybe even prank calling, this is nonsense

Comment by Chris, on 9-Sep-2009 12:07

If I was running a 0800/0508 number then I would expect to pay for incoming calls of course

Comment by Paul Brislen, on 9-Sep-2009 12:08

Hi Steve, did you miss the big logo at the top of the page? Or the comment: 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. but just for the record: this is Vodafone's point of view and doesn't pretend to be anything else. cheers Paul

Author's note by jointhedebate, on 9-Sep-2009 12:13

@Chris, this is why we're saying BAK for TXT (and for everything else) is a very very bad idea.



Comment by Chris, on 9-Sep-2009 12:18

@Paul if it's a bad idea then why was it vodafone that came up with the idea of charging customers for incoming calls/texts??? Telecom just said we might have to put the prices of handsets and 2degrees No Comment. You people also said something about prepay accounts may be closed if no topup within a month.

Author's note by jointhedebate, on 9-Sep-2009 12:25

Chris, we're saying that's one of the outcomes of moving to BAK as a model. Nobody wants to do that (except Two Degrees) and this is why.

Telecom has also said it would look at minimum monthly spends etc as a way of recouping the lost revenue.

And I think you'll find Vodafone didn't "come up with the idea" at all, we're simply saying that's one of the things that happens overseas when BAK is the model. Receiving party pays.



Comment by Chris, on 9-Sep-2009 12:30

Hey Paul can you tell me if it happens, I'm on Telecom NZ On Account. Will I have to pay for incoming calls/texts? will there be min spend for on account or just prepay? Just it you could advise what there doing in the USA with there BAK system. Thanks very much

Author's note by jointhedebate, on 9-Sep-2009 12:33

Hi Chris, that's yet to be worked out I'm afraid. The Commerce Commission is reviewing whether or not it will recommend regulation. If it does, the government then has to decide whether or not to accept that recommendation.

After that there's a process of working out how that regulation should work and the Commission says it'll finally have something in the market by 2011.

Until then it's just guesswork really. We can point to what happens overseas and, as Steve B says, there's no country in the world that's moved from termination rates to bill and keep, but the Commission did seem interested in how the TXT message market would work in NZ under BAK.

Short answer: no idea yet.



Comment by Chris, on 9-Sep-2009 12:39

@paul I'm sure Telecom will have an addon for like $60 a month or something that can be added to the customers account to get free incoming calls/texts. I'm sure they have something like in the USA, also if they do have to bill customers for incoming calls/texts then the bill should show the phone number of the incoming call even if it's a private number because we would be billed for it.

Comment by Chris, on 9-Sep-2009 13:02

I think that they should leave well enough alone, with the way things are now the Teleco's get to use the spare money to invest in networks (NZ Have Quality mobile networks covering 97% of NZ) I think things should stay the same so we can have the latest networks and same quality service. Thank You

Author's note by jointhedebate, on 9-Sep-2009 13:09

@Chris, as do I.... but there are those who would have you believe the best thing that could possibly happen is we're regulated as the customers will benefit and that we should stop talking about it because we just should.

This is a major intervention in a market that, quite frankly, is working quite well. We have two national networks, one more that covers 50% of the population and six or seven MVNO players all in the market.

That's a lot of competition for a country with 4 million customers.

We have some of the cheapest prices for TXTing in the OECD and we have over 100% market penetration.

I'm not entirely sure where the market failure is in that scenario.



Comment by Chris, on 9-Sep-2009 13:15

Even if the prices are high customers benefit from the Quality of the mobile networks, to me it is worth every penny to have Quality

Comment by Chris, on 9-Sep-2009 13:18

And the latest in mobile Technology (Data Speeds etc)

Comment by Steve M, on 9-Sep-2009 13:54

Paul: - Unlike you, I'm not paid to write on here. And believe it or not, I don't have any particular axe to grind. - I put up the link to the ComCom transcript because I think it gives a fairer / more balanced view. - And for readers who are genuinely interested in this issue, I highly recommend that you read it. That way you can form your own educated viewpoint rather than glibly accept the one-sided spin that's spun here...

Comment by simon14, on 9-Sep-2009 15:44

Vodafone don’t want to cut the MTR because they will make less profit.
They will only discuss the reasons why we shouldn’t lower the MTR and ignore all the reasons why we should.
That is why no one should take any of these posts seriously; they are all bias as they are coming directly from Vodafone; the very company that will suffer from lower MTR’s.
Vodafone will naturally try anything to convince the general public that lower MTR’s are a bad idea. Some of their reasoning’s have been laughable and some have used scare tactics.
This whole blog is bias, it is written from a financial corporate point of view, not in the best interests of NZ as they are trying to make out.

Comment by simon14, on 9-Sep-2009 15:47

Chris, i really don't know what makes you think NZ has had the "latest" in mobile technology. We've only had 97% 3g coverage since the end of May.

