Vodafone on Mobile Termination Rate Undertakings

Paul 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.

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