Mobile termination rates in Europe: a cut too far or a cut too fast?
Ten cents per minute is the average charge for connecting a call to a mobile phone in Europe. One cent is the typical fee for connecting a call to a fixed line100. That differential of nine cents is likely to become the subject of heated debate in 2009 and winners and losers may be defined by the rate at which it declines.
Mobile termination rates (MTR) have historically been higher than equivalent fixed charges. Mobile operators have pointed to the cost of building and maintaining mobile networks as justification101. During 2008 in Europe, the spread of MTRs was between $0.03 and $0.24 per minute102. Operators argued that this variance is due to local costs such as licenses, labor and financing. The European Commission (EC) has had a different view.
In June 2008 the Commission recommended that the cost asymmetry between individual operators be removed. It also recommended that the asymmetry between mobile and fixed be reduced. It recommended that MTRs should fall by 70 percent over three years103, towards €0.01-€0.02 per minute; much closer to the rate charged by fixed operators.
Compliances with the EC's recommendations could oblige some operators to make substantial changes to business models and tariffs, or even revise financial performance targets downwards104.
Prepaid customers in Europe may be among the losers105. They typically make few outbound calls, but are worthy clients in that they generate termination revenues from inbound calls. Lower MTRs could mean some prepay customers make losses, unless prepaid tariffs rise and handset subsidies fall106. But increased cost of ownership may make mobile too expensive for some prepay customers107.
If operators lose prepaid customers or are unable to compensate with growth elsewhere, the financial performance gap versus peers in emerging markets could increase. European operators' EBITDA margins average 35 percent. Margins of over 40 percent are common among operators in emerging markets108.
Regulatory intervention has already been blamed for a drop of 2 percentage points in European operators' investment109. Intervention on MTRs could exacerbate that trend110.
Mobile operators have already acknowledged that MTRs must decline. But 2009 is likely to see them push for a less drastic descent than the EC proposes.
Bottom line
Mobile operators likely to be adversely affected by MTR cuts should suggest alternative approaches to the EC's proposals. They could, for example, recommend a glide-path approach, in which MTRs decline predictably. Even by this method, MTR declines are likely to accelerate, and operators must carefully model the impact on revenues and profitability. They should determine how data services could offset the falling voice revenues resulting from lower MTRs.
Operators should avoid overstating the impact of MTR cuts. Exaggerated claims may not help negotiations with the European Union, and may heighten the concerns of investors. They should focus on demonstrating that a 'one-size-fits-all' approach to European MTR regulation may be inappropriate and potentially damaging.
Mobile operators who stand to gain from MTR cuts, that is, those who pay more to competitors than they receive, should consider the broader impact on the mobile industry. Consumers are likely to expect lower bills from all
operators.
Consumer groups should monitor progress carefully. Operators' knee-jerk reactions to sudden cuts could disadvantage millions of consumers, particularly those on low incomes. It may be better to call for a more moderate approach, from both operators and regulators.
Local regulators should develop MTR glide paths that respect operators' costs and market conditions. Any break from cost-oriented MTR pricing requires detailed economic justification. Regulators should pursue rapid agreement with operators on MTR reductions, and make such agreements public. The EC may be less inclined to pursue the matter if progress is swift.
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