Did Vodafone unintentionally pwn the Commerce Commission?

By Steve Biddle, in , posted: 13-May-2010 09:12

I'm not the only person asking myself this question today after the Commerce Commission backtracked on their earlier decision and recommended regulation of Mobile Termination Rates (MTRs) in New Zealand. This is an about face from their February decision that recommended against regulation, and instead that a voluntary undertaking by Vodafone and Telecom be accepted. A final decision will be made by the Minister, Steven Joyce, in early June.

If the decision to regulate is made by the Minister the first question that has to be asked is how long it will take before regulation will take affect. The current MTAS investigation has taken 18 months to reach it's current point, and there are certainly plenty of people in the industry who now believe it could be the very least another 12 months before regulation takes effect. If this was the case it would occur before the expiry of Vodafone and Telecom's existing agreements with the Crown. Trying to introduce regulated prices before then runs the risk of legal action from Vodafone and Telecom - a voluntary agreement on the other hand won't suffer the same fate.

It is also worth remembering that the Commission's preferred outcome was voluntary industry undertakings rather than regulation. It's not hard to take the view reading through documents between the Commission, Vodafone, Telecom and 2degrees in late 2009 that the Commission set strict guidelines on what would be acceptable in these voluntary undertakings. This undertaking was formed and revised many times to meet those guidelines. It seems since then the goalposts have now moved.

A 12 month delay will possibly generate upwards of $100 - $150 million in extra profit between Vodafone and Telecom, a figure based upon estimates of what the voluntary offer from Vodafone and Telecom will cost them. The cynic in me can't help but think such a delay only benefits two parties - Vodafone and Telecom. It certainly does not benefit the end user, or 2degrees. Have the Commerce Commission in effect been railroaded without realising the implications of their change of mind?

So why could regulation take so long? First of all we have to establish the actual reason for the MTAS investigation. Despite popular opinion being that it was launched to force the retail costs of mobile calling down, this was never a focus of the investigation.

 

In November 2008 the Commerce Commission commenced its investigation into 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. The Commission's investigation did not look at the prices that consumers directly pay for mobile services.

 

Reading through a number of documents from the Commission it is very clear that they had two key goals in mind

  • To establish a true cost for MTR rates. Due to voluntary undertakings accepted by the previous Labour Government, concern was raised that our MTR rates were well in excess of the true cost and significantly higher than Australia. Compared to OECD averages and average long term exchange rates our MTR rates were about average however regulators in Europe were aggressively targeting MTRs with the goal of lowering them significantly.

  • To consider whether on-net calling deals are anti-competitive. Debate raged on about whether higher MTRs encouraged an environment where cheaper on-net calling became the norm. The argument is that this forms a barrier to the entry of smaller players into the marketplace, however there are arguments against this including setting asymmetrical MTRs for new networks. This allows calls off-net to be charged at a different rate to the inbound MTR revenue received by an operator, resulting in a net gain to them. 2degrees have an asymmetrical agreement in New Zealand.

In light of the announcement yesterday many people see Vodafone as having scored an own goal with the launch of their Talk plan offering on net calling at a cheaper rate than they were willing to offer other providers to terminate traffic on their own network. I don't believe this for one minute - there are some exceptionally good arguments against this and Vodafone's pricing is no different to many other deals that already exist in the marketplace, and in the rest of the world. Cheap on-net calling has become very common in the global mobile market in recent years - in Australia new plans from 3, Vodafone and Virgin all offer unlimited on-net calls. In Europe it's very common to find operators offering large numbers of free on-net minutes with every prepay topup, or offer free on-net weekend or evening calling. None of this is new. Even Taylor Reynolds, the OECD's top telecommunications analyst, was asked about Vodafone's plan when he visited New Zealand last month. His response was one of surprise that we were even paying for on-net calls at all because a lot of OECD operators give users free on-net calling! Turkey have imposed regulation to stop this, with TurkCell being unable to offer on-net calling rates at less than their inbound MTR rate. Such a regulation here would mean that calling plans such as Best Mate, Favourites, TalkZone, and capped calling between Telecom landlines and mobiles would all be illegal. I can only assume that organisations in support of the Commission's decision also support retail price controls and want to see plans such as these made illegal.

A lot has changed in the global marketplace in recent months. In April UK telco regulator Ofcom announced significant MTR rate cuts from the current rate of 4.3p per minute to 0.5p per minute by 2015. Such a fundamental move by Ofcom possibly caught the Commerce Commission off guard, and one has to ask the tough question about the Commission's true reasons for changing their mind. Could the real reason be that  the investigation has dragged on for so long, the goalposts have moved numerous times, and the voluntary undertakings that they helped shape are now seen as being significantly higher than new regulatory proposals from EU regulators be the real cause of this about face?

