Mobile phone termination rates - briefing

07 May 2009
by eub2 -- last modified 07 May 2009

The European Commission has today set out clear guidance for EU telecoms regulators on the cost-based method to be used when calculating termination rates – the wholesale fees charged by operators to connect the call from another operator's network which are part of everyone's phone bill. The guidance is in the form of a "Recommendation" that national regulators are obliged to take "the utmost account" of. The Recommendation indicates specifically that termination rates at national level should be based only on the real costs that an efficient operator incurs to establish the connection. Eliminating price distortions between phone operators across the EU will lower consumer prices for voice calls within and between Member States, saving business and household customers at least EUR 2 billion in 2009-2012, and help investment and innovation in the entire telecoms sector. Mobile termination rates varied widely in the EU in 2008 from 2.00 euro cents per minute (in Cyprus) to 15 euro cents per minute (in Bulgaria). Mobile termination rates (on average 8.55 euro cents per minute) are also typically 10 times higher than fixed termination rates (on average ranging from 0.57 to 1.13 euro cents per minute). Higher mobile termination rates make it harder for fixed and small mobile operators to compete with large mobile operators. These divergences, and differing regulatory approaches, undermine the Single Market and Europe's competitiveness.

What are termination rates?

Termination rates are the wholesale tariffs charged by the operator of a customer receiving a phone call, to a fixed or mobile phone, to the operator of the caller's network for connecting, or "terminating", the call. Termination rates are therefore part of the cost of a call between customers of different network operators and included in the phone bill of the calling customer.

How much does terminating a call cost today?

Termination rates are applied by both fixed and mobile operators for connecting calls on their networks. Although termination rates are regulated in all Member States, the level of these rates diverges widely across the EU. Average mobile termination rates, for example, varied from 2 euro cents/min in Cyprus and 5 euro cents/min in Finland to 8 euro cents/min in Germany and over 15 euro cents/min in Bulgaria in 2008. Mobile termination rates are still around 10 times higher than fixed-line termination rates which ranged on average from 0.57 euro cents/min to 1.13 euro cents/min over the same time period. The extent of these variations cannot be justified solely by differences in the underlying costs, networks or national characteristics.

Why should termination rates be regulated?

At the current stage of technological development, fixed or mobile phone calls to a subscriber can only be terminated by the operator of the network to which that particular customer is connected. This creates a 'monopoly' situation for each network operator on their own network resulting in distortions of competition, such as excessive pricing. Regulating termination rates therefore addresses the risk of excessive pricing by ensuring that the prices reflect the underlying costs of terminating the call.

Who regulates termination rates?

The regulation of termination rates in each Member State is the responsibility of the national telecoms regulators. Under EU telecoms rules, when a national telecoms regulator determines that a relevant market is not effectively competitive, it must identify operators with significant market power and impose appropriate obligations on them to encourage competition. National regulators are then required to notify the Commission and the other EU Member States' regulators of their draft decision(s) to ensure consistent regulatory practice across the EU and legal certainty for market players (the so-called Article 7 procedure). Having received a considerable number of such notifications from national regulators under this consultation mechanism, the Commission has consistently stated that regulated termination rates should be set on the basis of the costs of an efficient operator. This would ensure a level playing field amongst different operators and give operators incentives to become efficient and bring benefits to consumers, in particular lower prices.

Why is the Commission now intervening in the way national authorities regulate termination rates?

While termination rates are on a downward trend as a result of regulatory intervention, they remain too high, particularly for calls to mobile phones. In addition, termination rates are set at disparate levels across different Member States. Such diverging levels cannot be solely explained by differences in the underlying costs or national specificities but are in large part driven by inconsistent approaches to the regulation of termination rates.

This inconsistent regulation:

• hampers the consolidation of a single borderless market in the EU
• hinders the evolution of cross-border competition and services
• tilts the playing field in favour of larger, more established mobile operators to the detriment of smaller entrant mobile operators with large traffic outflows to other networks
• distorts competition between fixed and mobile networks resulting in fixed operators essentially cross-subsidising their mobile counterparts
• impedes investment in next generation networks and the development of fixed-mobile convergent services and
• ultimately leads to higher phone tariffs for business and household customers.

This is why the Commission has issued a Recommendation on the regulatory treatment of termination rates, providing clear principles for national regulators to set a fair cost. Consistent regulation across the EU will provide legal certainty and a level playing field for telecoms operators. This will lead to more investment, innovation and competition in the telecoms sector benefiting Europe's 500 million consumers.

What does the Recommendation require from national telecoms regulators?

The Recommendation states that national telecoms regulators should set termination rates at the level of what it costs an efficient operator to "terminate" calls on his network. It provides a methodology for calculating a termination rate that allows an operator to recover all of the relevant costs efficiently incurred when providing call termination services to third parties. This methodology leads to termination rates which would prevail in a competitive market and thereby eliminates to a large extent currently existing distortions of competition, such as excessive pricing, resulting from the 'monopoly' situation characterising termination markets in Europe.

National telecoms regulators are obliged to take "utmost account" of the Recommendation which stipulates that the recommended costing methodology should be implemented by the end of 2012.

However, the Commission recognises that some less well-resourced national telecoms regulators might need an additional transition period to prepare the recommended cost model. Therefore, in exceptional circumstances, national telecoms regulators may use alternative approaches until 1 July 2014 if these methods result in an outcome consistent with the Recommendation and with that of a competitive market. Alternative approaches beyond this date can only be applied where cooperation among EU regulators would not be sufficient to offset this lack of resources and it would be objectively disproportionate for such regulators to apply the recommended model.

