Vodafone undertaking proposal: zero rate SMS, voice cut by two thirds

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#284584 22-Dec-2009 11:59

I don't know whether "national" means the same thing as "nationwide" or not.

Could do... but could well be they want one person to lead the team that designs cellsites for their entire NZ network.

Their next step would presumably be to upgrade everything to 3G and offer data but that's not a cheap exercise. As I said both Vodafone and Telecom paid about $500m each to build 3G out to 97% coverage. That's just capital expenditure as well, and doesn't include operational spend (eg wages, marketing and contractors etc).

Speaking as an observer with no particular inside information...

Paul Brislen
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ajw

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#284588 22-Dec-2009 12:08

PaulBrislen: I don't know whether "national" means the same thing as "nationwide" or not.

Could do... but could well be they want one person to lead the team that designs cellsites for their entire NZ network.

Their next step would presumably be to upgrade everything to 3G and offer data but that's not a cheap exercise. As I said both Vodafone and Telecom paid about $500m each to build 3G out to 97% coverage. That's just capital expenditure as well, and doesn't include operational spend (eg wages, marketing and contractors etc).

Speaking as an observer with no particular inside information...

They obviously have a business case. Depending on the frequency bands being used it would take about 1350 sites to provide nationwide coverage.

spronkey

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#284654 22-Dec-2009 16:24

PaulBrislen: @spronkey, here's how it works:

Customer A makes no calls at all from her phone. She tops up once a year to the minimum ($20) and her phone remains active. She receives 100 calls a year which last (for arguments sake) for 100 minutes. All of those calls (again for simplicity) come from off net, so this customer "earns" 100 minutes at (currently) 15c/minute (so $15). Total earn for the year, $35.

Remove that 15c/minute entirely (bill and keep) and the customer's value drops by almost half.

That's as extreme an example as I can think up but imagine applying that model over a large percentage of your customer base and you'll see the economic impact.

This may be a question you can't answer for one or more reasons, but how many of your customers receive more than they call or sms, and what distribution is off vs on-net?

Because it seems to me like you've left off the other side of this equation completely. Assuming that your incoming vs outgoing is 50/50 on vs off-net, and your customer's outgoing calls are market share split, e.g. slightly over half are within your network (in which case termination doesn't apply), and the rest are incoming, a termination rate drop would do both what you describe above, and also reduce the amount you have to pay other networks for termination.

So in effect, Customer B makes 100 minutes of calls per year off-net, previously costing you 15c/minute, completely nullifying the effects of the loss of off-net income from Customer A.

Or am I missing something?

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#284673 22-Dec-2009 17:50

@spronkey, no idea sorry... the mix of customers is ever changing and so I couldn't begin to hazard a guess.

But yes, in effect if Customer B makes lots of calls and they're all off net then it will balance out Customer A.

But our mix as it stands is 70% prepay so I'm going to say a significant of those customers aren't B type, they're more like A. I do know that most customers call a handful of customers repeatedly, rather than a wide group of customers (it's the same world wide - most people call the same half dozen numbers or so over and over again).

But the point is there will be a chunk of customers who cease to be profitable because of the dropping of MTRs, so in answer to the original poster's question (paraphrased as: what impact will MTRs have on retail customers) you cannot conclude that prices will automatically go down because of the reduction of MTRs.

The Commission's only cost model says that costs will go up for some customers but that negative will be outweighed by the benefit to fixed line customers who will, naturally, receive 85% pass through rising to 100% out of the goodness of the fixed line operators' hearts. Should pass through drop below 65%, however, that benefit will vanish.

Cheers

Paul

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Vodafone

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timestyles

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#284719 22-Dec-2009 21:44

First, I haven't read all the replies on this thread. My opinion is that mobile termination rates have no real effect on cellphone pricing, an example being that basically prepay charges haven't dropped by more than about 10% in the last 10 years with the exception of Bestmates (which MTR doesn't relate to) and $10 texting. MTR's have dropped from at least 35c/min to the current about 15c/min for between Telecom and Vodafone. Competition drives cellphone pricing, you only have to look at 2 degrees' pricing to see that. Also, VF is highly likely to drop prepay pricing in the next year to stem the movement of customers leaving.