Getting to where we are now has taken 18 month. In that time we're seen fundamental changes in the NZ marketplace with the extremely successful launch of 2degrees. We are finally seeing prices fall as we now have competition in the marketplace. Are we facing the likelihood of another 12 - 18 months of delays while lawyers, analysts, and regulators battle it out deciding which pricing model best suits New Zealand? Or are we better off accepting voluntary undertakings from the industry, that were by large shaped by the Commission, and getting on with things?



Other related posts:
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 Paul Brislen, on 13-May-2010 09:59

We'd have to be pretty cunning to come up with a plan where we offer damn good Undertakings and then scupper them at the last moment as part of our Machiavellian efforts to thwart the process... to do so with a retail plan that shouldn't make any difference to the wholesale rate (as you point out Steve) is pure genius! And sadly I'd have to say we're just not that smart. (an alternate theory is this is an even more cunning plan hatched by the Comms team because even if our Undertakings are accepted, we'll be back talking about all this in a couple of years anyway - this way we get regulated and that's that. Much better for my migraine) We offered an Undertaking - the Commission asked for a sharper Undertaking which we gave them. They then asked for us to align our Undertaking with Telecom which we did. Let's be clear - this is regulation in everything but name. The Commission set the rate, we met it. Case closed. The Undertakings will come into effect in October - full blown regulation will take as you say about a year to 18 months. The end result will be startlingly similar to what we have offered to do but delayed by 18 months. And frankly by then I'll be well over the whole thing. Cheers Paul


Comment by wongtop, on 13-May-2010 11:21

@PaulI think if you read the original recommendation the ComCom was of a view that;1. The combination of above cost MTRs and on-net discounting was anti-competitive.2. That the final undertakings were still above cost.3. The 2/3 view was that signficant additional on-net discounting was unlikely to occur (no more than 5% pa - para xli of MTAS Final Report Exec summary).On the basis of 3, the 2/3 recommended that the final undertakings be accepted.You guys kind of blew 3 out of the water when you launched TALK.@SteveThe ComCom appears to have opened the door to international benchmarking for initially setting regualted MTRs (para 23 of the Draft Reconsideration) - and even a version of BAK, before making a final decision.


Comment by Paul Brislen, on 13-May-2010 11:43

@wongtop, As Steve has pointed out, there's nothing in Talk that doesn't already exist in the market. The difference appears to be built around "but this is Vodafone launching it" which quite frankly, as a regulatory decision, blows chunks. This is retail price setting - not something the Commission should even think about getting involved in, and yet here we are.


Comment by Rhys Smith, on 13-May-2010 15:12

@ Paul Brislen, I realise the MTAS Final report is heavy reading, however it would appear (at this stage at least) that MTAS will be regulated from January 2011 in the ball park of 5.7c per minute and trending downwards from there. Not sure where you got the 12-18 month timeframe from now for MTAS regulation to take effect. One can only hope that they give a strong weighting to LRIC or BAK though. And regarding Talk, of course it's something that didn't already exist in the market. The option to bolt on 200 anytime minutes to anyone on the Vodafone network for $12 per month for Vodafone Prepay customers... with no other monthly fees payable? Sure seems like a new offer to me? If there's any confusion regarding whether or not the "Talk" plan coupled with very high MTRs is anticompetitive, the recent submission by Rod Inglis from Woosh was spot on the mark. As he correctly notes; $12 per month buys a Vodafone Prepay customer 6c per minute calling. Tens of thousands and hundreds of thousands of dollars a month buys a competitor 15c to 19c per minute. Is this fair? No, it's anticompetitive and would be illegal in most developed countries. For Talk not to be anticompetitive, MTRs need to be circa 2.5c per minute. You, Tom, Russell and the gang know how to calculate it - cut the Talk retail rate in half (to allow for origination and termination costs), then minus 18% for retail costs, to give you a wholesale MTR rate. Oh that's right - last time I checked you were claiming that the MTR isn't a wholesale rate? Maybe you can clarify for me how it's appropriate for MTRs to be more than double your on-net Talk rate, because the chorus of worldwide opinion from regulators and people in the know suggests it isn't appropriate.


Author's note by sbiddle, on 13-May-2010 15:19

@rhys

What Vodafone introduced was noting new. Plans offering airtime below MTR costs have existed for a number of years. If you read my post from a few weeks ago you see comparisions to Telecom offering calls of up to 60 mins from Telecom landlines to Telecom mobiles for $1. If this new offer is anti competitive why have the Commerce Commission not raised issues in the past about these specific plans?

