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Policy and regulation
Mobile termination rates — should they be regulated?
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photo credit: AFP/PhotoAlto
 
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Photo credit: AFP/PhotoAlto

Mobile operators have generally tended to set mobile interconnection rates* through negotiation and commercial agreements, with the regulator only acting as an arbiter when parties fail to agree. But the story is quite different when it comes to regulation for fixed interconnection rates.

Liberalization in fixed telephony around the world has led to an ever-growing number of service providers, creating the need for regulators to ensure that all operators can interconnect their services and that former monopolies do not abuse their market power. As a result, fixed telephony interconnection is heavily regulated in many countries, compared with the lighter touch regulation in mobile communication services worldwide.

Recently, though, some aspects of mobile services have come under closer scrutiny by regulatory authorities. One such aspect concerns the rates that mobile operators levy on each other and on fixed network operators for terminating calls — commonly known as mobile termination rates.

This is the subject of a chapter in the report Trends in Telecommunication Reform 2009: Hands-on or hands-off? Stimulating growth through effective ICT regulation, issued by ITU on 9 March 2010. It was also the topic of a discussion paper presented to ITU’s Global Symposium for Regulators, held in Beirut, Lebanon, in November 2009.

Under pressure

The ITU report underlines that mobile termination rates have become a concern in many countries. It notes that the move towards “hands on” regulation of these rates is especially evident in Europe. In 2001, the European Commission (EC) set up a framework requiring regulators to review interconnection markets. As a result, many European countries introduced price controls for mobile interconnection charges — most commonly on mobile termination. But this was insufficient to bring down the charges. In 2008, mobile termination rates ranged from EUR 2 cents per minute in Cyprus to almost EUR 16 cents per minute in Bulgaria.

In May 2009, the EC adopted a recommendation on the regulatory treatment of fixed and mobile termination rates throughout the European Union (EU). The recommendation sets out principles for national regulatory authorities to follow when setting fixed or mobile termination rates. For example, the long-run incremental cost (LRIC) model is recommended as the methodology which should ensure that termination rates are based on the costs incurred by an efficient operator.

The EC has said that eliminating price distortions across the EU will lower prices for voice calls, saving customers at least EUR 2 billion in the period 2009– 2012, and stimulating investment in the telecommunication sector as a whole. It also holds the view that higher mobile termination rates make it harder for both fixed and small mobile operators to compete with large mobile operators. It believes that divergences in national-level regulation not only undermine the notion of a single market, but also reduce Europe’s competitiveness.

The EC is therefore pushing for very significant cuts in mobile termination rates to between EUR 1.5 cents and EUR 3.0 cents per minute by 2012, compared to an EU average of EUR 8.55 cents per minute in October 2008. In contrast, several mobile operators have carried out studies concluding that lowering mobile termination rates will not necessarily reduce prices for consumers, because other tariffs (such as subscription charges) are likely to increase. Among other reasons for their opposition is that the policy might result in potential newcomers to the mobile market not being able to generate enough returns on their investments, thus harming competition and reducing benefits for the consumer.

The EU is not alone. Regulatory pressures (formal and informal) have been applied to mobile termination rates in many other countries. But not everyone is moving in the same direction. Some regulators are moving from “hands on” to “hands off” regulation. For example, in April 2009 the Office of the Telecommunications Authority (OFTA) of Hong Kong, China, deregulated fixed-mobile interconnection charges, leaving them to be settled by commercial agreement.

Types of charging

There are three main ways in which operators pay interconnection charges for carrying each other’s traffic:

  • Calling party network pays (CPNP) — the originating operator pays a per-minute charge to the operator that terminates the traffic being exchanged. It is the most common interconnection regime.

  • Bill and keep (BAK) — under this system (sometimes called “sender keeps all”), each operator agrees to terminate calls from another network at no charge (usually on condition that traffic is roughly balanced in each direction).

  • Receiving party network pays (RPNP) — an operator receiving a call pays a per-minute charge to the originating operator. Less common than CPNP, this system is used in North America and Japan.

Operators generally seek to recover their net costs through charging consumers of their services. There are two main ways to do this:

  • Calling party pays (CPP) —the person who makes the call pays for the entire cost of that call, but nothing for calls received. This system usually coexists with CPNP interconnection charges for operators.

  • Receiving party pays (RPP) — the person receiving a call pays all or most of the cost. In the mobile sector, this refers to payment of the “airtime charge” for termination on the recipient’s handset, while the originator too might still pay for a local call. This retail charging system usually coexists with RPNP.

Regional perspectives

Africa

Africa is seeing a boom in the number of mobile phone operators and networks — all of which need to connect with existing ones. Of the 19 African countries that responded to the ITU Survey on Tariff Policies 2009, 16 have imposed price controls on mobile termination rates. Two countries (Benin and Burundi) use the bill and keep interconnection regime, which is normal for Internet service providers, but not yet commonly used by telephony operators. Some 13 countries indicated that they apply the calling party network pays regime for interconnection services. This partly explains the extensive regulatory intervention in the region. Of the countries using cost-based pricing to regulate mobile termination rates, 60 per cent had adopted LRIC models, while international benchmarking was used by 20 per cent.

Arab States

Markets in this region are becoming more competitive as a growing number are liberalized and new companies enter. In some cases (such as Qatar and Morocco), both fixed and mobile termination rates are regulated, often by using international benchmarking. Other countries have only one operator, so there is no regulation of interconnection charges. In yet others, such as the United Arab Emirates, interconnection agreements are negotiated between parties, with regulatory intervention only in case of a dispute.

