Of termination rates and regulatory holidays

, posted: 5-Aug-2010 19:56

Yesterday was an important day in the now seven year debate about mobile termination rates in New Zealand. The Minister accepted a recommendation from the Commerce Commission that the Commission should have the power to set the fees that operators charge each other for sending calls and texts between their networks.* Next the service will be formally regulated with a change to the law, and then the Commission will embark on the process of actually figuring out what prices and other terms and conditions should be. Once we get beyond the shouting and triumphalism from those who have long argued that termination rate regulation is the best course of action, the question for me is what difference will this actually make to mobile customers. Much of the press coverage make the point that we should not expect big changes in mobile retail prices from regulation of mobile termination rates. And it seems people are getting this message. I noted yesterday the results of a poll on stuff.co.nz that the vast majority of respondents do not expect a substantial impact from the regulation of mobile termination rates. When I looked about three o'clock nearly a thousand people had responded, with over 70% saying they didn't think regulation would significantly lower mobile prices (http://www.stuff.co.nz/lightbox/business/industries/3989464 KeepThis=true&TB_iframe=true&height=500&width=680). Vodafone is on record as saying that this majority is right, i.e., mobile termination rate regulation will not lead to a sudden or significant drop in mobile retail prices compared with what would have happened without regulation. Here are four reasons why: 1) Prices were coming down anyway. The difference between voice termination rates under regulation and the alternative is just a few cents. The alternative to regulation - an enforceable undertaking to cut prices under the Telecommunications Act - would also have meant faster reductions: lower rates cut in from October this year, at least six months earlier than regulation. Below is a list of the rates under the undertaking compared with the Commission's estimates under regulation. You can see how small the differences are. The difference is calculated as the undertakings rate less the rate under regulation. The negative number for Oct 2010 is because the undertakings lower termination rates more quickly. Comparison of voice termination rates per minute under regulation or enforceable undertakings** Undertakings Current   17.7 Oct 2010   12 2011   10 2012   9 2013   8 2014   6 Regulation Current   17.7 Oct 2010   17.7 2011   7.7 2012   5.3 2013   4.8 2014   4.4 Differences Current   0 Oct 2010   -5.7 2011   2.3 2012   3.7 2013   3.2 2014   1.6 2) 2degrees does not pay these prices. As everyone knows since the NBR made it plain (see http://www.nbr.co.nz/secretdeal), 2degrees has a special deal with Vodafone that gives it lower MTR prices already. The deal also means that Vodafone pays more for a call or text going to a 2degrees customer than 2degrees pays Vodafone for calls or texts going the other way. Under regulation 2degrees is likely to find itself financially worse off than under this deal, and it will no longer be able to charge as much for calls from fixed lines to 022 customers. One reason that 2degrees would argue for regulation that would make it worse off could be that it believes it will make its competitors, including Vodafone, even worse off. 3) Because of the two-way-ness of mobile to mobile traffic, only operators with an imbalance of mobile traffic actually end up paying for termination rates. For any operator whose traffic is in balance, mobile termination is a wash, i.e., it generates revenue but also generates the same level of costs, meaning no bottom line impact. If an operator had a lot of customers who didn't make many calls compared with customers on other networks, it could well end up making money from mobile termination rates, profits that would be at risk from regulation. 4) The overall impact on competition of lower mobile termination rates is unclear. Some regulators, including our Commission, think that lower mobile termination rates will mean lower prices for calling from fixed lines to mobile phones, but higher prices for calling from mobile phones for at least some customers. This is because termination rates make up a large proportion of revenue for customers who receive a lot of calls, and when those revenues are cut by regulation, competition for those customers naturally falls. I noted that even Eric Hertz, CEO of 2degrees, was yesterday saying that it was not possible to guess what impact cutting termination rates would have on mobile calling rates (http://www.stuff.co.nz/business/industries/3992074/Welcome-for-mobile-fee-move). In my view the main impact of this mobile termination regulation decision is not on the retail mobile market. The difference between regulation and the enforceable undertakings is not big enough to make a difference to competition. In fact, the key impact is on those who will work on the regulation of this service, who will now face many months of debate about details of the regulation. We have been here before. The industry and Commission spent several years arguing about regulation of cell-site sharing, in theory to help 2degrees with building its network. The standard terms determination process created more than 3,000 pages of documents and took nine months to complete. Unfortunately all this effort generated no meaningful benefit for customers. And 2degrees still has very few sites shared with Vodafone despite the service being regulated since December 2008. The Commission even wrote to 2degrees expressing their dismay about this chronic waste of resources (see http://www.nbr.co.nz/opinion/chris-keall/two-degrees-comcom-warning-letter-full). It is also interesting to see regulation of mobile networks being further extended at the same time as the government has decided that it will not allow the Commission to regulate prices for at least the next ten years on the soon-to-be-built fibre network, and as the Commission looks at rolling back regulation on Telecom's fixed network. I have not yet seen the explanation for this differential treatment. But from where I stand, the mobile sector is the most competitive part of the telecommunications market, with three competing networks and at least ten other retail operators. Hayden Glass GM, Public Policy Vodafone NZ * The Commission has made the same recommendation three times previously (June 2005, April 2006, February 2010), with the first and third recommendations being sent back for more work, and the second being rejected in favour of an enforceable agreement with the operators to bring down termination rates over time. ** Regulation may not kick in until April 2011 - estimates on how long the standard terms process will take vary. We assume here that the current rate remains the price until regulation is completed. The rate listed for regulation from 2011 is the average of the Commission’s cost estimates from Table 1 on page 12 of its Final Report. All rates in this table are shown rounded second plus second. To convert to minute plus second, divide these numbers by 1.23. Minute plus second is the current charging basis for these services.

