Vodafone on Mobile Termination Rate Undertakings
March 9th, 2010 at 2:00 pm by David FarrarPaul Brislen from Vodafone has offered me, and I’ve accepted, a guest post on the mobile termination rates issue. I’m happy to run both sides of the argument:
The Commerce Commission has recommended to the Minister of Communications that he should accept the Telecom and Vodafone undertakings rather than regulate the industry any further. Those that want regulation at all costs would have you believe this is a travesty and must be overturned, but really they should be celebrating. This is a big win for those that think termination rates are too high.
So what is a termination rate and why should you care? When you call a Vodafone mobile from a Telecom phone you’re paying Telecom a fee for that call. Vodafone doesn’t get paid for that call by the customer – it gets a cut of the earnings from Telecom directly. This is called a termination rate and it’s got very little to do with the retail price you pay. Think of a newspaper publisher – it earns its money from two sources: the cover price paid by the consumer, and the advertising rates, paid by the advertiser. The two are related but not directly linked. It’s a two sided market and so is telecommunications.
Over the past six years termination rates have fallen by 46% and the Commerce Commission feels they should be even lower. Part of the process is this idea of seeking “undertakings” from the industry – that is: what will you give us, industry players, to avoid regulation. It’s quasi-regulation that gives the industry the ability to offer a solution that will be quicker than regulation and still provide the solution the Commission is looking for.
In this case the Commission asked Telecom, Two Degrees and Vodafone, to submit undertakings to avoid regulation. We did, but the Commission asked for a unified undertaking from all three players to give it a benchmark with which to compare its own regulated solution. We tried, but there was no way the three players were going to agree on one solution – so Telecom and Vodafone put forward a combined best offer. After some wrangling, the Commission has recommend the government accept that offer.
The undertaking reduces the termination rate for voice calls from 15 cents to five cents per minute over five years. It happens in stages – so from October 1 it’s a 35% drop, followed by a further 10% drop on January 1, 2001 and further reductions in the years after that.
The second major part is that TXT message termination rates will drop immediately to zero. That is, aside for some wiggle room to stop TXT message spam, companies will charge customers directly for TXTs and won’t pass anything on to the other telcos.
The Commission’s job was to compare that offer with what it could best hope to obtain under regulation. Any regulation from this point on is at least 12 months away from implementation because of the Commission process, so the Commission has to weigh up these savings from October 1 versus potential savings delivered in 12 months time.
The undertaking is so close to the regulated outcome that any extra savings delivered under regulation clearly aren’t enough to outweigh the delay in delivering them.
So what’s in it for the telcos? Did we simply offer these deals out of the goodness of our hearts? Well, no. No company likes to be regulated and no company wants to be forced into a corner. Vodafone doesn’t like the Commission’s modelling, doesn’t trust its numbers, doesn’t like the outcome. But at the end of the day, the Commission is the regulator and we have to operate in that market and if it comes down to a commercial undertaking that offers a controlled descent or a regulated solution that includes revenue dropping off a cliff on a given day, I know which I’d prefer. We need some certainty around investment strategies otherwise it all becomes too hard.
We’ve offered to reduce rates dramatically. The Commission has recommended the Minister accept them and the customers will benefit sooner from the undertakings than they would from direct regulation. The telcos win because we have a solution in place and can get on and the consumers win because they can open their newspapers without having another story about MTRs rammed down their throats.
The Drop the Rate Mate campaign put together to influence this decision, ran a survey which looked at the public’s perception of the telco sector. One of the interesting outcomes of that research was that when asked whether they would change their political vote for a party that regulated MTR, only 20% of participants said they would. So in answer to my earlier question (why should you care) the answer is you shouldn’t. But finally we can all get on with our lives.
Related posts:
- The mobile termination rates decision
- Mobile termination rates
- Mobile rates to come down
- Guest Post: Vodafone on MTR
March 9th, 2010 at 2:16 pm
The Voda bloke says that the voluntary understakings are “quasi-regulation”. In other words, Steven Joyce has a choice between informal,dodgy “quasi-regulation” and being transparent and setting the rates. I don’t like regulation, but I would much prefer a minister, if he is going to regulate, to get out there, be honest and transparent, do it and admit he’s doing it – rather than do secret dodgy deals with Telecom and Vodafone to implement “quasi-regulation” and pretend he’s not regulating.
Vote:March 9th, 2010 at 2:26 pm
Termination rates are an anti-competitive practice that allows incumbants (Telecom and Vodafone) to prevent other parties (such as 2degrees) entering the cellphone market. It is because Telecom and Vodafone have abused their monopoly poisition that regulation is needed. to charge 9 cents to terminate a text message at wholesale rates is an example of this.