What MTR's do is: reduce competition, ie it's been about 15 years since the previous cellphone company (Bellsouth) started, I'm sure that if MTR's were zero then 2 degrees would have started a bit earlier although I have no way of proving that, of course. They also pay for network use when there is asymmetrical amounts of minutes going in and out.

What I don't understand is why rates are still dropping. Telecom's network has been around for 20 years, Vodafone's has been here 15 years. I really find it hard to believe that natural time based improvements are still occurring, My only conclusion is that MTR's are artificially kept high to keep competition from happening, and to stifle competition when it occurs.

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#284981 24-Dec-2009 11:36

@timestyles, you say "Telecom's network has been around for 20 years, Vodafone's has been here 15 years. I really find it hard to believe that natural time based improvements are still occurring" which seems to preclude any on-going investment in the networks whatsoever.

And yet Vodafone has invested continually for the past 10 years to build on top of an existing infrastructure which, to this day, is still being upgraded. Telecom (and I don't speak for Telecom of course) has chosen to dump its previous networks rather than upgrade them but even so is investing heavily in the sector.

So I'm not sure how you can conclude that MTRs are all about reducing investment or somehow related to blocking competition.

This is a two-sided market. The other example of that which I use is the newspaper industry. Newspapers earn their revenue from two sources: the subscribers (or cover price) and advertisers. Neither has a direct impact on the price paid for the other, yet both are required to make the business work. Just ask any publisher that has either cut advertising income (due to a massive reduction in advertisers' spending - down 25% year on year I hear) or cut subscription price (due to putting all the content online and giving it away for free).

MTRs are akin to the advertising rate in that industry - it's the price someone else pays rather than the direct user of the product produced (newspapers versus cellphone services).

If you think a 25% reduction in advertising spend is harsh, and it is, imagine what a 100% reduction for TXT messaging will do and then add in the reduction in MTRs for voice (down from 15c/minute today to a proposed 6c/min in a few years' time).

This isn't about blocking competition. Far from it - Vodafone in particular has gone out of its way to set up a wholesale industry that simply didn't exist two years ago. MVNOs are now able to access bulk minutes and data and build their own plans - expect to see big things from TelstraClear, CallPlus et al in the coming year. That's competition delivering results, not regulation.

Cheers

Paul

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http://forum.vodafone.co.nz

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#285015 24-Dec-2009 16:40

PaulBrislen: @timestyles, you say "Telecom's network has been around for 20 years, Vodafone's has been here 15 years. I really find it hard to believe that natural time based improvements are still occurring" which seems to preclude any on-going investment in the networks whatsoever.

And yet Vodafone has invested continually for the past 10 years to build on top of an existing infrastructure which, to this day, is still being upgraded. Telecom (and I don't speak for Telecom of course) has chosen to dump its previous networks rather than upgrade them but even so is investing heavily in the sector.

So I'm not sure how you can conclude that MTRs are all about reducing investment or somehow related to blocking competition.

This is a two-sided market. The other example of that which I use is the newspaper industry. Newspapers earn their revenue from two sources: the subscribers (or cover price) and advertisers. Neither has a direct impact on the price paid for the other, yet both are required to make the business work. Just ask any publisher that has either cut advertising income (due to a massive reduction in advertisers' spending - down 25% year on year I hear) or cut subscription price (due to putting all the content online and giving it away for free).

MTRs are akin to the advertising rate in that industry - it's the price someone else pays rather than the direct user of the product produced (newspapers versus cellphone services).

If you think a 25% reduction in advertising spend is harsh, and it is, imagine what a 100% reduction for TXT messaging will do and then add in the reduction in MTRs for voice (down from 15c/minute today to a proposed 6c/min in a few years' time).

This isn't about blocking competition. Far from it - Vodafone in particular has gone out of its way to set up a wholesale industry that simply didn't exist two years ago. MVNOs are now able to access bulk minutes and data and build their own plans - expect to see big things from TelstraClear, CallPlus et al in the coming year. That's competition delivering results, not regulation.

Cheers

Paul

And I note that MTR's will be reduced to 0.04 Euro per minute throughout Europe by December 2012 as a result of regulation.

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#285020 24-Dec-2009 16:57

I think you'll find that's a recommendation from the EU regulator and not something that is being implemented by any country in particular.

In Europe the national regulators are required to take on board what the EU regulator says, but they're not required to follow her lead to the letter.

