Yesterday was an interesting day in the mobile world in New Zealand. Along with yet another outage affecting the XT network, the Commerce Commission submitted their findings to the Communications Minister in relation to Mobile Termination Rates (MTR). The Commission in a 2 to 1 majority recommended to Communications Minister Steven Joyce that an aligned undertaking from both Telecom and Vodafone be accepted rather than the Commission being forced to intervene in the market and force the regulation of wholesale interconnection pricing.
The response from those with opposing viewpoints was interesting
Today is a very disappointing day for New Zealand mobile users. After much delay, the Commerce Commission appears to have squandered a golden opportunity to finally bring New Zealand mobile prices into line with the rest of the developed world. New Zealand consumers suffer with some of the highest mobile prices in the world. The Commission’s recommendation to leave the decision on access pricing up to the incumbents, Vodafone and Telecom, will mean this burden on New Zealanders continues for the foreseeable future.
The response from 2degrees was as expected. They are a company that has spent most of the last decade complaining about the regulatory environment in New Zealand rather than getting on with building a network. In August last year 2degrees finally launched their network and by their own admissions are doing amazingly well. Last week they announced that they had signed up 206,000 active customers, a figure that was well ahead of expectations, and also announced that for the first time people in New Zealand are now able to access prepaid calling rates at prices well below the OECD average. They are also claiming ARPU (average revenue per user) in excess of $10, a figure that is higher than many Telecom prepaid customers.
The question has to be asked as to why 2degrees seem to have significant issues with the Commerce Commission decision. Right now their business is booming and yet they see regulation of the industry as being essential to compete. One really has to wonder why this is the case.
The Drop the rate, mate! Lobby group (that is heavily backed by 2degrees and several unions) went even further accusing Commerce Commission members of doing “an about face”
Two members of the Commerce Commission have done an about-face, after repeated voluntary undertakings from the big telcos – while another, Anita Mazzoleni, has sided with consumers, the Drop the Rate, Mate! campaign said today.
The Drop the Rate, Mate! Campaign was formed to “to demand lower mobile termination rates in line with the costs of connecting calls and texts”. They have never explicitly explained exactly what they mean by this statement and where they see pricing in the market, but when a campaign is powered by nothing but hot air this isn’t surprising. One would presume they would be at least partly happy with the Commission’s announcement, SMS rates are potentially going to be cut to under cost and voice revenue cut to levels that are in line with costs based on some pricing models. Exactly what “about face” they are talking about is unknown, for months now the Commerce Commission have been actively encouraging a joint aligned undertaking from all three carriers that would deliver pricing that was acceptable to the Commission in preference to the Commission forcing regulation of pricing. To say that two members of the Commerce Commission have done an “about face” and no longer care about consumers is nothing but rubbish. The only “about face” I’m aware of in the whole MTR saga was the decision in December by 2degrees to throw their toys out of the cot and withdraw all previous undertakings that they had submitted to the Commerce Commission leaving them with no offer on the table.
I’ve been accused of working for both Vodafone and Telecom in past blog posts on the MTR issue but want to make it perfectly clear I no ties with either company. The telecommunications sector as a whole is of great interest to me and watching the MTR saga drag out over the past year has been fascinating. The rates charged by some carriers in New Zealand for fixed line to mobile and for mobile to mobile calls are expensive, what people need to remember however is that the MTR issue is a discussion of pricing of wholesale traffic interconnection, it isn’t a discussion on retail pricing. The Commerce Commission have no plans to regulate retail pricing and believe that pricing will fall due to competition in the marketplace due to lower termination rates. Whether this occurs is still to be seen as there is no evidence anywhere in the world that can draw any established relationships between wholesale interconnection rates and retail pricing. There are countries with high interconnection rates and low calling costs and countries with low interconnection rates and high calling costs.
What offer is on the table?
Both Telecom and Vodafone have said that from the 1st October 2010 they will drop SMS interconnection pricing to 0c and adopt a hybrid Bill and Keep pricing model. This hybrid pricing model means that Vodafone and Telecom will not charge each other for delivering SMS messages to the other network providing traffic levels remain even. If an imbalance in traffic occurs at a level between 7% and 12% then a charge of 2c per message will apply, and for an imbalance of greater than 12% a 4c per message charge will apply. The reason for the hybrid system and not a true bill and keep solution is primarily at attempt to stop the proliferation of unsolicited SMS messages, in a true BAK model with no restrictions it’s possible for a network to actively sign up users whose only intention is to deliver unsolicited SMS messages to users on other networks. It’s worth noting that current SMS traffic levels between networks are all reasonably even as SMS is a two way medium – if somebody sends you a SMS, move often than not you will send a reply.
