Will the Minister regulate MTRs?

By Steve Biddle, in , posted: 21-Apr-2010 09:06

In November 2008 the Commerce Commission began an investigation into Mobile Termination Access Services (MTAS), also known as Mobile Termination Rates (MTR) - the wholesale prices mobile providers charge each other to terminate calls on their networks. The goal was to assess "whether the mobile termination access services should be regulated, due to concerns that a combination of mobile termination rates that are significantly above cost, with significant on-net discounting, creates a barrier to competition in the mobile market"

I've had a great interest in the MTAS investigation and have blogged about it on numerous occasions. Last week I wrote a slightly tongue in cheek blog post on Vodafone's newly released Talk plan suggesting that Vodafone now welcomed regulation of rates and it is with some irony that on Monday both the Commerce Commission and Minister for Communications and Information Technology, Steven Joyce, announced that they were investigating this new plan to see whether this should be factor in determining the outcome of his decision to either accept a voluntary industry agreed pricing model, or force Government regulation upon the industry.

Despite my tongue in cheek comments last week my stance on the matter is one of impartiality. I agree that mobile calling costs in New Zealand are too high, however I realise that MTR costs are not the cause of high costs in New Zealand. A lack of competition in the marketplace is the sole cause of high rates, competition from 2degrees and virtual network operators such as Slingshot, TelstraClear and Compass has forced retail prices down. The exception has been regular calling prices for Prepaid users on Vodafone and Telecom which are stick stuck in the last decade at 89c per minute.

Revenue for mobile operators is a two way system. Revenue is gained from mobile users who make calls, send text messages, use data or access STK (SIM toolkit) based network services. Revenue is also gained from inbound termination rates that are in essence "earned" by that user, and the network as a whole, when inbound calls and text messages are sent to a user of the network. The common argument is that if revenue is lost from one part of the business it will simply have to be recovered from another part of the business, an economic principle known as the "waterbed effect".

The real world reality is that terminating traffic on any telecommunications network, whether it be a mobile network or a fixed line network has an inherent cost, whether this figure is small or large becomes a moot point, the key point is that a cost is incurred. Carriers have two ways of recovering this revenue, by charging the carrier who is terminating traffic on their network using the Calling Party Pays (CPP) billing model or the Receiving Party Pays (RPP) model, also known as Mobile Party Pays (MPP) in some countries. CPP means that the network charges the network terminating the traffic their negotiated MTR cost to terminate traffic and is the common model used by mobile carriers in most parts of the world. RPP/MPP means that the network terminating the traffic pays no cost but the receiving party is charged by the carrier when they answer the call. This is how an 0800 number works in New Zealand and is also how mobile users are typically charged in North America where they normally pay a flat fee per month for incoming calls or have these incoming calls deducted from their included minutes.

In recent years the MTR debate has become a hot topic for regulators around the world as they have had to try and tighten their grip on what they see as a stranglehold on customers that is artificially keeping the prices of calling mobile phones from landlines and mobile calls between networks much higher than they should be. What is clear is that while many see MTRs as the smoking gun, and that by cutting MTRS they will cut the price of calls and text messages, nobody is able to agree on exactly what constitutes a fair price for termination, or even how much terminating a call on a mobile network really does cost. What is clear is that as MTRs have been forced down by European Regulators prices have not necessarily followed suit , and in many cases have increased as operators try to recover lost revenue [1].

If McBiddle's (a global fast food chain focussing on burgers) were regulated forced by a Government body to slash the price of their McBiddle Deluxe burger by 50% it's inevitable that these costs would have to be reclaimed from elsewhere, whether by cost cutting, charging a fee to dine in, cutting free drink refills or making the McBiddle burger only available as part of a combo meal. The mobile market is no different.

In 2005 the New Zealand Commerce Commission took the opinion that the waterbed existed when in it's final report into regulation of MTAS it wrote:

A regulated fall in mobile termination rates is likely to lead to some rise in the price of mobile
services (mobile subscription and mobile-to-mobile calls), relative to the scenario of no
regulation, or alternatively, lesser price reductions than otherwise. To the extent that
regulation leads to a relative increase in mobile prices, and a reduction in mobile
subscription levels, a range of determinants may be generated. Accordingly, this effect has
been factored into the cost-benefit analysis

 

So what annoyed the the Minister and the Commission yesterday?