Your article here is pure spin – safe in the knowledge that Stephen Joyce reads this blog – you are trying to get public support for the cause of your employer. If you can now drop termination rates for texts – why did you not do so years ago – except to stop / hinder other entranets into the market? Why is NZ one of the lowest users of cellphones except of the prohibitive pricing that has been enjoyed because of a monopoly position?
And why if you can drop / reduce termination rates over a number of years then why not just drop them immediately – except again to protect your monopoly postion.
Vote:March 9th, 2010 at 2:27 pm
Having worked for telcos for 8 years it is easy to spot the first massive bullshit sentence:
“This is called a termination rate and it’s got very little to do with the retail price you pay.”
Stop reading at that point if that is any indication of the veracity of Mr Brislen’s story.
Ever called NZ from overseas and wondered why it costs, say, 30cents/min to call a mobile and 5c/min to call a landline. That’s the termination rate begin passed back to you, the caller.
Vote:March 9th, 2010 at 3:00 pm
Monty said “It is because Telecom and Vodafone have abused their monopoly poisition that regulation is needed”
I think you need to look up the meaning of the word “monopoly”.
Vote:March 9th, 2010 at 3:11 pm
Ok Chris in reality Telecom and Vodafone operate in a duopoly (although given their pricing structures they operate as a monopoly). I would argue that Telecom follow Vodafone as Telecom seek to protect their copper network and want to protect that as a primary concern.
Fact is that both companies have abused their dominant positions in the market to prevent other entrants and in the process have rorted the consumers who have had no choice for too long.
Vote:March 9th, 2010 at 3:22 pm
Telecom and Vodafone are not duopolies. They operate local mini-monopolies around the country. Up in Auckland, everyone is on Vodafone. In Dunedin, everyone’s on Telecom. Even from one department to the next at a single university, you’ll find your mini-monopolies – the science students will be on one network, the arts ones on another. This is not what anyone would expect in a proper market and its all because of the mobile termination rates.
Vote:March 9th, 2010 at 3:50 pm
Sounds like the one who likes to eat his own cakes and blow his own horn!!!
I had enough!
Vote:Bye…
March 9th, 2010 at 6:34 pm
The Commerce Commission has recommended to the Minister of Communications that he should accept the Telecom and Vodafone undertakings rather than regulate the industry any further. Those that want regulation at all costs would have you believe this is a travesty and must be overturned, but really they should be celebrating. This is a big win for those that think termination rates are too high.
>>This is a big win for VF and TC and allows them to protect artificially high profit margins for ANOTHER few years at the expense of the consumer
So what is a termination rate and why should you care? When you call a Vodafone mobile from a Telecom phone you’re paying Telecom a fee for that call. Vodafone doesn’t get paid for that call by the customer – it gets a cut of the earnings from Telecom directly. This is called a termination rate and it’s got very little to do with the retail price you pay. Think of a newspaper publisher – it earns its money from two sources: the cover price paid by the consumer, and the advertising rates, paid by the advertiser. The two are related but not directly linked. It’s a two sided market and so is telecommunications.
>> Termination rates are an artificial price protection construct created to hold prices higher and to confuse consumers.
Over the past six years termination rates have fallen by 46% and the Commerce Commission feels they should be even lower. Part of the process is this idea of seeking “undertakings” from the industry – that is: what will you give us, industry players, to avoid regulation. It’s quasi-regulation that gives the industry the ability to offer a solution that will be quicker than regulation and still provide the solution the Commission is looking for.
>> Over the past decade consumers have been gouged by the incumbents who have stalled on providing any price improvement UNLESS regulation has been threatened.
In this case the Commission asked Telecom, Two Degrees and Vodafone, to submit undertakings to avoid regulation. We did, but the Commission asked for a unified undertaking from all three players to give it a benchmark with which to compare its own regulated solution. We tried, but there was no way the three players were going to agree on one solution – so Telecom and Vodafone put forward a combined best offer. After some wrangling, the Commission has recommend the government accept that offer.
>> AKA the industry incumbents pissed around for so long (a decade) they had no choice but to agree to reduce MTR’s or the regulator would slash them by more.
The undertaking reduces the termination rate for voice calls from 15 cents to five cents per minute over five years. It happens in stages – so from October 1 it’s a 35% drop, followed by a further 10% drop on January 1, 2001 and further reductions in the years after that.
>> So, after a decade of pissing around the incumbents are going to piss around for another half decade dragging their heels removing MTR’s.