Both networks will drop voice interconnection rates for mobile to mobile and fixed line to mobile to 12c per minute from the 1st October 2010, with theis rate following a glide path dropping on the 1st January every year until it reaches 6c per minute on the 1st January 2014. All interconnection costs will be billed per second.
So what did 2degrees want?
2degrees have been pushing for rates to go even lower. Their last undertaking was for a true BAK pricing model for SMS messages (ie no charge even if there was a traffic imbalance), and for voice interconnection rates to be approximately ½ of what both Vodafone and Telecom submitted in their undertakings. Many of their submissions did nothing but complain about the competition rather than offer reasonable solutions and from the outside it seemed like their purpose was to hijack the whole investigation solely for their own motives.
2degrees have a true motive – and that’s the introduction of a true BAK pricing model for mobile in New Zealand. As a newcomer to the market they have the most to gain from BAK – the majority of calls from 2degrees mobile users are off net, this results in 2degrees having to pay Vodafone or Telecom money to interconnect calls. Likewise because the number of inbound calls falls well short they end up in a situation where they are paying other operators more than they are receiving in termination costs. It’s easy to see why 2degrees want BAK, the problem here is that the Commerce Commission were not interested in looking at using BAK as a pricing model for New Zealand. No other country has moved from a CPP (calling party pays) to BAK pricing model for mobile, and such as a move was totally out of scope for the MTR investigation. Exactly what decision 2degrees make now is over to them – they presumably still have the option of joining Vodafone and Telecom and leveraging their agreement, continuing with their current interconnection agreements, or sitting on the sideline with their ratchet making lots of noise while contributing very little.
Right now you have a choice in New Zealand when it comes to mobile. With three networks and a myriad of pricing plans there is plenty to choose from. What is plainly clear is that the wholesale cost of interconnection plays a minor part in determining the retail cost of both fixed to mobile and mobile to mobile calling. It’s possible to pay 23c + GST per minute to call a mobile phone from a Telecom Business line however a Telecom homeline user with no calling plan will pay 63c incl GST for the same call. Up until several years ago the standard Telecom rate for fixed to mobile was 71c per minute, a rate that was set close to 20 years ago when the MTR rate was around 50c per minute. We’ve seen wholesale MTR costs fall by more than 60% in that time but the standard retail price fell by approximately 10%. Likewise a mobile user can currently be paying as low as 25c + GST per minute with per second rounding after the first minute for a voice call using a provider such as Compass Mobile (a MVNO on Vodafone’s network) or can be paying 89c incl GST with calls rounded up to the next minute if you’re on Vodafone Prepay.
It’s very clear that wholesale MTR costs are not the cause of high mobile pricing in New Zealand, the problem is one of retail pricing. As MTR costs have fallen over time retail costs have not necessarily followed due to a lack of true competition between the two mobile operators in New Zealand. The Commerce Commission investigation had good cause and the current offerings on the table from both Telecom and Vodafone will mean significant drops in inbound revenue for both operators. As to whether it will mean cheaper calling prices for New Zealand mobile users is another question entirely, something only time will answer.
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Comment by Stuve, on 24-Feb-2010 12:31
When 2degrees start taking a real chunk out of Vodafone and Telecom MTR wont be as much of an issue. If/when they finally get plans out, I can see them hitting 500,000 connections this year. That will be a huge chunk out of Vodafone and Telecom.
Comment by Tom Chignell, on 24-Feb-2010 15:02
Steve Just a clarification. You say "Both networks will drop voice interconnection rates for mobile to mobile and fixed line to mobile to 12c per minute from the 1st October 2010, with theis rate following a glide path dropping on the 1st January every year until it reaches 6c per minute on the 1st January 2014. After the 1st minute all interconnection costs will be billed per second." Both undertakings have offered to change the call rounding algorithm from what's called "minute plus second" (what you describe here) to "second plus second". So calls of a duration of less than one minute are not rounded up to one minute but to the nearest whole second. This is a big change which is not well understood. There was general consensus at the Commission's conference that for the same per minute price, the minute plus second algorithm will collect 23% more revenue than the second plus second scenario. So moving from 15c (minute plus second) today to 12c (second plus second) is the same as moving to 9.75c (minute plus second). A 35% decrease in price. Hope this helps! Tom
Comment by Tom Chignell, on 24-Feb-2010 15:07
Steve Should have disclosed I am GM Corporate Affairs at Vodafone NZ. Perhaps you knew? Thanks Tom
Comment by wongtop, on 24-Feb-2010 15:25
In answer to the headline question - No.