  • 200 minutes of calling to any other Vodafone mobile or to any landline phone in New Zealand (on any network) for $12 per month

So what's wrong with that you might ask? Well I raised the issue last week that if those whole 200 minutes were used to call between Vodafone mobiles then it would represent an on-net net MTR rate that is less than Vodafone are willing to offer other carriers to terminate voice traffic. As many people have pointed out not everybody will use all of these minutes or even use them all to call another on-net mobile phone. It is expected that calls to landline phones will make up a significant percentage of these 200 minutes, and Vodafone will be paying approximately 2c per minute to terminate these calls with a fixed line provider. If these 200 minutes were split evenly between mobiles and landlines the net cost of calling another Vodafone mobile would be 12c per minute which is around the same rate that Vodafone and Telecom have proposed to the Minister.

It's worth remembering that deals like this are nothing new. Vodafone have already offered a Your Time 200 You Choose addon for a number of years that offers 200 mins of on-net only calling for $11.95 per month. Telecom offer business customers the ability to make calls to any Telecom mobile phone and speak for up to an hour for $1 + GST. Telecom Favourites also offers the ability to nominate mobile and landline numbers that can be called as much as you want for a flat rate of $6 per number, and likewise Vodafone also offer Best Mate which allows unlimited calling to another on-net Vodafone mobile. Both networks have also had SMS plans that deliver messages both on and off net for significantly less than their current MTR rates.

Cheap on-net calls have become a feature in recent times everywhere in the world. In Australia Vodafone, Virgin and Three all now offer free on net calling and text messaging as a standard feature of many new plans. Vodafone, Optus and Three also offer unlimited plans for $99 offering unlimited calling to landlines and mobile phones on any network in Australia for $99 per month with MTR costs of approximately 9c per minute for mobile calls and fixed price termination rates for calls to landlines.

So the question has to be asked : What issues can the Commission and Minister have with Vodafone's new plan? it does not represent a significant move away from anything that already exists in the marketplace.

And the tougher question: Should the Minister accept voluntary undertakings from the industry or should he regulate?

Those pushing for regulation have to realise that the Minister sending the discussion back to the Commerce Commission could easily face another 18 months worth of delays before any regulation occurs. Are we better to accept the offer that is on the table that will take effect from this October and deliver instant MTR reductions and regular drops down to 6c per minute (billed per second) in 2014 or should we start the entire 18 month long MTAS process again, with no clearcut agenda that will force the Commissioners to accept regulation, while MTR rates stay at at their present levels?

Nobody can say it's not a challenging time ahead for Steven Joyce!

 

 

[1] Mobile Regulation and the "waterbed effect" Genakos & Valletti Jan 2010 http://www.voxeu.org/index.php?q=node/4448



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Spark Paging network shutdown – the event nobody cares about? Not quite.
UFB voice, power cuts, copper invincibility and mainstream media FUD.
New Zealand’s growing BUBA problem (AKA I feel sorry for you if you’re on a Conklin)








Comment by juha, on 21-Apr-2010 10:15

2Degrees has an on-net pricing offer as well, with 22c/min and 2c/text, as opposed to 44c/min and 9c/text off-net. Most providers have some sort of incentive plan to keep customers' traffic on-net, which in part is undoubtedly influenced by termination charges.


Comment by Chris, on 21-Apr-2010 10:19

I don't see why anything needs to change. If you just use ya mobile now and then it doesn't cost much, I say just use a landline.


Comment by Chris, on 21-Apr-2010 10:23

@There will be no need to change the MTRs as the competition is starting to heat up now and retail prices are going down already.


Author's note by sbiddle, on 21-Apr-2010 10:38

@chris

There is a need to drop MTRs further. While out MTR rates are not escessive right now on a global scale MTR rates are falling rapidly elsewhere.

The question is whether the Minister should accept the rates already put forward by the industry which do offer very significant savings, or continue the investigation to deliver a result possibly 18 months from now that could at the most save a couple of cents per minute by 2014 (remembering that Vodafone and Telecom have proposed 6cpm by 2014)


Comment by simon14, on 21-Apr-2010 11:57

You state:

"The common argument is that if revenue is lost from one part of the business it will simply have to be recovered from another part of the business, an economic principle known as the "waterbed effect"."

