EC's mobile termination rate plan has big implications

On 7 May 2009, the EU Commission issued a recommendation on termination rate regulation, which can be found here.

European regulators will have to take utmost account of this document. While it mostly retains and formalises current best practice, there remain a number of points on which the recommendation diverges from past precedents, notably in its choice of considering termination traffic as a "small increment", and its explicit rejection of common cost recovery from termination rates.

Although these changes are obscure to non-specialists, they will have a significant impact on mobile termination rates (payments made by one operator to have the call terminated on another operator’s network). Due to growth in data traffic, termination rates would have fallen over the next few years, but the recommended change will cause significant reductions in termination rates to below the average costs of carrying calls.

This is not a quick win for the EC or consumers, because cutting termination rates does not directly cause a fall in prices for mobile calls. Indeed, the loss of net revenue from incoming fixed calls will force mobile operators to recover more of their costs from their own retail subscribers (or suffer reduced profits), which is likely to have a complex impact on the competitive retail market for fixed and mobile voice calls.

The most significant effects will be a reduction in the price of fixed-to-mobile calls (potentially leading to the inclusion of mobile calls in fixed, flat-fee offers), increased competitiveness of later entrants with significant traffic asymmetries, further offers of  mobile contract tariff plans with large bundles of calls, and changes in the structure of prepay pricing (for example, faster voucher expiry and minimum consumption levels).

In other words, while headline mobile prices might not rise, consumers may end up paying more for mobile service (and less for fixed-line service) as a result.

The Commission's view is that we now live in the best of all possible worlds, "The bottom line is, whatever system evolves as a result of lower mobile termination rates, consumers in Europe will be substantially better off than today."

Our view differs. There will be winners and losers, and quite possibly some unexpected side effects, such as new forms of tariff arbitrage, or disruption to established resale businesses such as MVNOs.