Other related posts:
Minister recommends regulation - Vodafone's response
Vodafone's response to the Commerce Commission's report
Here we go again

Comment by myndlyz, on 5-Aug-2010 22:41

cry me a river buddy, i havent read the whole article because it is quite boring. however, i have a question, how can a small company like 2degrees charge 44c per min to call ANY network yet voda and telecom charge 89c per min????!!!!!

cheeers :)

Comment by dannywii, on 6-Aug-2010 02:59

not interesting

we as consumer only care about how much we paying

2degree - paying ONLY $20 we get 22c per minute to 2degree mob, landline, international

vodafone - most expensive plan $370 with 1650 free minute = 22c per minute (IF we used all 1650min, if we used 800minute we r paying 44c per minute...free minutes is for vodafone only)

btw it's 2010 now no body that many txt anymore...to be more competitive remove ur free txt and give more free minutes or free internet usage

holy @#$% people buy iphone or android to use txt? that is not a reason to get smartphone isnt it

Comment by Chris, on 6-Aug-2010 12:04

Paul you should write Two Degrees instead of 2degrees, I believe you need to address them formally

Author's note by jointhedebate, on 6-Aug-2010 12:56

In order:

@myndlyz We have 49c/minute calling and we also offer $6/month call and TXT up to 1,000 minutes. It's all about marketing and not a lot about termination rates.

@dannywii - I think you're saying nobody sends TXT messages any more. This isn't true - roughly 700m a month go over the VF network and a similar amount pass through Telecom.

You're also comparing our most expensive plan with 2Degrees least expensive, which is hardly appropriate or helpful.

@Chris, Hayden wrote this but I'll let him know.

Comment by rewa hard, on 6-Aug-2010 14:09

I agree with dannywii and I have had a number of corporate accounts with Vodafone and when I went to terminate some of these accounts, some halfway through there 24 month term I was stung with a $520 Early termination charge per number! I would understand the charge if I was making huge savings thru these contracts but the plan they were on were 0 free mins and a flat rate of 33c per min. Hardly exciting considering I could get 30c a min with 2degrees and no stupid 24 month contracts. I also dont get how Vodafone offer cheaper rates to call overseas mobiles than NZ mobiles. Im sorry Vodafone but the golden days of ripping of kiwis by holding them to ransom are nearly over. Cant wait to change from VF

Comment by ockel, on 6-Aug-2010 14:11

@dannywii - the US is the biggest smartphone market in the world (by share - see NPD release this week).  This year US cellphone users sent more texts than made calls.  For the first time ever. 

SMS usage continues to climb despite bucket plans for voice and (until recently) unlimited data usage. 

Its 2010 - guess again about how people use their phones.

Author's note by jointhedebate, on 6-Aug-2010 14:16

@rewa, that's a different kind of termination rate. You pay an early termination charge when you've been given a handset subsidy. The ETC decreases the longer you're on contract until in the last few months of the contract you no longer owe anything.

