Mobile termination rates to be regulated

August 4th, 2010 at 8:59 am by David Farrar

has announced:

The Minister for Communications and Information Technology, Steven Joyce, has accepted a Commerce Commission recommendation to regulate .

He says regulation will improve competition in the mobile market and result in lower prices for mobile phone users.

Mobile termination rates are the wholesale prices charged by a mobile network operator (such as Telecom, Vodafone and 2degrees) for providing services to customers from other network operators.

Under Section 19 of the Telecommunications Act the Minister is required to make the decision that best gives, or is likely to best give, effect to the purpose of Part 2 of the Act – that is, to promote competition for the long-term benefit of end-users of telecommunications services.

Mr Joyce says he considers that accepting the Commission’s recommendation meets this test and in this case will lead to lower mobile termination rates and more competitive mobile pricing plans for consumers.

This is no surprise at all – but still a welcome decision. I believe it will lead to more competition and better pricing plans. The current MTRs act as a price floor and deter competition.

Consumers in Auckland should be choosing their mobile phone provider on the quality and price of the services they offer. Instead far too many have been forced into choosing a provider based on  the fact most of their friends are with that provider, and they can’t afford to be on another network.

Imagine if one had to choose your ISP, based on whom you send and receive most of your e-mails from. Imagine having to pay say 5c an e-mail if it was to someone on a different ISP.

Tags: ,

18 Responses to “Mobile termination rates to be regulated”

  1. GJ (329 comments) says:

    Sound good to me!

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  2. ben (2,384 comments) says:

    Sigh.

    The question nobody in this debate considers is how the rents earned on termination are currently being competed away. Whatever the answer to that question is is the also the answer to the question: what competition will this regulation destroy.

    You see there is actually a market here, it has competitors in it, and they like money. So windfall profits aren’t going to persist – they will be competed for. Vodafone will try to eat Telecom’s lunch, and so will 2 Degrees try to eat Vodafone’s.

    So here’s a prediction: these termination rents come on a per-subscriber basis, so the elimination of these economic rents will weaken the intensity of competition for subscribers. How does Telecom, Vodafone and 2Degrees compete for subscribers? With handset subsidies. So my prediction is the trade off of this regulation – there is always a trade off – is more expensive handsets, less variety of handsets, and lower mobile phone ownership in NZ.

    Joyce, DPF, and everyone else can sell this regulation only by ignoring this trade off. If only reality were so simple.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  3. ben (2,384 comments) says:

    Ha. Free market? New Zealand telecommunications? Funny.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  4. bhudson (4,741 comments) says:

    Ben,

    We may be approaching this from slightly different perspectives, but nonetheless I will attempt to answer your points.

    Although it can be argued that the mobile market is now operating as an oligopoly, it has historically been a duopoly with the two players being Telecom and Vodafone. While we now have additional competitors such as 2degress and TelstraClear Mobile, the two historical players still have real dominance of the market.

    As a result the economic rents on termination are not competed away at all – they are traded in way as to have minimal profit impact on the two main players, while providing significant barriers to new entrants. The termination rates are not true and actual costs, but arbitrary rates set by those two parties. As they each have similar shares of the overall mobile market, they have confidence that the termination charges that each pays the other will largely net out. That is; the termination rates can be as high or low as they, or we, like and as long as they are equal to, or higher than, actual costs, there is only a minor impact of profitability for each of them. (The profitability impact, such as it is, arises simply from the fact that neither of them have equal market share and perfectly equal distribution of calls across each other’s networks.)

    Regulation in termination rates will affect their revenue results but not their profitability (as the cost of termination vs. revenue received from termination will reduce in proportion for both of those two players.)

    What it will mean for new entrants however is that they are more able to compete in a market where (initially at least) their share is such that they have to pay far more in termination charges than they receive in termination revenue. Government intervention sure, but it does level that particular duopoly created mountain of a playing field.

    In very simple terms, regulation of termination rates should not affect handset subsidies as it has no impact on the profitability that sustains those subsidies. Unlike the direct impact of the termination rate itself, the competitive marketplace that it encourages will erode service provider profits, but those same competitive pressures will reinforce the continuation of the subsidies as the providers compete to retain and grow their market share.

    The winners are the consumers (residential and business users) and the new entrants. The historical players are faced with greater risk, but they each have greater resources to invest in innovation, products and marketing to seek to retain and growth their own share. While they may have more to lose, they have the wherewithal to minimise their losses.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  5. Maggie (672 comments) says:

    We’ll regulate the market to make it freer and more competitive. Why does that make me think of George Orwell?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  6. gazzmaniac (2,307 comments) says:

    2degrees can provide a mobile service at less than half the price of Vodafone and Telecom (ie 39c/min vs 89c/min prepay) under the current regulations. Why change? 2degrees will eventually encroach on enough of Vodafone and Telecom’s business, especially considering you don’t have to change your number when you change providers any more.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  7. bhudson (4,741 comments) says:

    @Maggie,

    Hmmm. You seem to be suggesting that regulation is a bad thing. And yet, as is clear from previous posts, you are a Labour supporter. And of course, as everyone knows, the Left are far greater proponents for Government intervention.

    Or is it just regulation by those not of the Left that you have a problem with?

    Orwellian indeed…

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  8. ben (2,384 comments) says:

    bhudson – a very thoughtful post, thank you.