 
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Photo credit: © Dreamstime
Asia-Pacific

Many countries in the Asia-Pacific region take unique regulatory approaches tailored to specific needs. For example:

  • Singapore — Retail prices for the fixed network have historically been set on a calling party pays basis, and a cost-based fixed termination rate of around 0.6 USD cents is applied to all traffic that terminates on incumbent fixed networks. Mobile operators recover termination costs from their subscribers, who pay for both incoming and outgoing calls. The mobile termination rate is set at zero and a bill and keep regime is applied. Retail prices are unregulated and operators compete with a variety of service packages. Following reviews in 1999, 2002 and 2006, the Infocomm Development Authority decided that the market was best served by not changing the system.

  • India — To promote the expansion of networks, in March 2009 the regulations were amended so that termination rates for all types of domestic call, fixed or mobile, were reduced from the equivalent of some USD 0.6 cents per minute to USD 0.4 cents per minute. For international calls, the termination rate was cut from approximately USD 0.8 cents per minute to USD 0.6 cents per minute. The Telecom Regulatory Authority of India (TRAI) said it expects this reduction to be passed down to subscribers in the form of lower outgoing tariffs for international calls.

  • New Zealand — Instead of regulation, operators have made legally enforceable commitments to reduce fixed-to-mobile charges. Telecom NZ agreed to reduce its mobile termination rate from the equivalent of some USD 14 cents per minute to USD 8 cents over a five-year period from 2007. Vodafone NZ pledged to cut its rate from USD 14 cents per minute to USD 10 cents over the same period. These industry commitments have been seen as the way forward to promote an effective and competitive telecommunication market.

The Americas

This is probably the most liberal region in terms of mobile termination rates regulation. According to the ITU Survey on Tariff Policies 2009, in more than half the countries in this region, mobile termination rates are determined through negotiation and commercial agreements between operators. Regulators intervene only when there are disputes, with many stipulating the methodology to be used in such cases to determine interconnection prices. Almost all the countries surveyed indicated that a calling party network pays regime is applied for interconnection services. Two countries (Colombia and Costa Rica) use a bill and keep interconnection charging system. Countries that regulate mobile termination rates adopt a costoriented approach, using either LRIC models or a combination of LRIC and benchmarking.

Europe and the CIS

Interconnection charges are regulated in most of the countries in the region. The ITU Survey on Tariff Policies 2009 revealed that mobile termination rates are regulated in 15 of the 17 countries surveyed in Europe and the Commonwealth of Independent States (or CIS). In the rest of the region, retail mobile services are not regulated, except international mobile roaming.

To determine mobile termination rates, more than half the countries use either benchmarking alone, or a combination of benchmarking and cost modelling (fewer than 30 per cent use cost-based pricing alone). Mobile termination rates set using the LRIC cost model average USD 8.5 cents. When the fully distributed costs (FDC) model is applied, they average USD 20.4 cents. Benchmarking, on the other hand, yields between USD 6.2 cents and USD 20.7 cents.

Convergence, IP and NGN

The migration to all-IP (Internet protocol) networks is now well under way by fixed and mobile operators, with many already providing next-generation networks (NGN) that carry Internet access and data services alongside voice. Links among Internet service providers have typically been unregulated, and a form of bill and keep is becoming ever more popular as calls migrate to voice over IP (VoIP) technologies.

For fixed and mobile telecommunications, the differences between interconnection charging regimes are largely a consequence of regulations developed when these services were viewed as distinct. Nowadays, the border between fixed and mobile is blurred. For example, if an operator uses its network of Wi-Fi hot spots to provide voice calls, should its termination services be subject to fixed or to mobile termination rates?

The growing trend towards IP-based technology carrying multimedia services to fixed or mobile devices means that traditional distinctions are less and less relevant. Regulatory mechanisms need to be updated and to become flexible in this dynamic market environment.

 
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Photo credit: © AFP

Why regulate termination rates?

Looking at the picture around the globe, it seems that there is no single answer as to whether to regulate mobile termination rates. The rates in the Americas region (where there is no price regulation in many countries) are very similar to those in Europe and the CIS, where regulation is prevalent. The Trends 2009 report says that decisions to pursue regulatory intervention should not be taken lightly and the timing depends on a number of factors, such as the various players’ market power and the overall degree of price competition. In addition, regulators should keep in mind that a range of other solutions exists. These include:

  • permitting more firms to enter the market, including virtual mobile network operators;

  • encouraging measures that help consumers to change their service providers;

  • ensuring transparency in tariffs so that consumers can compare different companies’ (and countries’) charges.

The Trends 2009 report concludes that regulators should take into account the generally acknowledged fact that the existence of high fees for access to competitors’ networks (termination rates) can distort competition, become a barrier to new entrants, and finally be harmful to end users. Eliminating unnecessarily high termination rates among operators could lower consumer prices, and spur innovation in the entire telecommunication sector, according to the report.

 

* Interconnection charges are the payments made by operators to compensate each other for traffic exchanged between their networks. The termination rate is one of several interconnection charges.

This article draws on “Mobile termination rates — to regulate or not to regulate”, Chapter six of the report Trends in Telecommunication Reform 2009: Hands-on or hands-off? Stimulating growth through effective ICT regulation, issued by ITU on 9 March 2010.

 

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