Ofcom's MTR proposal a major threat to revenues

OvumOn 1 April 2010, UK regulator Ofcom announced significant cuts to future mobile termination rates (MTRs) – the fees operators charge each other for connecting calls. Ofcom has proposed to change the methodology for how it calculates the charges to fall in line with a recent EC recommendation aimed at harmonizing these charges across Europe. The result is that MTRs will fall by a whopping 88% on average, from their current average of 4.3 pence per minute (ppm) to just 0.5ppm by 2015. While this is a significant threat to the biggest mobile operators’ revenues, it is welcome news for BT, 3 UK, and the majority of consumers who will enjoy lower retail prices when calling a mobile.
Despite the date of Ofta's announcement, it is no April fool. The regulator wants to get tough on the amount operators charge each other for connecting calls because this represents a price floor in terms of the retail price that is paid by consumers. Consumers are set to be the main beneficiary, and will notice the cost of calling from a BT fixed line to a mobile will fall dramatically over the next four years. This will allow fixed-line operators such as BT to bundle minutes to mobiles within their call packages, which up until now has been prohibitive given the cost. Those that will feel the most pain will be the mobile network operators. These charges account for a not insignificant proportion of their revenues (as much as 15%), and they may look to raise subscription charges to offset this.
The regime after 2015 has yet to be determined, but having the cost of terminating a call in the mobile network at a level similar to in the fixed network will enable operators to choose from a range of alternative charging mechanisms – such as bill and keep, where call termination is priced at zero. Capacity-based interconnect could be another option, which becomes a lot more relevant in a world where data is king and the minute is no longer a relevant cost driver.

Other European NRAs likely to follow suit

Ofcom is following the recommended approach from the European Commission, which wants to see these charges brought down to a similar level between operators and all member states as soon as possible. So far only Belgium has proposed MTRs in line with the new approach (89% lower than the current charge controls), although Portugal is set to follow shortly.
This is a departure from the way Ofcom currently treats certain costs – hence why there is such a big reduction. Up until now Ofcom has used what is known as a LRIC+ methodology, whereas this new approach is what is called a pure LRIC methodology and allows for the recovery of fewer costs. It is well known that the underlying costs of providing call termination have fallen significantly over recent years as technology has become cheaper and networks have been rolled out. However, the wholesale charges between operators have not fallen by the same proportion. Today’s announcement can be seen as a way to redress that balance.
Had Ofcom continued with a LRIC+ approach, the termination rates for all operators would be around 1.5ppm – three times higher than the option on the table. However, to ignore the Commission would be a difficult option for Ofcom – as it is obligated to take upmost account of it. At this stage Ofcom hasn’t been able to find any substantive reasons why the UK is different from other countries that might make the EC approach unsuitable. However, you can be sure that the biggest MNOs will look for them. While they will have expected a significant reduction, albeit perhaps not of this magnitude, they will almost certainly lobby hard and could even appeal an eventual decision (likely in the second half of 2010) to delay its implementation.