Mobile rate cuts to raise prices elsewhere

The European operator community has stepped up its attack on the European Commission’s proposals to cut mobile termination charges. The results of an operator sponsored report are out and they make uncomfortable reading for low and medium users of mobile services in Europe.

In June, EU telecoms minister Viviane Reding proposed to bring mobile phone call costs down further by slashing voice call termination rates as much as 70 per cent.

Mobile termination rates (MTRs) are the wholesale tariffs charged by operators for connecting phone calls from other networks. And while it may be true that vastly divergent MTRs across the EU distorts competition between operators from different countries and between fixed line and mobile phone operators, the operators themselves argue that a forced reduction in prices would not necessarily benefit consumers.

A group of European operators – Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone – commissioned research house Frontier Economics to examine the merits of moving to a system of very low mobile interconnection charges, such as Eur0.01 to Eur0.02 per minute.

The EC’s consideration is largely motivated by the US market experience, where mobile subscribers consume significantly more minutes compared to their European counterparts, and where the interconnection mechanism between mobile operators involves low MTRs.

However, Frontier believes that while reductions in MTRs would lower call prices and increase the minutes of usage, other tariffs would be expected to increase, because a reduction in MTRs will not allow operators to recover their costs.

Essentially, Frontier’s number crunchers reckon that a 10 per cent reduction in MTRs would lead to a 10 per cent increase in mobile retail prices, which may not be beneficial for the majority of consumers.

When compared to the US, which operates on a RPP (Receiving Party Pays) model, charges for incoming calls would be expected to increase as the MTRs are reduced, lowering the value for customers and reducing penetration.

“Thus, by drastically reducing MTRs, actual subscribers would generally tend to speak more but there will be fewer subscribers. This is exactly the situation in the US,” where penetration is 85 per cent, compared to the more than 100 per cent penetration of many European countries, Frontier said. The researcher noted that customers in the US have also filed a lawsuit against mobile carriers for the imposition of charges to receive unsolicited messages or spam.

While the report concedes that US pricing plans offer a good deal for high consumers of mobile minutes and services. As the usage intensity decreases, the US price plans score worse, to the point where for medium rate users in the US, the minimum expenditure is around $17 higher per month than in Western and Central and Eastern European countries. The same is also true of this application for prepaid users, who tend to be low intensive users, Frontier said.