EC plan to harmonize mobile termination

The European Commission (EC) recently outlined proposals for a significant departure from the way in which mobile call termination is currently regulated, with the aim of harmonizing the way wholesale charges are calculated.

By 2012 the EC wants termination rates to be based on a bottom-up long-run incremental cost (LRIC) cost model and to be symmetrical between operators. This shift in methodology represents a significant threat to the current level of mobile termination rates in Europe and the revenues operators get from them.

The EC's desire to create a common methodology stems from the problem of inconsistencies. Between the 27 member states of the EU, mobile termination charges vary wildly. According to our recently published interconnect benchmarks, it costs as little as €0.02 per (3.146 cents) minute in Cyprus to terminate a call whereas in Bulgaria it can cost as much €0.18 per minute. The EC believes such variations cannot be explained by national circumstances alone and rather are due to the way the costing methodology is implemented. To achieve more consistency the EC has detailed which costs can and can't be recovered when terminating a call.

Arguably it will be the new entrants that feel most of the pain. Currently many enjoy a higher call termination rate due to the relatively small volume of traffic terminated and their possible unequal spectrum allocation.

However, the EC believes these rate differentials have been enjoyed for too long and are not encouraging the new entrants to become efficient. It argues that as spectrum trading becomes possible late market entrants are in a position to obtain more/better spectrum.

To make such a statement may be premature, however. While in the long term spectrum trading could allow a rebalance, we have yet to see any significant activity either in the quantity or quality of spectrum being traded. In addition, those operators in possession of prime spectrum would have a strong incentive to hold onto it if it leaves them better placed than their competitors.

Although not dealt with explicitly in this consultation, there has also been a lot of news about a movement away from the current system of mobile termination to "bill and keep". In our view, given the current high level of termination charges, it is unlikely that this will happen anytime soon.

Rather, these proposals from the EC should be seen as an attempt to first level the playing field so that operators are in a position in three to five years' time that will allow them to decide if they would prefer such a system. Such a decision can't come from the EC.

Once operators have had time to fully digest the proposals and their implications, you can expect strong lobbying to commence. Given the style we have become used to from Viviane Reding (EC commissioner for telecoms), there is almost certainly room for compromise. It is now up to the operators to find those points on which she is prepared to concede; they have until 3 September 2008.

Matthew Howett, Analyst

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