The European Regulators Group monitors such things (it's made up of regulators from Europe, oddly enough) and its latest report is on this list - about the fifth one down.

EDIT: Incidentally, the mid point (0.06EU) is about the same as 14c NZ which puts NZ around the middle of the pack as far as EU countries is concerned today, before we drop the rates dramatically. The OECD prefers a 10-year weighted average for currency conversion, but that'll give you some idea of where we sit today. Currently MTR in NZ is 15c, going to 14.4 in April with 100% passthrough to consumers, however that will all fall away if the new regime is accepted.

cheers

Paul

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#285022 24-Dec-2009 17:06

ajw:
PaulBrislen: @timestyles, you say "Telecom's network has been around for 20 years, Vodafone's has been here 15 years. I really find it hard to believe that natural time based improvements are still occurring" which seems to preclude any on-going investment in the networks whatsoever.

And yet Vodafone has invested continually for the past 10 years to build on top of an existing infrastructure which, to this day, is still being upgraded. Telecom (and I don't speak for Telecom of course) has chosen to dump its previous networks rather than upgrade them but even so is investing heavily in the sector.

So I'm not sure how you can conclude that MTRs are all about reducing investment or somehow related to blocking competition.

This is a two-sided market. The other example of that which I use is the newspaper industry. Newspapers earn their revenue from two sources: the subscribers (or cover price) and advertisers. Neither has a direct impact on the price paid for the other, yet both are required to make the business work. Just ask any publisher that has either cut advertising income (due to a massive reduction in advertisers' spending - down 25% year on year I hear) or cut subscription price (due to putting all the content online and giving it away for free).

MTRs are akin to the advertising rate in that industry - it's the price someone else pays rather than the direct user of the product produced (newspapers versus cellphone services).

If you think a 25% reduction in advertising spend is harsh, and it is, imagine what a 100% reduction for TXT messaging will do and then add in the reduction in MTRs for voice (down from 15c/minute today to a proposed 6c/min in a few years' time).

This isn't about blocking competition. Far from it - Vodafone in particular has gone out of its way to set up a wholesale industry that simply didn't exist two years ago. MVNOs are now able to access bulk minutes and data and build their own plans - expect to see big things from TelstraClear, CallPlus et al in the coming year. That's competition delivering results, not regulation.

Cheers

Paul

And I note that MTR's will be reduced to 0.04 Euro per minute throughout Europe by December 2012 as a result of regulation.

I certainly haven't been aware of the EU mandating a EU wide MTR rate - do you have a source for this?

One thing you do need to factor in as well is that wholesale interconnects in the EU have in some cases moved to minute + minute billing. In the past there were some operators offering minute + second billing or second + second billing and some with 30s blocks or 30s and then per second. The offer here in NZ is per second and you have to realise there are significant differences between the three different pricing models so they cant directly be compared.

Vodafone actually submitted a cheaper rate of NZ 3cpm in their earlier submission to the Commerce Commission but they indicated this would never be accepted because it was a minute + minute rate whereas their newer joint proposal with Telecom is a second + second price with no minimum.

ajw

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#285023 24-Dec-2009 17:16

sbiddle:
ajw:
PaulBrislen: @timestyles, you say "Telecom's network has been around for 20 years, Vodafone's has been here 15 years. I really find it hard to believe that natural time based improvements are still occurring" which seems to preclude any on-going investment in the networks whatsoever.

And yet Vodafone has invested continually for the past 10 years to build on top of an existing infrastructure which, to this day, is still being upgraded. Telecom (and I don't speak for Telecom of course) has chosen to dump its previous networks rather than upgrade them but even so is investing heavily in the sector.

So I'm not sure how you can conclude that MTRs are all about reducing investment or somehow related to blocking competition.

This is a two-sided market. The other example of that which I use is the newspaper industry. Newspapers earn their revenue from two sources: the subscribers (or cover price) and advertisers. Neither has a direct impact on the price paid for the other, yet both are required to make the business work. Just ask any publisher that has either cut advertising income (due to a massive reduction in advertisers' spending - down 25% year on year I hear) or cut subscription price (due to putting all the content online and giving it away for free).

MTRs are akin to the advertising rate in that industry - it's the price someone else pays rather than the direct user of the product produced (newspapers versus cellphone services).

