Ofcom turns guns on mobile phones sector

Watchdog tells operators to slash their charges to other networks

The communications watchdog has ordered mobile operators to slash their termination rates in an attempt to make calls cheaper for consumers.

The largest operators were shocked by the size of the proposed cuts, which will cost them billions of pounds, and warned that customers would lose out in the longer term.

When a mobile call is received from a landline or mobile on a different network, the operator will charge theirs; a practice that is worth about £2bn a year.

That fee is referred to in the industry as the Mobile Termination Rate, and is currently charged at between 4.3p and 4.6p for every minute of the call.

Ofcom yesterday recommended that wholesale fees be cut to 0.5p over the next four years. "As rates fall and operators adapt, consumers will benefit from cheaper calls and competition in both the UK fixed telecoms and mobile markets," a spokeswoman said.

The largest operators had expected costs to fall no lower than 1.5p. Orange was yesterday celebrating the official completion of its merger with T-Mobile, but the champagne went flat when they saw Ofcom's proposed cuts.

A spokesman for Orange called it "a backward step for Britain" and warned that consumers may not be the winner. He said: "If these proposals come into force, the way our consumers currently buy, use and enjoy their mobiles may be forced to radically change."

Operators could stop subsidising handsets and customers may have to pay to receive calls. The spokesman warned that network investment and the roll-out of services like 4G could be stalled by the move. "Whilst we are both disappointed and shocked at Ofcom, it is clear from their latest proposals that they have largely ignored our concerns," he added.

Vodafone added: "A cut of this magnitude deters future investment, makes it less likely that the UK will continue to lead in mobile communications and is at odds with the Government's vision of a Digital Britain."

One analyst said a consequence of the new rules is that terms for pre-paid customers may change for the worse. Almost two-thirds of mobile users in the UK are on pre-pay and Morten Singleton, an analyst at Collins Stewart, said prices were likely to rise.

"As a receiver of calls the pre-paid customers generated quite decent revenue from the mobile termination rates alone. With these rates finally coming down to a level more commensurate with the costs of providing the service operators will have to reassess the profitability of their prepaid customer base."

Ofcom last set termination rates in 2007, and by March next year costs will be down a quarter. The latest proposals will come into force next year, and come down to 0.5p by 2015.

Yesterday's announcement was hailed as a victory by companies, including Three and BT, who had strongly campaigned to "terminate the rate". The campaign's petition received 135,000 signatures, whie 262 MPs signed the early-day motion. Kevin Russell, Three's chief executive, said: "Low mobile termination rates are great news for the UK consumer. This change is overdue and we call on Ofcom to bring it in as soon as possible."

John Petter, BT Consumer's managing director, agreed as the termination fees currently generate £750m a year in extra cost, saying "customers will see the benefit". However, the telecoms provider was disappointed the lowest charge would not be brought in straight away. Ofcom also said it was to reduce the time needed for consumers to switch their numbers over from one mobile operator to another. It hopes to bring the time down from two days to one.