Guest Post: Vodafone on MTR
October 6th, 2009 at 1:00 pm by David FarrarI’ve blogged a few times on mobile termination rates, and Vodafone have offered a guest post to give their view (which is somewhat different to my view) on the issue. Always happy to have the debate. The guest post is:
Vodafone has made an Undertaking as part of the Commerce Commission’s investigation in to Mobile Termination Rates (MTRs) that dramatically changes the telco environment for all concerned. Instead of charging 15c/minute to terminate a voice call, Vodafone will move to 3c/minute. Similarly, to receive a TXT we are cutting the rate to 1.2c/TXT.
These are enormous cuts to the current rates: an 80% drop in voice termination and 87% drop in TXT.
So why would Vodafone voluntarily make such an offer? Surely the cost of reduction – we put it at $450m over five years – is too much for a business to bear?
The short answer is: the alternative is regulation and any company will tell you regulation is bad for business – and sometimes consumers too.
The longer answer is that we want certainty and that regulation doesn’t deliver that. Regulation also involves a very messy, drawn our process involving complicated cost models. The business, the Commission and industry could well do without this if we can possibly avoid it.
In 2007 we had a deal with the government and contrary to popular opinion it wasn’t a last-minute smoky back-room deal designed to circumvent the process. When a minister of the Crown says “boys, sharpen your pencils or I’ll regulate” by crikey you sharpen your pencil.
Vodafone and Telecom agreed to drop rates over a period of time, to start immediately and (very importantly) to pass all those savings on to customers. The minister saw that getting a resolution immediately and having the money go to customers was better than anything the Commission could offer and he accepted the deal.
Job done, five years of certainty, let’s get on with business, we thought.
Eighteen months in, the Commerce Commission re-opened an investigation and removed any certainty we had from the deal.
Certainty is everything for investment and regulatory certainty is a must-have.
Instead we have a Commerce Commission that has changed its method of benchmarking termination prices three times during the last few years and which has assumed much higher levels of consumer benefits under regulation without really explaining why. And in New Zealand there’s nothing Vodafone or anyone else can do about it. There’s no merits review process for telecommunications, there’s no court of appeal, all we can do is seek a judicial review and frankly that’s a bad idea on many levels.
But do you know what? That’s the way this game is played. The Commerce Commission gets to ask the questions and the Commerce Commission gets to make the recommendations. Today we need to tackle the issue in front of us right now.
So we set about trying to find an innovative solution that would work for all parties. We’ve accepted that while we have major issues with the Commission’s analysis on this issue, there’s nothing we can do that will change the Commission’s view, so we need to work with them to come up with the next best thing: some level of certainty over the large scale regulatory changes we are about to experience.
Which brings me to our new Undertaking.
Vodafone wants certainty and currently the only thing certain is that when the Commission reports in to the Minister in December it’ll opt for some of the most aggressive regulation in what used to be called the western world.
By putting in an Undertaking that offers to deliver better outcomes than regulation, we hope to do three things: avoid regulation; give the Commission the rates it wants and give Vodafone’s investors the certainty they need so we can keep investing heavily in the local market.
By lowering our TXT rates immediately (April next year, which is as immediate as things get in this discussion) we deliver ahead of the Commission’s timetable (which would see regulation taking effect in 2011 at the earliest).
For voice calls we’re offering a glide path from current rates down to 3c/minute by 2015. That’s slower than the Commission has laid out, but gets us to a lower number than the Commission has indicated. The glide path means we can plan better year on year for the next five years (and that’s good for us) and it’s a lower number, which is good for the Commission’s process. The Commission wins by forcing rates lower, and we get to do it in a business-like manner.
The next step is for the Commission to report to the Minister in December and then Steve Joyce has to make the call. If we go down the regulation route we face two years of conferences and submissions on cost models and frankly that’s not something I’d wish on my worst enemy. If the Undertakings are accepted, by April next year we’ll be done and we can get down to doing what businesses should stick to: making products and selling them to customers.
Related posts:
- Vodafone on Mobile Termination Rate Undertakings
- A possible own goal
- Mobile termination rates
- Vodafone responds
October 6th, 2009 at 1:17 pm
Vodafone’s offer here is lower than the one you posted on earlier in the week – you had them at 7c, they are promising 3c. The only bit more expensive than the Commerce Commission’s proposal is the txt messages, but 1.2c by 2010 is pretty good even compared to 0.5c by 2015. Presumably there would still be room for reduction after 2010.
Given that the offer is pretty close to the Commerce Commission plan, then so long as Telecom come on board I’d say go with it. A negotiated solution is always better than a regulatory solution if it can get close to the same financial outturn.