If you think a 25% reduction in advertising spend is harsh, and it is, imagine what a 100% reduction for TXT messaging will do and then add in the reduction in MTRs for voice (down from 15c/minute today to a proposed 6c/min in a few years' time).

This isn't about blocking competition. Far from it - Vodafone in particular has gone out of its way to set up a wholesale industry that simply didn't exist two years ago. MVNOs are now able to access bulk minutes and data and build their own plans - expect to see big things from TelstraClear, CallPlus et al in the coming year. That's competition delivering results, not regulation.

Cheers

Paul

And I note that MTR's will be reduced to 0.04 Euro per minute throughout Europe by December 2012 as a result of regulation.

I certainly haven't been aware of the EU mandating a EU wide MTR rate - do you have a source for this?

One thing you do need to factor in as well is that wholesale interconnects in the EU have in some cases moved to minute + minute billing. In the past there were some operators offering minute + second billing or second + second billing and some with 30s blocks or 30s and then per second. The offer here in NZ is per second and you have to realise there are significant differences between the three different pricing models so they cant directly be compared.

Vodafone actually submitted a cheaper rate of NZ 3cpm in their earlier submission to the Commerce Commission but they indicated this would never be accepted because it was a minute + minute rate whereas their newer joint proposal with Telecom is a second + second price with no minimum.

Getting rid of distortions of competition between mobile and fixed
operators
There is also an important distortion of competition between mobile and fixed
operators
Currently mobile termination rates are also typically 10 times higher than fixed
termination, with fixed termination rates ranging on average less than 1 eurocent
per minute and mobile termination rates ranging to 8.55 eurocents per minute.
High mobile termination rates are thus an indirect subsidy for the larger mobile
operators – a subsidy that has to be paid by all fixed operators, by smaller mobile
operators and by all consumers.
While there may have been a greater tolerance of high mobile termination rates
when mobile networks were first being rolled out across Europe, they can no longer
be justified today, at this advanced stage of mobile market development.
If you just look at this table (slide 4), you will see that Europe is the world leader in
mobile penetration, so indeed mobile market development does not need to be
artificially and indirectly subsidised by fixed operators.
The regulatory approach recommended by the Commission today
What are we now doing concretely in today's Recommendation?
In today's Recommendation, the Commission sets out clear consistent principles
for national regulators to follow when setting a fair price for terminating calls on
fixed and mobile networks. The recommended methodology is a Long Run
Incremental Costing model (LRIC). This methodology ensures that termination
rates will be based on the cost of an efficient operator.
The objective of this approach is to mimic a competitive market situation. It
identifies the costs which an efficient operator would face in providing the
wholesale service to third parties and helps to identify the price that would prevail
under competitive circumstances. At the same time, it will still allow operators to
recover the cost of terminating calls.
We are confident that bringing mobile termination rates closer to efficient costs in
all Member States will bring about a number of beneficial effects for the competitive
process, for investment and for consumers. This will:
- Lead to greater consistency and regulatory transparency further consolidating
the single telecoms market;
- Reduce inefficient transfers from smaller mobile operators to their larger, more
established mobile competitors;
- End the fixed-mobile subsidy and create a more level playing field and
enhanced competition between fixed and mobile operators;
- Support important pro-consumer investments, such as high-speed broadband
networks, or in developing converged fixed-mobile offerings;
- Result in new, innovative services and lower prices for European consumers;
and
- Help unlock additional revenue opportunities for EU telecoms operators through
increasing customer demand.
5
Timeline for the phasing in of the LRIC model
What is the timeline for phasing in the new regulatory approach recommended by
the European Commission today?
According to the existing EU telecoms rules, national telecoms regulators are
required to take "utmost account" of the Commission's Recommendation. This
implies that regulators will have to bring termination rates in their countries down to
the level of efficient cost, starting today and completing this task by the end of
2012.
In setting this deadline we took into careful consideration views expressed by
various stakeholders, representative bodies and by the Member States during the
consultation process. We believe that this transition period represents an
appropriate balance between allowing regulators and operators time to adapt to the
recommended costing approach, whilst ensuring that consumer benefits are
delivered as soon as possible.
However, we also recognise that some smaller regulators may need an additional
period to prepare the recommended cost model. Therefore, the Recommendation
incorporates added flexibility for regulators with limited resources to use alternative
approaches for a limited further period (normally until 1 July 2014). This does not
however compromise the objectives of the Recommendation as these methods
must still result in outcomes consistent with the Recommendation and with a
competitive market structure.
In short, smaller regulators (like the Maltese one) may temporarily still use
another model, but the economic result regarding the level of the regulated
rates must be the same by the end of 2012.
According to our Impact Assessment this would lead to a level of mobile
termination rates across the EU between 1.5 and 3 eurocents by 2012.
We firmly trust that the new European Telecoms Authority BEREC (that should
replace today's loose European Regulators Group in the course of this year) will
provide the appropriate framework within which regulators can exchange their cost
modelling experience and expertise and provide the necessary assistance for
smaller regulators to implement the recommended methodology.
I would like to thank the services of DG INFSO who have done a great job in
preparing today's Commission Recommendation. I will pass the floor now to Neelie
who has helped me tremendously and collegially to get this important new