But Vodafone have always claimed that MTR's don't impact on retail prices and that MTR's are pretty much just a wash (VOdafone pays Telecom $50 and Telecom pays Vodafone $50). If MTR's are reduced, the the amounts each party pay each other are less.

Yes, Vodafone for example will receive less revenue from MTR's, but they will also be paying less.

How can Vodafone argue that MTR's have no impact on retail prices and say they are a wash and then turn around and say if you cut them, we are going to have to find the revenue from somewhere else?

The only way i can see lower MTR's impacting on revenue for the Telcos is from landline to mobile calls, not mobile to mobile calls.
 


Author's note by sbiddle, on 21-Apr-2010 12:05

Despite being involved in this MTR discussion for so long Simon14 I find you don't understand some very basic concepts very well.

If MTR's are cut Vodafone will lose significant revenue from inbound fixed line to mobile calling. This represents a fairly significant sum to their business. I've been told a ballpark figure but won't disclose it here because it is not a publically disclosed figure. All I will say is it's a very big number.

Voice calling between mobile networks is also not symmetrical. It does not represent a 50/50 split so any calls in excess of those received from another network result in Vodafone having to hand over cash. Once again this number is not publically disclosed but is signifcant as Vodafone have a greater chunk of the voice market than Telecom.
 


Comment by ockel, on 21-Apr-2010 13:04

"There is a need to drop MTRs further. While out MTR rates are not escessive right now on a global scale MTR rates are falling rapidly elsewhere."

Australia's ACCC resolved in 2009 to hold the MTR's at AU9cpm for 3 years.  It also noted that the previous round of MTR regulation did not prevent Telstra from lifting its mobile calling tariffs.  And it pondered whether Australia would be better served by a negotiated outcome as observed in the NZ mobile market.

This in a market with 4 mobile operators plus MVNO's.  Clearly the high degree of competition AND regulated MTR's in Australia did not stop Telstra from raising its rates. 


Comment by n4, on 21-Apr-2010 18:22

The waterbed theory ignores the facts that if costs are shifted from an area where there is no competition (MTRs) to an area where there is competition (retail pricing) then the market will become more competitive and the overall costs are likely to drop. Assuming that VF (and Telecom presumably) can simply increase retail pricing to recover termination revenues is unrealistic.


Comment by Paul, on 21-Apr-2010 19:21

@Ockel, well said. The problem with lowering MTRs is that the savings, in general, go to the fixed-line providers and there is NO onus on them to pass any of the savings on to the customers. So, in Australia Telstra has earned an estimated $900m extra over and above its previous earnings simply by pocketing the difference. It's not the customers who benefit, it's the fixed line operators who get a fatter margin. Ironically, in New Zealand we have 100% pass through to customers today. However the Commerce Commission says that's just automatically going to happen anyway, so it has thrown out the existing legally binding Deeds signed by both Telecom and Vodafone which guarantee pass through in favour of regulation that doesn't mention pass through. Despite yesterday's statements, the ComCom doesn't usually look at retail pricing because it has no mandate to set retail prices - only wholesale. cheers Paul


Comment by simon14, on 23-Apr-2010 13:01

@sbiddle

First off, i acknowledged that fixed line to mobile would impact on their revenues.

Secondly, i'm only stating what i've been told by people at Vodafone regarding with split of traffic being roughly equal in each direction. Thi information has been pasted several times on the Vodafone blog in the past.


Comment by Rhys Smith, on 25-Apr-2010 12:12

@ Paul - good comments - however 100% passthrough? I would dispute that! Sure, Vodafone NZ has been passing through 100% of the saving to fixed line customers. But as MTRs have dropped throughout time from 50c per minute to 15c per minute, the standard mobile to mobile voice call rate on prepay is 89c per minute. As the vast majority of your customers are mobile ones, you have in fact passed through none of the savings! My point - Vodafone won't agree to pass through regulated (or "voluntary") MTR savings to its mobile customers, so why should landline providers guarantee to pass through savings to their fixed line customers?


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Steve Biddle
Wellington
New Zealand


I'm an engineer who loves building solutions to solve problems.


I also love sharing my views and analysis of the tech world on this blog, along with the odd story about aviation and the travel industry.

My interests and skillset include:

*VoIP (Voice over IP). I work with various brands of hardware and PBX's on a daily basis
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+My views do no represent my employer. I'm sure they'll be happy to give their own if you ask them.


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