Vote:October 6th, 2009 at 1:25 pm
Well reasoned. If Vodafone’s offer was amended to cut MTRs from Vodafone’s proposed 12 cents per minute from April 2010 to 10 cents per minute, followed by a glide-path decline to 3 cents by 2015, I would accept the deal – applying regulation to Telecom at similar levels if necessary.
Reasonable certainty for the operator (= ongoing investment confidence) is a major factor in an overall balanced equation if NZ is to maintain good and improving comms infrastructure. Coupled with the crippling hidden cost of regulation, it warrants a compromise deal.
Vote:October 6th, 2009 at 1:27 pm
I’ll be generous and assume (it isn’t explicitly stated in the posting) that the reductions will be passed-on IN FULL to consumers.
The problem Voda have is that, whether justifiably or not, nobody telcos. Whenever a telco comes out with something that poses a reduction in rates, everyone from the Gummint to the ComCom to everyday customers, is checking to see if they have their fingers crossed behind their backs. The devil is always in what is not said, rather than what is.
Fact is, the cosy duoploy enjoyed by Telecom and Voda for so many years in New Zealand has resulted in some of the most expensive telecommunications pricing (including landlines, internet and cellular) in the world.
Why MTRs at all? Seems to me Bill & Keep is a better model.
Busting up Telecom as part of the National broadband roll-out is a good start. It may result in a move to IP telephony (and value-add high-speed services) and Telecom may be able to turn a quick profit by ripping out some of the copper and selling it off to China or wherever.
FWIW, IMHO.
Vote:October 6th, 2009 at 1:30 pm
David, great stuff for posting another point of view here.
I get plenty of thumbs down when I say this, but consider how short sighted the Commission and the Minister is when they keep threatening to change the rules on these companies, knowing full well that they do so in an environment that gives almost no room for those companies to appeal.
That is not a climate conducive to investment.
Now I am not saying anything goes, but the Commission does not seem to understand that investment incentives matter. Part of this is because they simply do not have the tools or the competence to deal with dynamic incentives and efficiency. The Commission is firmly stuck in a first year, perfect competition, static efficiency framework – all regulators are – and the upshot is that the Commission is not capable of understanding the full set of economic phenomena and consequences before it. Couple that with the power to declare prices, limited right of appeal and an activist government, and the country has a problem.
New Zealand desperately needs protection from errant regulation and regulators, has done for a decade now, because the Commission has got so much wrong and it is capricious. A regulatory framework that makes efficiency (i.e. welfare maximisation) the goal and an independent reviewing body that the Commission must answer to and which is out of the reach of the Telecommunications minister would be a valuable first step.
The long term consequences of underinvestment are dire: either you get no investment, or you get the government offering huge subsidies and directing traffic to get the next generation of investment done. Talk about second best.
Vote:October 6th, 2009 at 1:38 pm
@Alistair,
re: Pass through – Vodafone has said it will pass through the savings. We challenge the other telcos to do the same… our estimate is they currently pass through around 30%. The ComCom process tells us they expect around 80% pass through rising to 100%, presumably through osmosis.
cheers
Paul
Vote:October 6th, 2009 at 1:40 pm
The pricks are only doing this because of the threat of regulation. The offer is dodgy as all hell – how come it takes the threat of regulation for them even to consider reasonable charges to encourage competition?
Vote:October 6th, 2009 at 2:11 pm
Thanks for the response, Paul. It therefore looks (to my untrained eye, anyway) like the Voda position is the optimal one, given the problems you’ve identified with regulation. No great surprise to see Telecom staying true-to-type, huh?
Vote:October 6th, 2009 at 2:22 pm
Oh I think Telecom’s offer is pretty good and very well intentioned… the next stage is to see if the ComCom is interested in this and then we’ll have a quick conference to see if we can all agree on one undertaking and then… it’s off to the Minister.
Vote:October 6th, 2009 at 2:24 pm
For me, the term “five years of certainty” represents “five years of certainty in receiving the monies from an overly high MTR.”
This smells of a thinly veiled stab at the idea of regulation, and it also seems a little naive of Vodafone to assume that in five years, the Commerce Commission wouldn’t have changed their minds or events would have moved on and forced them to change tack.
Vodafone want certainty, but their kind of certainty involves the kind of certainty where customers just carry on paying the highest MTR possible and where real open competition is stifled. That’s the certainty you want in business.
Investment thrives on all kinds of things, and to be honest, one of the things it often does without is certainty. What it can’t do without is risk management. If Vodafone NZ have been putting their eggs in the basket of certainty, then they need to start playing the risk management game instead.
I don’t think they’ve been doing anything of the sort, of course – I just think that right here they’ve decided to try out the bullshitting line and assume that no-one has a clue about how investment works.
Vote:October 6th, 2009 at 2:40 pm
Hi Chris,
if Vodafone was charging “the highest MTR possible” that might be the case but we’ve been steadily reducing our MTRs for the past five years. They’re now in the middle of the pack when compared with Europe (a good benchmark) and if you’re talking about retail prices, we’re in the cheap half of the OECD.