    I’ll make a couple of points in response. First, although termination revenues basically wash out over all for the large players, it is the margin that matters. When Vodafone or Telecom (and indeed 2 Degrees) think about the value of acquiring the next customer, they will include the amount of termination revenue they would expect that customer to attract. That then informs how much they are willing to pay to acquire that customer. This calculation is still going to happen even if, overall, the revenues of the two companies roughly wash out. They don’t wash out at the margin – and its the margin that affects willingness to invest in acquiring a customer via handset subsidy. Thus we should expect less subsidy and higher handset prices when termination rents are regulated away.

    Second, 2 Degrees isn’t hurt by termination in the way you think they are. 2 Degrees on the whole probably earns about as much in termination as they pay, provided 2 Degrees customers receive about as many calls as they make. The reason 2 Degrees doesn’t like termination is because termination locks in network effects that provide an advantage to being a large incumbent. Being on a large networks lowers the likelihood other people you call will be off-net. If that affects the amount you pay to call them, as it generally does, then termination fees will, it is argued, tend to make the large network attractive just for being large. That is why termination hurts 2 Degrees.

    Now: whether eliminating this network effect by regulation will produce gains overall is a genuinely hard question. On the one hand you subdue competition for subscribers, on the other hand you make it easier for startups like 2 Degrees to come in. The trade offs are hard and probably impossible to assess. Since nobody is thinking about this trade off, what Joyce is doing is gambling with billions of dollars of other peoples money and, by the way, signalling (again) just how limited the protection investors in NZ have against capricious intervention. I am not persuaded slightly lower calling prices provide anything like the benefits required to justify these costs.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  9. expat (4,050 comments) says:

    All good stuff Ben, thanks for those thoughts.

    Irrespective of whether regulation is the best answer, and it probably isn’t, it is probably the least worst answer in terms of driving change and market competition. The Telco’s certainly haven’t much of an interest in doing so without regulation, as we have seen over the past decade with consistent obfuscation and filibustering on the topic of MTR’s and the like aka taking the piss.

    On handsets, given most of the handset subsidies are either based on 2 year contracts or crap handsets or both, I personally think that the handset pricing argument is a bit of red herring, and as competition hots up for market share we’ll start seeing how sharp prices can get.

    But you have a point, regulation may introduce new problems. Lets hope we don’t allow any new ones to fester for a decade as the MTR problem did.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  10. cha (4,084 comments) says:

    2degrees can provide a mobile service at less than half the price of Vodafone and Telecom

    2degrees can provide a mobile service at less than half the price of Vodafone and Telecom by making a $52m loss.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  11. ben (2,384 comments) says:

    it is probably the least worst answer in terms of driving change and market competition. The Telco’s certainly haven’t much of an interest in doing so without regulation

    I strongly disagree with that. In fact I think the very opposite is true. What else except competition explains Telecom and Vodafone’s construction of AMPS, D-AMPS, GSM, CDMA, GSM-CDMA and now XT networks in the last 25 years? It certainly wasn’t regulation that convinced those companies to invest, since there is no regulation that says they had to. But they did. Telecom could have earned just about as much revenue, give or take, without >$1 billion in cumulative industry investment. So why did they? The answer of course is that had they not invested Telecom and Vodafone would have zero customers by now on their completely obsolete networks. Competition, in other words, matters.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  12. expat (4,050 comments) says:

    Yes, the obsolescence of the hardware and software and corresponding forced upgrades by vendors probably had a huge part to play.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  13. ben (2,384 comments) says:

    Expat: nope, wrong again I’m afraid. Each new network was introduced years before technical obsolesence. AMPS was switched off, what, 8 years after CDMA arrived?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  14. gazzmaniac (2,307 comments) says:

    And I suspect CDMA will be switched off in due course also – once XT has been around long enough and enough customers are on it. It’s already happened in Australia, I’m pretty sure that NZ has one of the only CDMA networks left.

    cha – One has to assume that 2degrees have a business model that will eventually break even, or that they intend to sell their customer base to another operator in the future. I’d have thought Hutchison until their merger with Vodafone Australia, perhaps Optus?
    The Telecommunications market in Australia is a lot more competitive than in NZ, and the pricing of 2degrees call rates (an incidentally XT data rates) is in line with what you’d expect in the Australian market.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  15. brucehoult (201 comments) says:

    @gazzmaniac Telecom has already announced CDMA closure dates.

    Overseas roaming (such as it was!) is gone from 29 October. EVDO 3G is gone from 30 November (it was only operational for five years!), leaving only the old CDMA 2000 1x which will itself close in mid 2012.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  16. Jeremy Harris (319 comments) says:

    The hits just keep on coming for Telecom, I don’t know why they don’t have a full structural seperation at this point…

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  17. perfectvampire (21 comments) says:

    I think this will have a much larger impact on Vodafone. They have led the way in terms of on-net pricing and promotions. Of interest though, Telecom launched XT with no on-net plans – all the calling minutes & text extras under the XT plans were to ‘any network’. Clearly the existence of MTR’s wasn’t a barrier to Telecom making the decision to introduce such a pricing structure (and essentially increase the level of MTR payments to Vodafone that would likely result).

    Sounds like a politically motivated decision to me, rather than one that is necessarily based on the reality of the current market dynamics.

    In regards to new entrants – let’s be real; the geographical nature of NZ makes investment in infrastructure incredibly expensive when one considers the population spread. The only thing stopping new entrants into the market is the infrastructure cost to actually build a network. With a population of 4 million, and high mobile penetration, it doesn’t exactly require a degree in finance to conclude the numbers just don’t stack up.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote