Call charge ruling set to pile on the agony for struggling mmO2

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MmO 2, the mobile phone operator, could see its losses rise by almost £100m a year due to a competition probe.

MmO 2, the mobile phone operator, could see its losses rise by almost £100m a year due to a competition probe.

The Competition Commission will next month rule on a year-long investigation into how much mobile phone operators charge customers. While the result is still confidential, it is widely expected to force the companies to cut call charges between networks by up to 15 per cent, minus retail inflation.

According to Investec Securities, this would result in a £96m reduction in mmO 2's profits over four years and a £240m fall in revenues.

Such a ruling would hammer mmO 2's shares, which have fallen 45 per cent this year amid concerns that the company lacks the scale to compete against Vodafone. In the year to 31 March 2002, mmO 2, run by Peter Erskine, made a pre-tax loss of £873m. Investec believes that of the four main mobile phone operators, mmO 2 is the most exposed to a Competition Commission ruling because of its reliance on the UK market.

Christian Maher, a telecoms analyst at Investec, said: "We believe the Competition Commission will implement a worse outcome on the mobile operators than the stock market expects... We believe investors are underestimating the regulatory threat posed to O 2 in the UK."

The Competition Commission believes forced price cuts are necessary because mobile phone companies are using abnormally high call rates to fund generous subsidies on handsets.

If charges are enforced, the mobile operators have warned that other tariffs may have to go up to compensate. MmO 2 is understood to be considering raising the cost of its pre-paid mobile packages. Mr Maher said it might also consider actively disconnecting some lower-spending customers. Other operators are looking at scaling back their investment in 3G, the new mobile phone technology that will offer high-speed internet access.

Trevor Brignall, a business development director at Cap Gemini Ernst & Young, said: "The investment the operators made in the 3G licences was based on the economic conditions of the time. If changes are now made to the regulatory conditions, then the operators will have to review their business models." Most operators have already delayed their 3G rollout until mid- to late 2003 over fears that the technology is not yet up to scratch. There are also concerns that a tough ruling from the Competition Commission may also hit mobile phone retailers, such as Carphone Warehouse and Phones 4u.

The Competition Commission investigation has caused widespread anger in the mobile phone industry. The UK is one of the most competitive markets, with mmO 2, Vodafone, Orange and T-Mobile. In the new year they will be joined by Hutchison, which is to launch 3G services.

One senior mobile industry source, who asked not be identified, said that enforced price reductions would actually reduce competition as Vodafone, the biggest operator, would be able to absorb the costs more easily than its rivals.