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)






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Steve Biddle
Wellington
New Zealand


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


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