The point is, the Commerce Commission hasn’t addressed our concerns, doesn’t see the problem with having a model that consists of “list nine countries, pick the middle one” (which is how it picked its draft recommendation: currently we’re Israel), doesn’t see the problem with not doing any work on the cost of Mobile to Mobile or TXT (it’s produced a model based on fixed to mobile only) or any of the other issues we’ve raised… and there’s nothing we can do about it because the Commission has the final say. There is no merit’s review process.
So in that environment, yes Chris, you’re mostly right. This isn’t a “thinly veiled” attempt to avoid regulation – it’s a blatant attempt to avoid regulation. Telco regulation, generally speaking, sucks badly. Just look at the TSO and its tax on competition. Here you’ve got a perfectly reasonable regulation that drags on so long it becomes a tax on competition. The sector changes radically periodically and regulation generally lags behind. We’d like to avoid it and if we can do that by offering these kinds of rates, so be it.
cheers
Paul
Vote:October 6th, 2009 at 3:31 pm
That old canard. Telco’s love a monopoly. And if regulation gives them one, they love them some regulations. Telcos aren’t free-marketeers. Anything but.
If you want to see Telcos loving a free market, look how they had to be dragged, kicking-and-screaming in the UK to give number portability. They hated it and did everything they could to block it. Who wants customers jumping to a competitor who gives a better deal? Now it’s law but they’ve done their best to make the system a complete pain in the arse for their customers.
Vote:October 6th, 2009 at 4:18 pm
Paul,
I think you’re right in pointing out that MTRs have dropped, but they’ve dropped by you, in a manner that’s beneficial to you. Telecom and Vodafone have sewn up competition in the market and been dragged kicking and screaming into playing fair with people. That’s the problem when you oppose yourselves to regulators rather than doing the right thing in the first place. In this case, the state is an arbitrator between people when the bias is so clearly loaded in the favour of one party, and the telcos have brought it on themselves.
Telco regulation is incomplete and shoddy in NZ, I’ll give you that – it’s a leftover from the true Telecom monopoly, and the kinks haven’t been ironed out, largely because of the lack of other players. But the answer to incomplete and shoddy regulation isn’t no regulation.
If you want to use your European model as the answer, then you’re looking at a system where regulation has been the key to open competition and consumer choice – MTRs, cross-network pricing, per second billing, all of these have been forced onto the telcos to the benefit of the consumer. It’s cost the telcos, but with Europe as the most developed mobile market in the world, you can’t say it’s held back progress.
The simple answer is that the main players in NZ want a system where consumers are held down and screwed by a combination of lack of regulation and their market dominance. If you wanted competition, or certainty, or if you wanted a benefit to your consumers, then you’d be pushing for the lowest MTR rates possible and making up the ground in the areas of your business that matter – service delivery and customer relations.
Vote:October 6th, 2009 at 7:00 pm
Excuse the tasteless analogy, but we’re all acting like battered wives here. Going back with a promise of major improvements, and we forget the nature of the Beast. The nature of the Beast is that it will change the way they package, market and present their future offers in such a way that they’ll put their hands in our pockets all over again. Their only loyalty is to their shareholders, and if you read the piece again, this is all about their shareholders getting certainty. That means they have a stable platform to build on and ‘do’ us all over again. The fact that the CC are creating uncertainty is the ONLY thing we have in our favour. When these Telco’s collectively take $1000 of net profit per year for every man, woman and child in this country, out of the country, I don’t really think they are worried about certainty – they are worried about protecting their bottom line.
Vote:October 6th, 2009 at 9:37 pm
I started reading this post thinking I was going to hear a reasoned argument as to why they use MTR as a billing means. Instead we just get some form of justification of what they have suggested to avoid a “plaque on both their houses”.
Perhaps Voda or Telecom would like to have a go at explaining why MTR is so important to us as consumers and why they do not adopt bill and keep as occurs in other parts of the telco market overseas and here.
Vote:October 6th, 2009 at 11:45 pm
malcolm said
“If you want to see Telcos loving a free market, look how they had to be dragged, kicking-and-screaming in the UNITED KINGDOM to give number portability. They hated it and did everything they could to block it. Who wants customers jumping to a competitor who gives a better deal? Now it’s law but they’ve done their best to make the system a complete pain in the arse for their customers.”
That should read
“If you want to see Telcos loving a free market, look how they had to be dragged, kicking-and-screaming in the NEW ZEALAND to give number portability. They hated it and did everything they could to block it. Who wants customers jumping to a competitor who gives a better deal? Now it’s law but they’ve done their best to make the system a complete pain in the arse for their customers.”