Author's note by jointhedebate, on 9-Sep-2009 16:11

Hi Simon,

the whole point of me writing this is to engage in a discussion on the points... if you want to ask a question, I'll tell you what we think. You say my reasoning is laughable but haven't asked anything, just stated your view. You're welcome to it but then, so am I.

Ask a question - see what happens!

As for 97% coverage "only" since May, well that's astonishing. New Zealand is probably the only country in the OECD to have two 3G networks built out to 97% population coverage. They don't have that in Australia or the UK by a long chalk.



Comment by Chris, on 9-Sep-2009 16:58

@Simon what paul said!

Comment by Steve M, on 9-Sep-2009 19:42

Paul: - I have a question for you - actually, I have two... 1. If it's true that "mobile to mobile (MTM) and TXT are mostly a wash - there's about 10% variance at most", then why do you think that 2D has argued so strongly for this? Since by your reasoning, they have little (if anything) to gain... And: 2. The flipside to my question above - if Telecom has so much to gain from this (the FTM side), then why are they arguing against it? Why aren't they supporting the ComCom on this?

Author's note by jointhedebate, on 10-Sep-2009 09:25


I can't speak on behalf of Telecom or Two Degrees and have no insider information.

But to me the 2D move is not about termination rates, it's about laying the groundwork for the next investigation - national roaming.

We allow 2D to use our network where they haven't built out. This is regulated but 2D would have to build (from memory) 10% population coverage before gaining access. We gave them access before that to get them into the market.

The Commission has said it wants to revisit roaming but won't do so until after the termination rates' discussion. I believe 2D will try to use the pricing determined in the MTR regulation as a basis for any discussion around how much national roaming should be set at.

Given we already have them in the market, I struggle to see the need for a regulated look at national roaming, but then I also fail to see the market failure in TXT messaging as well and that's not stopping an investigation.

As for Telecom, they could very easily take the line that Telstra took in Australia - that is, to back out of all involvement and just accept whatever regulation came out. Why? Because it benefited hugely from lower termination rates and, as I've said, didn't pass through much of it to customers.

It's to Telecom's credit that it hasn't simply followed the path of least resistance/most revenue.

Comment by Chris, on 10-Sep-2009 10:01

Thats a very nice thing you lot did for NZ Comms

Author's note by jointhedebate, on 10-Sep-2009 10:05

Hi Chris,

well, let's be realistic... we did it to get them in the market because we were told we'd be regulated as the market was uncompetitive. So now we have competition and... regulation is an ever increasing possibility.

ah well.

Comment by oxnsox, on 10-Sep-2009 10:16

Isn't the real question...
Who is driving the whole ComCom review?

Surely it's not you or I the consumer as we've had choice in these markets for a long while.
It appears that the review, and by default any debate, is being driven by those wanting to enter the market with some sort of osmotic support from the Govt. through arms-length agencies and opaque regulatory support.

Why do I think this....
In a real free market world, players are surely free to come and go from markets as their business plans, capital and directors and shareholders see fit.  If you are going to enter into any enterprise you have to do your sums well and build a sustainable business case before you commit. Arguing that the market prevents you via some form of legislative process is simply soapbox politics.

Even in these tough economic times we are seeing the emergence of new players in the Auto manufacturing area. In 10 years there will be recognised names in that arena that we don't now know.

Secondly. The NZ market, for just about anything, is small and globally insignificant. We have a country (approx ) the size of of the UK with a population of less than a third of Londons, yet we have 2 and abit genuine physical mobile networks.  Take the wider view people, how many physical networks are there in the UK... America... Australia?  If the hype of competition and wild wealth and revenue streams was really as rosy as the picture, wouldn't there be more players in the markets with most to offer?

Whatever model our networks choose, or are cajoled into using, they are there because it makes business sense. If they can't turn a profit or maintain their network infrastructure they loose customers and market share and spiral down to an 'also ran'.  They may as well invest all their capital and management skills into flipping burgers.... There's no politics or competition or lobby groups or small profits in that market.

Comment by Steve M, on 10-Sep-2009 11:19

@Chris: - It was a very nice thing that VF did for NZ Comms. Didn't you know that: - VF is a benevolent charitable organisation - VF always acts in the best interest of consumers - VF doesn't have a mean spirited / profiteering / anti-competitive bone in its body - VF wholeheartedly welcomes competition, and - VF will bend over backwards to help give potential competitors a 'leg up' into the market...? - Welcome Mr New Competitor - I've been ripping off consumers for years, I'm well & truly milking them for everything I can, but hey welcome aboard, I'd love to share my milking shed with you!!

Author's note by jointhedebate, on 10-Sep-2009 11:41

Oh Steve... and you were doing so well with the asking real questions, entering the debate...

such a shame.

Comment by Chris, on 10-Sep-2009 13:16

@Steve M your right, they do make money of 2 Degrees.

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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.

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