Guest Post: Vodafone on MTR

I’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.