Vodafones attempt at a deal is merely a strategy (almost certainly in conjunction with telecom, taking turns about to ‘show willing’) at reducing the rate of acceleration of change and preserving revenues probably by the thick end of a billion over the next 5 years each.
Why should consumers bear the additional cost of up to a couple of billion in total (between the telcos)?
Why should consumers subsidise competition shy telcos on both revenues and capex tax write offs?
I still haven’t heard a good reason.
Vote:October 6th, 2009 at 11:57 pm
Paul Brislen –
Vote:I don’t really care what the mobile termination rates are, and how telcos interact with each other. In fact, most people in New Zealand don’t. What we do care about is how much it costs us to make calls and send texts.
Presently it costs 20c to send a text message (160 bytes!) on the Vodafone network. That’s over $1300/mb. It is extortionate. It is also the same price that it was in the mid 1990s when SMS first started. There is no way that anyone can convince me it costs 20c to deliver 160 bytes in 2009, especially when Vodafone itself allows somebody to purchase 10mb for $1 on prepay (that’s over $13k worth of data, at SMS rates). SMS should be free, or cost somewhere closer to what it actually costs (a fraction of a cent), instead of taking the general public for a ride.
It is also extortion when you look at the cost of calling someone from the Vodafone (prepay) network. It costs 89c/min to call within New Zealand (the same rate to call the UK). It costs nowhere near that much in Australia – Telstra are the dearest and cost about 45c/min on prepay. It is that expensive because Telstra maintain the largest 3G network in the world, in the country with the lowest population density in the world. That is how I am able to browse the net right now. If you are city based you can choose another carrier and will pay substantially less than that (including on Vodafone. Incidentally it is cheaper to call to a New Zealand mobile from Vodafone Australia than it is from Vodafone NZ. WTF???).
So no, I don’t really feel sorry for Vodafone NZ at all (or Telecom for that matter). And next time I am in New Zealand I will be changing to 2degrees, because I am far happier to pay 22c/min to call a landline from a cell than I am paying 89c/min. Plus you get 50 free texts when you top up. I helped my mum change over from her (telecom) mobile to 2degrees, and she went from paying about $80/month to $20/month with no adjustment to her usage.
October 7th, 2009 at 11:09 am
@expat, I don’t think you’ll find it that hard to port your number in New Zealand… number porting stats released by the TCF show a great deal of success in this area. Interestingly, most of the porting seems to have been in fixed line numbers rather than mobile but in both cases it’s working well.
@Poliwatch, David kindly let me write a post here but 800 words is really only going to scratch the surface of MTRs and the industry. I’ve been writing in more detail about it at Geekzone and I’m happy to answer any questions you have on it, but don’t want to abuse David’s hospitality… http://www.geekzone.co.nz/jointhedebate.
In answer to your question: “Perhaps Voda or Telecom would like to have a go at explaining why MTR is so important to us as consumers and why they do not adopt bill and keep as occurs in other parts of the telco market overseas and here”, the simple answer is: it isn’t important to the the consumer because it’s a bill that other telcos pay, not a wholesale rate that informs your retail rate directly.
Bill and Keep occurs overseas and in every jurisdiction (that I’ve seen – happy to be corrected) it includes customers paying to receive calls as well as make them.
The reasoning is simple: You call me on my mobile from your landline. You’re paying Landline Company a fee (eg 63c/minute) but I’m not paying Mobile Company anything to receive that call. Yet the costs of connecting that call are shared equally (as is the non-monetary benefit – it’s good to have customers able to call each other).
The receiving party has a choice to make – either charge the other telco or charge the customer to recoup those costs. Charging the other telco is the path we’ve taken and that charge is the termination rate we’re talking about.
@gazzmaniac, termination rates (as I’ve said above) don’t relate directly to retail rates. NZ termination rates are currently less than countries that have better retail pricing (The Netherlands, for example, has the lowest retail rates in the OECD yet has higher MTR than NZ).
Vote:October 7th, 2009 at 5:04 pm
Paul Brislen (11.09 am, in reply to gazzmaniac), while it is slightly OT to discuss retail rates on a thread about MTRs, I agree with gazzmaniac that (almost) nobody gives a fat rat’s rear end what the MTR is ;they care they are are (or at least the believe they are) being gouged by a cozy, anti-competitive duopoly charging among the highest retail call rates anywhere in the world. As I said, slightly OT, but now would be a great time to reply to that comment…
Vote:October 8th, 2009 at 11:30 am
Paul, What is so special about New Zealand that requires its telecommunications to be so expensive? Population density clearly isn’t the answer (think Australia), nor is terrain (most towers are in towns anyway, and there are plenty of similar sized mountainous countries with cheap rates).
Vote:As I mentioned previously, this discussion about termination rates is pretty academic for most New Zealand telecommunication users. We’re more interested in retail rates.