VFNZPaulBrislen

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#285025 24-Dec-2009 17:31

Couple of points there:

@SBiddle - almost right. We proposed minute plus second billing at 3c/min... the Commission asked us to move to second plus second and fall into line with Telecom, which we've done. For a like to like we're going to be looking at what would have been about 4.something cents per minute under a minute plus second billing regime. But hey, that's what the Commission wanted.

@ajw, I have trouble following your post (sorry, it's the formatting) but I think you're saying that fixed rates are different from mobile rates... not sure if that's true. We've studiously avoided that in NZ because it leads to distortions. France, for example, does have a different rate for mobile versus fixed termination and that's lead to just about all calls in France being routed through a "mobile" termination point (roughly 80% of all French traffic is now classified as mobile) simply to get the better rate. This makes a nonsense of the modelling among other things. We've stuck to matching both rates as it's easier for all concerned.

The point is that NZ rates today are in line with European rates and will shortly be moving to a rate ahead of where most European regulators are happy to go. That's a risky model when we rely on European money to invest in the local networks... something the Commission needs to consider when setting rates at or below competitive markets around the world.

cheers

Paul

Paul Brislen
Head of Corporate Communications
Vodafone

http://forum.vodafone.co.nz

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ajw

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#285026 24-Dec-2009 17:37

PaulBrislen: Couple of points there:

@SBiddle - almost right. We proposed minute plus second billing at 3c/min... the Commission asked us to move to second plus second and fall into line with Telecom, which we've done. For a like to like we're going to be looking at what would have been about 4.something cents per minute under a minute plus second billing regime. But hey, that's what the Commission wanted.

@ajw, I have trouble following your post (sorry, it's the formatting) but I think you're saying that fixed rates are different from mobile rates... not sure if that's true. We've studiously avoided that in NZ because it leads to distortions. France, for example, does have a different rate for mobile versus fixed termination and that's lead to just about all calls in France being routed through a "mobile" termination point (roughly 80% of all French traffic is now classified as mobile) simply to get the better rate. This makes a nonsense of the modelling among other things. We've stuck to matching both rates as it's easier for all concerned.

The point is that NZ rates today are in line with European rates and will shortly be moving to a rate ahead of where most European regulators are happy to go. That's a risky model when we rely on European money to invest in the local networks... something the Commission needs to consider when setting rates at or below competitive markets around the world.

cheers

Paul

The message is still the same.

According to our Impact Assessment this would lead to a level of mobile
termination rates across the EU between 1.5 and 3 eurocents by 2012.

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#285027 24-Dec-2009 17:40

And 3Eu/c is what, about 6cNZ... which is not out of line with what we're proposing in our Undertaking.

Paul Brislen
Head of Corporate Communications
Vodafone

http://forum.vodafone.co.nz

ajw

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#285028 24-Dec-2009 17:47

PaulBrislen: And 3Eu/c is what, about 6cNZ... which is not out of line with what we're proposing in our Undertaking.

And the Commerce Commission recommended a voice termination rate of 7.5cents and second plus second billing in Sept- October 2009.

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#285031 24-Dec-2009 18:02

Again, that's a draft and it has yet to make its final recommendation and our offer beats those rates.

Not sure what your point is here. Are you saying we should adopt the regulated approach without going through the process? Or that the Commission's rate is better than the Undertakings?

Paul Brislen
Head of Corporate Communications
Vodafone

http://forum.vodafone.co.nz

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