As for "being illegal in other countries" I'd like to know where (except for Turkey) that on-net calling is resatricted, because I'm certainly not aware of any other countries. As the OECD's top telco analyst said, it's now become the norm. MTR's at 2c are not going to stop cheap on-net plans and high off-net calling. They might discourage it and operators will logically have no reason for it, but it won't stop it. It might be seen as anti-competitive but unless you're going to bring in retail price controls it can't be stopped.


Comment by Rhys Smith, on 13-May-2010 15:50

@ sbiddle. $1 for up to 60 mins from a Telecom business landline has it's drawbacks! Monthly landline rental of circa $55+GST, plus 4.55c per min+GST for all local calls. Not to mention that if you call a Telecom mobile for between 2 and 4 minutes you'll pay 25c-30c per minute regardless. Most businesses aren't making 1hr calls to mobiles regularly. Sure, it looks like a great offer, but has a lot of catches. There is no additional fee to get the monthly Talk package with Vodafone, and it's billed minute per minute, not dollar per hour.


Comment by Rhys Smith, on 13-May-2010 16:04

@ sbiddle, another thing, if MTRs drop to 2c per minute, I'm willing to bet you'll see Woosh, Orcon, Slingshot etc offer 10c per minute calls to any mobile (or thereabouts) as well as reasonably priced unlimited bundle deals. 89c per minute on VF or Telecom prepay mobile doesn't look too great when you can call for 10c per min from your landline. It'll then flow on that 2 Degrees, VF and Telecom will need to drop their mobile rates across the board to try to stay competitive. Just my view though.


Comment by johnr, on 13-May-2010 16:21

@Rhys Smith bet they don't or this would kill there ARPU


Comment by Paul Brislen, on 13-May-2010 17:23

@rhys, the process from here is very simple - the Commission now receives submissions, then cross submissions, then issues a final recommendation to the minister. He then accepts it or rejects it or sends it back for more work. Assuming he accepts it then the Commission starts a full STD process. The last one took 18 months - let's assume only a year for this one. The Commission has to establish the cost involved in terminating a call in New Zealand. This is non-trivial. At that point, assuming the Commission continues along the lines of thought it has displayed so far, we could look to see rates of around what we're offering in the Undertakings - arguably, TXT will be worse off because we're offering BAK and the Commission won't go to that point (it will look at cost and then add a margin - around 1c/TXT). So the upshot is that after a year's wrangling, many legal bills and economic arguments, we'll be able to safely safe what it costs (in Commerce Commission terms, not real-world terms) to terminate a call in New Zealand. As Steve has said, on net pricing is not illegal in most countries - in fact, it's welcomed. Virgin offers free calls to on-net numbers in the UK and several other places I'm told. This is a good thing for customers. If MTRs are so anti-competitive, how did Vodafone get started? When we arrived in NZ the MTR was 50c/minute. Somehow we muddled through. Two Degrees already is the most successful launch into a mature market I've ever seen. It took Meteor years to reach 5% market share in Ireland, and yet Two Degrees managed it in less than five months. How many customers will they have in a year's time when this process is concluded? If customers want 200 minutes to Vodafone mobiles we've had the offer in the market for quite some time - our Mega plan offers exactly that. Talk is designed to get people using their mobiles instead of their landlines. It's a landline replacement and as such it's working well. The Commission's assumptions are that 90% of the calls are on-net (VF to VF). This is a number they made up. There's nothing to stop Two Degrees offering a similar plan - we have no magical hold over calls to landlines any more than they do. Already Two Degrees offers special rates to its own members - 2c/TXT - that are well below termination rates. Termination rates are not wholesale rates. I've made this point several times but it seems to get ignored - they are not a wholesale rate. You don't add MTR to margin and get retail rate. MTR is what a telco pays instead of a customer paying. That changes things significantly.


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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
  -Asterisk (incl PiaF, FreePBX, Elastix)
  -Polycom
  -Cisco
  -Linksys
  -Patton
  -Zyxel
  -Snom
  -Sangoma
  -Audiocodes

*Telecommunications/Broadband
  -xDSL deployments
  -WiMAX
  -GSM/WCDMA
  -WiFi

*Structured cabling
  -Home/office cabling
  -Phone & Data

*Computer networking
  -Mikrotik hardware
  -WAN/LAN solutions

*Wireless solutions
  -Motel/Hotel hotspot deployments
  -Outdoor wireless deployments, both small and large scale
  -Temporary wireless deployments
   
*CCTV solutions
  -Analogue and IP

I'm an #avgeek who loves to travel the world (preferably in seat 1A) and stay in nice hotels.


+My views do no represent my employer. I'm sure they'll be happy to give their own if you ask them.


You can contact me here or by email at stevenbiddle@gmail.com

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