By Gavin Patterson

The European Commission’s latest attempt to iron out the wrinkles in Europe’s mobile landscape has already led to howls of dissent from operators, which claim the action to reduce mobile termination rates (MTRs) could radically change the appearance of the industry in Europe forever.

In the past five years, Brussels has assessed more than 770 proposals by national regulators, taken advice from the European Regulators Group (ERG) and concluded that price regulation of MTRs across Europe lacks consistency and that a new pricing mechanism is required.

Under the proposed mechanism, only the proportion of costs related to increased capacity requirements for carrying wholesale voice traffic would be included.

The Commission says that, on average, 75 per cent of the costs of mobile call termination are network-related, with the radio access network generating slightly more than half. The remaining 25 per cent is typically accounted for by spectrum costs, business overheads and wholesale commercial costs.

The Commission claims it is merely attempting to spur competition among operators and reduce mobile phone bills by about 70 per cent over the next three years. The ERG itself recommended only a 40 per cent reduction in termination rates in this period – from an average of about Eur0.09 (US$0.14) a minute now to about Eur0.055 a minute in 2011 – so the final outcome is far from certain.

Termination rates are at present determined by individual national telecoms regulators and range from Eur0.02 a minute in Cyprus to more than ?0.18 a minute in Bulgaria.

EU telecoms commissioner Viviane Reding says that termination fees currently account for approximately 20 per cent of operator revenues but do not reflect the cost of providing the service; they are also nine times higher than fixed-line termination rates, she says.

Moreover, the Commission says that fixed operators and their customers are indirectly subsidising mobile operators by paying higher termination rates for calls made from fixed lines to mobiles. This cross-subsidisation was estimated at Eur10 billion in Germany for 1998-2006 and Eur19 billion in the UK, Germany and France for 1998-2002.

Nevertheless, the European Telecommunications Network Operators’ Association (ETNO) says the alignment of mobile termination rates to rates in the fixed sector is not appropriate, as the two networks are totally different, and lead to different termination costs.

ETNO also claims that mobile users are already seeing prices fall by an average of 10 per cent a year, with MTRs themselves falling 40 per cent over the past four years. The association said that radical changes to the method of calculating termination rates may result in consumers having to pay to receive calls or the removal of some cheap tariffs or prepaid packages.

Hamid Akhavan, chief executive officer of Deutsche Telekom, also says the Commission proposal is “too drastic”, while Richard Feasey, director of public policy at Vodafone, said it would fundamentally change the way mobile operators cover the cost of operating a network. What’s more, he said, the proposal could lead to calling-party pays (CPP) giving way to the receiving-party-pays (RPP) model prevalent in Canada, Singapore, Hong Kong and the US, whereby customers end up paying to receive calls.

Brussels says that a settlement system of this type avoids the deficiencies of the CPP system, namely high termination rates, and enables consumers to respond to charges where more competitive alternatives exist.

Some leading operators also reckon that large decreases in revenues from termination would signal the end of handset subsidies in Europe, increasing the cost of ownership for customers, lengthening replacement cycles and affecting overall handset sales across the region.

Credit Suisse points out that the reduction in handset subsidies in Europe and North America in 2001 caused handset demand to weaken dramatically, along with the replacement rates for several quarters. “While this remains a risk, especially if subsidies were cut, we believe that the impact may be more minimal now than in the past,” stated Credit Suisse in a report.

The bank says that if replacement rates do moderate as consumers postpone purchases because of the lower subsidies, global volumes are likely to fall by only 2 per cent. Kevin Russell, CEO of 3, says talk of ending subsidies is merely scaremongering by the likes of Vodafone, O2, T-Mobile and Orange. “From 3’s standpoint, our prices would not go up, our handset subsidies would not reduce, and we would be able to put more value in our bundles, which would effectively mean reducing prices,” he says.

Of course, 3 pays out more in termination fees than it receives, so Russell would welcome a reduction regardless. Nevertheless, beyond a short-term reduction in termination rates, the Commission does not expect a fundamental shift in the way mobile operators conduct their business. The public consultation will run until September 3, and the Commission will issue a final recommendation in October.