If you don't want to go on contract you don't have to. We have zero term contracts, one year contracts, two year contracts and Prepay. The choice is yours.

Comment by langi27, on 6-Aug-2010 14:55

I don't understand why you continue to try to convince the public that your still right. You couldn't convinve the Commerce Commission and your not convincing us.

Regardless your arguments are flawed:

Firstly I've still not seen any good argument or solid facts that the MTR actually represents the costs associated with termination. Your pie in the sky figure is extremely high when compared to similar sized networks with similar populations and usage stats.

1) Rates were coming down anyway, because you knew you were being pushed into this and by doing nothing would have guaranteed MTR regulation.

2)2degrees only has a special MTR agreement with VF, this doesn't help any one else except 2degrees calls to VF. The Comcom isn't just doing this for 2degrees benefit.

3) If this so-called balance of calls from one to the other and back are balanced then why have an MTR at all?

4) Eric Hertz also said - "2degrees CEO Eric Hertz said excessive MTRs had held competition back in New Zealand and today’s decision was a boost for consumers. It would result in lower calling and text messaging costs and had sent a strong message to the industry, he said"

He seems pretty confident this will result in lower retail rates. I would like to support his views as they are aligned with my own, I too would like lower retail rates. He is alot smarter than me in this matter and I hope he can achieve this.

2degrees have done very little in the way of tower sharing because of the RMA height restrictions not because they don't want to share on your tower. When your antenna heights are restricted and VF are at the top, 2degrees antenna's are 2-3meters below, their cell size is dramatically reduced. They have figured out that it is more cost effective for them to build new towers than co-locate and have swiss cheese coverage.

Author's note by jointhedebate, on 6-Aug-2010 16:24

@langi27 you're not required to read it - this is a place where we wanted to talk about MTR. It says in the blurb: "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."

However, to answer your points:

1) The Undertakings process is part of the regulatory process - lowering the rates has been part of that process. Not sure why you think that's a bad thing.

2) NZ has two nationwide networks (Telecom and Vodafone) and a third network in the form of 2Degrees that covers some of the main cities.

We have as much network coverage as Australia does, with a vastly smaller population.

If you think there will be a fourth network builder, or fifth, I think you're probably sniffing something toxic.

3) Because when someone else wants to use your network you get to charge them for it. It's entirely up to you. Feel free to build a network (you'll need about $3bn for a national one) and then not charge anyone to use it, but I doubt you'll get backers.

4) We have three networks and about ten MVNOs. That's more competition per customer than Australia has. How much competition do you want?

Comment by SteveON, on 6-Aug-2010 18:41

I spent a little time looking @ VF Ireland and am very surprised at their lack of competition considering it appears that they have more networks than us.

1) NZ requires 2x the investment per sq km to service the same area. I am not so sure if this include our spread out population...

2) We are a small nation smack bang in the middle of the south pacific with only 4mil people with amazing hills which blocks the signals.

4) the RMA is holding back 2degrees from sharing towers in the metro areas, however where they WILL be sharing towers; is in the sticks, where it WILL be much cheaper for 2degrees to get in.

5) Having ten MVNO's is a usless argument when they still have a base cost which is set by VF. it's silly to give an MVNO a price that way undercuts the main operator.

6) 2degrees have an agreement with VF but nobody ever talks about the cost for terminating a call when roaming on the VF network. eg... I'm in Palmy roaming on VF and call a Telecom mobile. That call must cost at least 25c to 2degrees.

7) 2degrees do not have an agreement with telecom.

I concur that MTR does indeed need to come down. By the way that I believe our networks are far under utilised and there is enough bandwidth to carry 2x the current voice traffic. I have no idea what the stats are; but if you loose 50% of the margins/cost you will get 2x the calling and therefore you'll most likely break even and not loose out.

People are going mobile only overseas but NZ is lagging. Cutting the phone line is the next stage. I would like to do it, but can only do it by ensuring that all my friends are all on the same network. So far I only have 4/5 of my close friends on 2degrees.

But if MTR was down, the network my friends are on will not matter!

Comment by grant_k, on 7-Aug-2010 06:33

This spectacle of Vodafone crying over spilt milk makes me about ready to puke...