Are there any countries already complying with the rules recommended by the Commission?

In October 2008, the French telecoms regulator, ARCEP decided to bring mobile termination rates closer to the cost of an efficient operator. The Commission welcomed the proposal noting that ARCEP's approach clearly represents best European practice and very important efforts to bring mobile regulation in line with the Commission Recommendation on the regulatory treatment of termination rates. ARCEP indicated in this context that the efficient cost-based mobile termination rate to be reached by all mobile operators would be between 1 euro cent and 2 euro cent per minute. The Commission also welcomed the Italian and the Romanian regulators' commitment to bring termination regulation in line with European law and best European practice and their firm intention to develop a cost model in line with the Recommendation.

At the same time, the Commission has recently called on the Bulgarian regulator, for example, to introduce a faster reduction of mobile termination rates reiterating that in 2008, mobile termination rates in Bulgaria were, with over 15 euro cents per minute, the highest in the EU. The Commission has also urged the Spanish regulatory authority to take further necessary steps to reduce termination rates to a cost-oriented level reflecting the cost of an efficient operator, while the German regulator even had to be asked to notify the Commission of the actual mobile termination rates as they represent an important part of the price remedy and play a key role in ensuring effective competition in the EU telecoms market.

In the Commission's view, how low should mobile termination rates be?

The Commission’s Recommendation aims first and foremost at greater consistency and more effective regulation of termination rates. The objective is not to regulate down to a particular level. Of course, considering that mobile termination rates are on average nine to ten times higher than average fixed termination rates, there is scope for significant reductions of mobile termination rates from current levels. Regulating termination rates on the basis of efficient costs will result in substantial reductions over the next three years, depending of course on the extent to which termination rates currently exceed efficient cost in each Member State and could lay in the range of 1.5 to 3 euro cents per minute.

What will be the impact of the expected reductions in termination rates on industry?

The proposed approach will lead to more substantial reductions in termination rates than previously seen in the EU. However, operators will still be able to recover their costs for "terminating" calls. Operators in countries that already have very low termination rates are still able to recover their costs, generate substantial revenues and compete effectively.

A Commission Staff Working Paper explores the likely implications of the recommended approach for competition, industry players and consumers in detail. On the basis of the short-term static assessment alone (where all other factors are fixed over time), a potential reduction in mobile industry cash flows/profits of around €4 billion is estimated over the next three years as regulators move towards the recommended approach.

At the same time this loss is offset with estimates predicting additional revenues for fixed operators of at least €2 billion over the next three years as well as €2 billion of additional consumer benefits. The static model developed by the Commission cannot reliably capture all of the dynamic effects of enhanced competition (including the possibility for new revenues from other services) which will extend over the mid-to-longer term and will be even more positive than estimated by the short-term model. Indeed, more competition delivers increased incentives for efficiency and innovation that will encourage customers to use their phones more and will promote previously unexploited revenue opportunities for operators in the EU. While more difficult to predict in the mid-to-long-term, the overall gain to society as a whole resulting from the combined effect on consumers and market players will be much greater than shown by the static model alone.

Will the Commission's Recommendation be good for competition and consumers?

The proposed common approach to the regulation of termination rates in the EU will promote competition by bringing greater legal certainty to operators that want to operate and invest on a cross-border basis.

Regulating termination rates based on the costs of an efficient operator should reduce cross subsidies from fixed to mobile operators and minimise the financial impact of traffic imbalances between smaller and larger networks, while still allowing all operators to cover the cost of terminating calls. This will ensure a more equitable allocation of financial resources across the EU telecoms markets, will create a level playing field for operators and provide appropriate investment incentives. In particular, the expected enhanced competition between operators should help encourage important network and service innovations such as fibre roll-out and the development of bundled offerings or converged services and provide faster and more efficient services and products to consumers at better prices, especially by smaller mobile phone operators as well as fixed network operators.

As to consumer benefits, it is likely that the regulation of termination rates on the basis of the costs of an efficient operator will result in lower phone bills for consumers. Some price restructuring may of course occur, but enhanced competition will help secure a continued downward trend in retail prices and affordable mobile phone usage across the EU, helping to avoid even low-spending consumers from giving up their mobile phone connections or subscriptions. Indeed, some late-entrant mobile operators have indicated that they are ready to receive the 40 million customers that European incumbent operators claim they would no longer be able to serve under the recommended costing approach.

Could the Recommendation lead to a situation where Europe's consumers, like in the US, will have to pay for receiving telephone calls?

This is highly unlikely. The Commission's Recommendation only aims to set out clear consistent costing principles on the regulatory treatment of termination rates in the EU. The choice of business model for the exchange of termination traffic and for retail pricing remains a matter for the operators to decide by themselves. The Commission Recommendation does not preclude alternative mechanisms from evolving in the future as long as they are consistent with a competitive outcome and the interests of consumers. "The calling party pays" principle is firmly anchored in the mentality and consumer behaviour of Europeans. A company changing this would therefore risk losing its customers to its competitors. The bottom line is, whatever system evolves as a result of lower mobile termination rates, consumers in Europe will be substantially better off than today. This explains why the European Consumer Association BEUC supports the Commission's Recommendation on Termination Rates.

Source: European Commission