The second major part is that TXT message termination rates will drop immediately to zero. That is, aside for some wiggle room to stop TXT message spam, companies will charge customers directly for TXTs and won’t pass anything on to the other telcos.
>> A token concession given that 2Degrees has gone to market with a 9cent text deal effectively killing the TXT MTR gouge.
The Commission’s job was to compare that offer with what it could best hope to obtain under regulation. Any regulation from this point on is at least 12 months away from implementation because of the Commission process, so the Commission has to weigh up these savings from October 1 versus potential savings delivered in 12 months time.
>> The commissions jobs is to force the incumbents to stop pissing around for A DECADE MORE.
The undertaking is so close to the regulated outcome that any extra savings delivered under regulation clearly aren’t enough to outweigh the delay in delivering them.
>> BUlshit, the consumer is going to be out of pocket for ANOTHER HALF DECADE
So what’s in it for the telcos? Did we simply offer these deals out of the goodness of our hearts? Well, no. No company likes to be regulated and no company wants to be forced into a corner. Vodafone doesn’t like the Commission’s modelling, doesn’t trust its numbers, doesn’t like the outcome. But at the end of the day, the Commission is the regulator and we have to operate in that market and if it comes down to a commercial undertaking that offers a controlled descent or a regulated solution that includes revenue dropping off a cliff on a given day, I know which I’d prefer. We need some certainty around investment strategies otherwise it all becomes too hard.
>> Whats in it for the Telco’s? – profiteering off the back of MTR’s for ANOTHER HALF DECADE
We’ve offered to reduce rates dramatically. The Commission has recommended the Minister accept them and the customers will benefit sooner from the undertakings than they would from direct regulation. The telcos win because we have a solution in place and can get on and the consumers win because they can open their newspapers without having another story about MTRs rammed down their throats.
>> You have been FORCED to reduce rates dramatically after A DECADE of prevarication.
The Drop the Rate Mate campaign put together to influence this decision, ran a survey which looked at the public’s perception of the telco sector. One of the interesting outcomes of that research was that when asked whether they would change their political vote for a party that regulated MTR, only 20% of participants said they would. So in answer to my earlier question (why should you care) the answer is you shouldn’t. But finally we can all get on with our lives.
Vote:>> Totally irrelevant bit of obfuscation. It’s about the rate, mate.
March 9th, 2010 at 7:01 pm
Yes, we pay too much for our things. I think the government should also regulate the price of food, computers, cars and we don’t get paid enough, so it should set suitable salaries as well.
Just with one stroke NZ can be lifted from poverty into the OECD top 15. Why are they not regulating more? After all, it has worked everywhere it was tried.
Vote:March 9th, 2010 at 7:08 pm
Extra Competition is the only answer.
After being charged $5k for 2 weeks moderate usage in Greece for 2 weeks for downloads of newspapers, and Trademe.
I have no sympathy for their positions. It cannot bear any relation to the actual wholesale price of the downloads, and was 5x dearer than the in-house Wi-Fi service that I thought was ludicrously expensive.
Expect much more of this trauma, as folks take their children abroad with smartphones recently purchased, and the kids endeavour to maintain their facebook accounts etc.
Vote:March 9th, 2010 at 7:18 pm
Berend you tool, it’s not about regulation for regulations sake but preventing monopolies, duopolies and cartels from screwing consumers.
Vote:March 9th, 2010 at 8:42 pm
I find it amusing how so many of the commenters who are normally loudly lamenting the interference of government, falling over themselves to recommend regulation because it benefits them personally. If the mobile services are so profitable, there should be new competitors falling over themselves to enter, but they’re not. Telstra Clear for example simply wholesales other networks. If the return was there I bet they’d be in like a robbers dog; conclusion, it makes good money, but not THAT good.
Funnily enough, it is easy to control your mobile costs, just don’t make so many useless calls. You know what it costs, vote with your “ears”, and don’t use a high priced service. As for those overseas charges, many of the markets where the roaming calls are highest are where the governments explicitly regulate charges, but you see, they don’t care so much about foreigners, funnily enough, so you get stung.
[DPF: You fail to understand how termination rates work. They make it near impossible for competitors to enter the market.
Think of it like this. You want to set up an ISP as ISP prices are too high. Now you get some customers and they want to e-mail their friends through your ISP. But the existing two big ISPs tell you that they will charge you 10c for every e-mail one of your customers sends to one of their customers.
You then have two choices. You can charge your customers 10c per email, which means you will have no customers or you can charge them $40 a month for an ISP account and pay $60 a month to the two big ISPs for e-mails they received, and go out of business]
Vote:March 9th, 2010 at 9:38 pm
I’m with Berend. People can reduce their cellphone bills by sending emails or using Skype instead.
