Mobile giants' £80bn nuisance call

The EU's plan to crack down on the connection charges levied by mobile phone networksthreatens to wipe billions off their bottom lines. By Sarah Arnott

The cost of mobile phone calls could come down by as much as 70 per cent within three years if Brussels' plans for swingeing cuts to the prices mobile operators charge each other go ahead.

The public consultation laun-ched by the European Commission yesterday looking at "termination rates" – the fee that mobile networks levy for putting calls through to their customers from other networks – will run until September.

Rates differ between different countries and different operators. In Cyprus, for example, the average is two eurocents per minute; in Bulgaria, it is 18; in the UK, it is around six. But the savings could be vast. The cost to Europe's consumers could be as much as £80bn over the past decade, according to the European Competitive Telecommunications Association. In the UK alone, BT pays around £1bn every year to put landline calls through to mobile phones, and another £1.5bn washes around between the mobile operators.

Viviane Reding, the EU telecoms commissioner who has already taken on the mobile industry once over voice roaming costs, says there need to be major changes. "Disparate termination rates across the EU and large gaps between fixed and mobile termination rates are serious barriers to achieving a Single European Telecoms market that benefits competition and consumers. Call termination markets in the EU need a regulatory plumber. Over the next three years, I expect greater consistency and co-ordination to bring the costs for mobile phone calls down by around 70 per cent from the current level."

Consumer prices, kept artificially high by the wholesale cost ceiling, are not the only problem. Because termination rates are of most benefit to the largest operators, with the largest networks, they affect the flexibility of the market and discriminate against new entrants. Smaller operators are disadvantaged because there are fewer calls on to their networks, and therefore paying them a fee.

Neelie Kroes, the EU competition commissioner, said: "Truly cost-oriented termination rates will increase competition to the benefit of consumers and will also benefit large parts of the telecoms industry as it is likely to eliminate distortions of competition between fixed and mobile operators. It will also reduce the large sums for call termination which smaller mobile operators have to pay to large operators when they try to compete with the latter with the very popular flat rate offers."

Critics characterise termination rates as an anachronism left over from the mobile industry's early years, when they were designed to help sweeten the expensive and risky creation of a mobile infrastructure in competition with the fixed-line giants. Now the mobile phone companies are giants in their own right and other countries which do not have termination rates, such as the US and Singapore, do not have notably higher call costs or lower usage.

"The way mobile termination rates are being regulated in most European countries leads to rates that are too high and they distort the price of mobile telephony," David Harbord, an economist and director of Market Analysis, said. "This regime has led to distortion and there are examples of alternatives where there are no termination charges and the mobile companies still thrive."

BT and 3, which is the UK's smallest operator, are already waging a campaign for Ofcom to address the issue and have lodged a case with the Competition Commission, claiming the practice is obsolete. A spokeswoman for BT said yesterday: "BT welcomes any move that would bring down the cost of calling mobile phones from fixed phones and stop what the Commission has recognised as a subsidy from fixed phone users to the big mobile companies".

Kevin Russell, the chief executive of 3, said: "There will be a fight over this but there shouldn't be. There is an opportunity for Ofcom to take a stronger stance on what is a really important consumer price issue and a really important competition issue."

But the fight will not only be between the winners and the losers from the current system, but also between Europe and the national regulators. Ofcom already has a programme in place to bring UK suppliers' rates in line – at around 5p per minute – by 2011, and may not be inclined to jump just because Brussels says so. "Ofcom supports a sustainable cut in mobile termination rates and we have already established a reduction in UK rates, going down every year until 2011," a spokeswoman said yesterday. "Regulation should be evidence-based and Ofcom will be looking with interest at the Commission's consultation."

Some of the larger operators were emphatic in their condemnation of the proposals. Hamid Akhavan, the chief executive of Deutsche Telekom, said of Ms Reding's planned 70 per cent cut: "If that is the level, it is significantly below what we expected... and too drastic." But most kept their tongues between their teeth yesterday, contributing little more than slightly barbed observations that it is a matter for local regulators rather than Brussels.

In fact, while the major operators would clearly like to hang on to the largest possible fees for the longest possible time, most acknowledge that the rates have to come down. The debate is about the question of degree. Vodafone, for example, has expressed tentative acceptance of a 40 per cent reduction over three years. Richard Feasey, the director of public policy, said: "We are supportive of some aspects of the proposals – operators are making efficiency gains and as a consequence termination rates could fall. But the fact of the matter is that there are costs involved in running a network and they don't magically disappear and will have to be absorbed somewhere."

In the US, where there are no termination charges and call prices remain low, the money is made elsewhere – through higher handset prices, for example, and fees charged for all in-coming as well as out-going calls. Overall costs are therefore higher and the minimum cost of staying connected to a US mobile network is around €15 per month, whereas in Europe the rate is nearer to €10 per month, according to Vodafone.

Cutting termination costs might bring down prices for the wealthier mobile phone user, whose relatively expensive contract bundle will absorb all the extras. But the less well off will be hit, and those on pay-as-you-go worst of all. Notably, the US has a very small pay-as-you-go market compared with Europe, and a lower proportion of the population with mobile phones as a result. According to a recent Vodafone survey of 3,500 European customers, around 100 million adult mobile users might simply walk away, taking the region's penetration rate down from around 85 per cent today to nearer the US level.

"European use of mobile services continues to grow at 20 per cent a year," Mr Feasey said. "The Commission's proposals might have a much less disruptive impact 10 years from now, when differences between Europe and the US will have narrowed substantially."

It is an argument that is not made only by the major operators. James Barford, from Enders Analysis, said: "It is in the mobile operators' best interests to keep their rates as high as possible – that is just economics, but termination charges are not an extra bit of money that the mobile operators are pocketing – competitive markets don't work that way and there are pluses and minuses to each system. The average cost is lower in the US, but mobile services are more accessible in Europe and the pricing for less wealthy users is better."

'The first time, we felt hijacked'

The thorny issue of termination rates, and who will pay for what if they are scrapped, is not the only point of contention between the European Commission and the mobile phone industry.

Next week, the deadline set by Viviane Reding, the EU telecoms commissioner, on mobile data roaming charges expires, by which time the operators are expected to have made major reductions in the prices charged for data services, such as text messages and internet access, when their customers are abroad.

Some suppliers have made progress. T-Mobile announced last week it was cutting its download charges from £7.50 to £1.50 per megabyte, and that its text-message rate will come down by nearly 40 per cent to 25p. But the prices are still way above the €0.12 (9p) target set by Ms Reding in informal discussions with industry chiefs at the Mobile World Congress event in Barcelona in February. And the Danish government wrote to the commission last week claiming a rate of €0.042 would still leave the operators a healthy profit.

Ms Reding has already caused a storm once over roaming. Last year, she brought in regulations cutting voice-roaming charges across the region by 60 per cent, to the delight of consumers and the annoyance of the operators.

With little progress towards the data target, she may have to resort to regulation again. But some claim the readiness to wield the big stick has been counterproductive. "There was threatening language over voice roaming, so the industry brought prices down and then the commissioner regulated anyway – so the threat now is ... just interpreted as politicking," a source at an operator said. "The first time around, the industry felt hijacked so it may be less willing to move quickly this time."

Sarah Arnott

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