Everything was going along swimmingly earlier in the year, with the minister set to accept Vodafone & Telecom's undertakings to reduce MTRs.  Then some marketing genius at Vodafone got too clever by far and came out with the Talker plan, offering dirt-cheap on-net pricing.

This was a cynical ploy to exploit even further their market dominance and lock people in to Vodafone, at the expense of other carriers.  Well it backfired big time, and they shot themselves in the foot with what must go down as one of the all-time great marketing blunders in NZ.

The minister requested that the ComCom do a rethink, and the rest as they say is history.  I for one would have been happy to see the undertakings accepted because they meant an earlier drop in MTRs, whereas now we must wait until next year.  However, the wait will be worth it for consumers in the long run, but Vodafone have cost themselves tens of millions of $ with this cockup.

All this talk emanating mainly from Vodafone that there is no guarantee of lower calling rates being passed on to consumers is pure BS, plain and simple.  Once again, the impetus to lower fixed to mobile calling rates will come from VoIP operators, as it has in the past, and slowly but surely, this pricing will make its way into the mainstream.  For Vodafone to claim otherwise is a clear case of sour grapes.

After being a Vodafone customer for 11 years, I left last year for 2degrees and have been more than happy with their prepay offering.  I can view my call records online, topping up is a walk in the park, and their website is extremely reliable, unlike Vodafone's, with it's frequent outages during my time as a customer.

I am happy to support the guys that finally broke open the Vodafone/Telecom duopoly, and introduced real competition to the NZ mobile market for the first time in many years.

Vodafone only have themselves to blame for the mess they now find themselves in.

Comment by jjero, on 7-Aug-2010 12:16

You quote the amount of people in the public that think there won't be a substantial impact. Of what relavence does this have to the truth of what will happen. I'll tell you: none. Argumentum ad populum. Your argument is flawed.

Author's note by jointhedebate, on 9-Aug-2010 08:56

@StevenON, it's not MTR that introduces on-net/off-net pricing - it's marketing.

In Australia, for instance, the new Vodafone iPhone plans include unlimited calling and TXTing to other Vodafone mobiles. Any other Vodafone mobile. We couldn't introduce that here - the Commerce Commission would be very unhappy (see Talk).

On-net discounting is commonplace around the world and at a TUANZ conference not long ago an OECD economist was surprised there was any concern about on-net pricing. He sees it as a great way to grow your market base and indeed, Two Degrees does it here as do we all.

Also, we have a commercial deal with Two Degrees that offers them more per TXT than they pay us per TXT - termination rates work in 2D's favour under that deal.

@grant_k, there is nothing in Talk that either wasn't in the market already or which was outside the parameters recommended by the Commerce Commission. Do you really think we would have launched such a plan if we thought it would bring in that kind of response?

As for pass-through, the Commerce Commission's only cost-modelling exercise included very high levels of pass through - much higher than seen in the rest of the world. Read back through these posts - there are a couple on this issue early on and the information in them is still valid today.

Telstra, in Australia, not only didn't pass through the bulk of the savings but pocketed them to the tune of A$900m over five years. With that cash it built a mobile network the envy of the rest of the world and managed to reduce competition in the mobile space rather than increase it (one fewer network operators these days).

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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

jointhedebate on Of termination rates and regulatory holidays: @StevenON, it's not MTR that introduces on-net/off-net pricing - it's marketing....

jjero on Of termination rates and regulatory holidays: You quote the amount of people in the public that think there won't be a substan...

grant_k on Of termination rates and regulatory holidays: This spectacle of Vodafone crying over spilt milk makes me about ready to puke.....

SteveON on Of termination rates and regulatory holidays: I spent a little time looking @ VF Ireland and am very surprised at their lack o...

jointhedebate on Of termination rates and regulatory holidays: @langi27 you're not required to read it - this is a place where we wanted to tal...

langi27 on Of termination rates and regulatory holidays: I don't understand why you continue to try to convince the public that your stil...

jointhedebate on Of termination rates and regulatory holidays: @rewa, that's a different kind of termination rate. You pay an early termination...

ockel on Of termination rates and regulatory holidays: @dannywii - the US is the biggest smartphone market in the world (by share - see...

rewa hard on Of termination rates and regulatory holidays: I agree with dannywii and I have had a number of corporate accounts with Vodafon...

jointhedebate on Of termination rates and regulatory holidays: In order:@myndlyz We have 49c/minute calling and we also offer $6/month call and...

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