What we really need need Steven Joyce to do is force the supermarkets to sell all their groceries for half price. Just imagine how many people that would benefit. Progressive and Foodstuffs together have a very luck chunk of the market – ZOMG ITS A DUOPOLY REGULATE IT!!!
[DPF: And again you do not understand how termination rates work. This is not about regulating a retail price. This is about charging an inter-connect fee which is 100 times greater (for text messaging) that the actual cost, which prevents competition. You can choose to shop at Foodstuffs and never deal with Progressive. However you can not generally get a Telecom cellphone, and only use it to talk or text other Telecom customers - you want to be able to contact any phone user. Just as you would not sign up with an ISP that only allows you to visit websites they host]
Vote:March 9th, 2010 at 9:44 pm
People, if you love regulation, why can’t we regulate the tax down?
That never happens, even when there’s now a guy in charge who said: read my lips, National isn’t about raising taxes.
Vote:March 9th, 2010 at 9:49 pm
Berend, I have a lot of sympathy for the “less regulation, let the market fix itself” argument. However there are many cases where a market (with a few, large players) can back itself into an inefficient corner that it will not necessarily find a way out of without a big hand from above. Nobody wants to be the first to back down.
The Govt was not planning to tell the telcos what they can charge their own mobile customers, so Vodafone will still be free to charge Vodafone customers whatever they like and Telecom will still be able to charge Telecom customers too. If termination charges represented a true cost then they will be reflected in what customers pay going forwards.
If it turns out that mobile charges do not increase after the reduction in interconnect charges then we will know that it was an inefficient arrangement.
Vote:March 10th, 2010 at 3:35 am
MTR’s are such a great idea, lets apply them to groceries at the supermarket.
Steak, Rump @ $16.99 p/kg + a Food Termination Rate of $1 p/kg
Vote:Beer, Steinlager @ $19.99 p/dozen + FTR of $.10 p/can
March 10th, 2010 at 7:32 am
I don’t care what Paul Brislen says.
The fact is that we have the most expensive mobile calls in the world. So , no amount of clarification or justification is acceptable.
Vote:March 10th, 2010 at 9:48 am
A few points there:
@wreck1080, the OECD ranks NZ pricing in the top half – the CHEAP half – of its retail pricing. Hardly the “most expensive mobile calls in the world”. Have a look at the Commerce Commission’s own reports into this (found here: http://www.comcom.govt.nz/IndustryRegulation/Telecommunications/MonitoringandReporting/DecisionsList.aspx).
@expat, MTRs in your model are already applied to that Steak, Rump. The price on the shelf includes the cost of growing the steak, transporting the steak, storing the steak and marketing the steak. The cost of fuel is a factor, as is the cost of everything else in the (ahahaha) food chain leading to the supermarket shelf.
@Jim, the Commerce Commission cannot set retail pricing. There’s a reason for that – this isn’t Communist Russia (or 1970s New Zealand) and that’s the way I’d like to keep it. They can only set wholesale rates and have chosen to look at MTRs in this respect.
@Guy Fawkes, I have some sympathy for your situation. International roaming is a costly business because you’re dealing with twice the number of companies you normally would and the exchange rate kicks in and becomes a huge influencing factor. However, it’s got nothing to do with MTRs. It’s a retail price point that I’m hopeful we’ll address as soon as possible. The reason your wifi costs one fifth is because wifi is unlicensed spectrum. Mobile operators have to pay a licence fee to the govt to use that spectrum and that cost is included. Perhaps we could look to drive down the price of this process? We’re also gearing up to bid for digital spectrum that may come available for the next generation of network.
@Jim, your argument is that because we’ve built a network and we charge other companies to use it we’re somehow abusing our position. We built a network for our customers to use – we charge our customers to use it. Some of those customers are consumers (retail customers) and some are other telcos who want to offer up our network to their customers.
If you’re on Telecom and call a Vodafone number, you’re paying Telecom for the service. Yet half the costs are borne by Vodafone in that case. Vodafone can’t charge you for the call – you’re not our customer. Vodafone can charge the person you’re calling, but that is counter-intuitive (it’s what they do in the US and frankly it doesn’t work). So we charge Telecom directly to recoup costs.
@Monty, if MTRs are anti-competitive then how did Two Degrees launch? How did it become one of the most successful start-up telcos in the world (getting to 200,000 customers far more quickly than they or the analysts expected)? How did they manage to do that when MTRs for voice are 15c/min (as opposed to the 50c/min Vodafone faced when it launched or the 6c/min we’re moving to)?
Our commercial deals with Two Degrees give them a huge leg up in the market. We sold them spectrum at a cut-price rate. We offer them co-location so they can build their network (although they don’t use it, the regulated service is there). We have a commercial deal for roaming so they can offer service outside the main centres and we have a commercial offer that’s very advantageous but which 2D don’t want us to talk about.
In my world, commercial deals always trump regulation. No company likes to be regulated and we’re bending over backwards to make sure we don’t get regulated. If that means giving away $80m a year for the next five years then we’ll do it.
Cheers
Paul
Vote:March 10th, 2010 at 11:21 am
You can tell when the telcos are lying, their lips move.
Vote:March 10th, 2010 at 2:41 pm
Paul, my argument is not that charging for access to your network is abusing your position. It’s that MTRs bear little relation to costs and that they are something that won’t naturally be improved by competitive market forces as some have suggested. I also reject that they bear little relation to what customers pay. MTRs effectively set a price floor on network to network calls.
One only needs to look at the difference between on-network and off-network call pricing to understand the part that termination rates play versus actual network capital and operational costs.
Two sensible telcos sharing a market would be unlikely to want to reduce MTRs themselves, unless by mutual agreement. The perverse way in which these charges are largely borne by competitor’s customers together with the revenue they generate creates an unusual market pricing situation.
Vote:March 10th, 2010 at 2:58 pm
Paul: @expat, MTRs in your model are already applied to that Steak, Rump. The price on the shelf includes the cost of growing the steak, transporting the steak, storing the steak and marketing the steak. The cost of fuel is a factor, as is the cost of everything else in the (ahahaha) food chain leading to the supermarket shelf.
Yes but this will result in the cost being 16.99 + 1.00 = 17.99 for Voda/TC steak whereas Voda/Voda Steak is 16.99 and as a consumer I don’t care but then don’t know what the price will be until I have paid for it because the label on the steak may be portable and not actually reflect its origin.
The duopoly Telco’s in NZ have only improved mobile prices due to regulation in the past decade.
I know the financial sales people say that past performance is not an indicator of future performance but in the Telco world it sure gives you a pretty good clue.
Vote:March 10th, 2010 at 3:16 pm
Hi Expat, I would argue that regulation (TSO in particular) has artificially held prices up (Telecom has put up line rental every year for as long as I can remember despite costs coming down). It’s not regulation that drives pricing, it’s competition and we have a very competitive market.
First, we have not one but two 3G networks that cover 97% of the population. NZ is unique in this – most 3G networks cover the main centres and nothing else – 70% is the typical max. Pure competition drove the build out to 97% in NZ and that’s a billion dollar investment from us, half a billion from Telecom.
Secondly, Two Degrees has launched. NZ has 3 networks that cover the bulk of the population. Australia, by way of contrast, has 3 networks that cover the bulk of the population. That says to me either we’re over supplied for networks or Australia is undersupplied. Australia’s mobile operator base has shrunk recently so I’m guessing we’re oversupplied.
Third, the MVNOs. These are the guys that launch without a network at all. It’s early days yet but these guys can and will take market share. TelstraClear has launched a loud campaign. Slingshot has come out with a great offer and all of this with the existing MTR regime.
As for your steak, I think there’s a model that already fits what you’re describing: it’s called GST and it works well.
Jim, I think you’re confusing MTRs with a wholesale rate. They’re not – this is a two-sided market. I use the example of the newspaper industry (since that’s where I’m from). Newspapers make their money from two sources – subscribers and advertisers. The two are linked (they both provide money to the publisher) but they’re not intertwined. You can move the subscription price or the advertising price independently of the other price point. In the telco sector it’s the same thing – MTRs are the amount the other telco pays instead of the customer. Sure, all price considerations ultimately get paid for by the customer, but MTRs are such a small component you’d get a better result if you regulated the amount of money telcos spend on marketing or lattes.
Vote:March 10th, 2010 at 4:47 pm
Paul, I know the difference between termination and wholesale. I started work at a large NZ telco in 1994 and have worked for others since. I have experience on more than one side of the termination rate equation and how that influences telco product offerings and prices.
I guess we see things differently. Needless to say I didn’t work in media relations.
Vote:March 10th, 2010 at 5:06 pm
Soooooo, how come 2 degrees see a profit margin to be made in little ole Nu Zulund if the market is so competitive?
Not just a branded 2 degrees network on top of VF kit but actually their own built spanking 3G network….can’t imagine they are here unless the ROI is up to scratch.
Vote: