Ofcom’s proposals to cut mobile termination rates (MTR) will gauge a big chunk out of the revenues of the big four operators O2, Vodafone, Orange and T-Mobile.
There are two questions: will consumers really benefit from smaller bills and increased competition as Ofcom hopes; and how will the big four recoup the loss in revenue?
One operator will not be losing revenue, however. Ofcom’s proposals are good news for the UK’s smallest operator, 3, which won’t need to recoup costs as it’s a net loser from MTRs at present. It pays out more in MTRs than it gains (to the tune of around £200m last year). This is because it has a much smaller customer base than its big rivals, so its subscribers are more likely to be calling someone on another network.
In addition, 3 has a much higher proportion of customers on contract than its rivals. Contract subscribers tend to make far more calls than prepay subscribers, who prefer to wait to be called so they can conserve their credit.
BT will also be better off as it has to pay out far higher MTRs than it is allowed to charge for mobile calls to its fixed lines. Ofcom has said it expects BT to pass its savings on to consumers.
Ofcom’s figures show that termination charges between fixed and mobile phones generate £860m a year at the current MTR. By cutting the MTR from 4.3p per minute to just 0.5p per minute by 2015, that sum will fall to as little as £100m.
That’s a lot of money to lose for the big four (or three if we count Orange and T-Mobile as one). MTRs are estimated to account for something like 15% to 16% of their revenue.
The big four face a reverse situation to 3. They all have more prepay customers than contract. At present prepay customers generate a decent amount of income via MTRs, as they tend to receive far more calls than they make. But without the MTR subsidy, prepay customers will generate very little revenue, if any at all, as voice and text revenues are in decline anyway, thanks to the intense competition to attract and keep customers on the networks with low tariffs.
The mobile networks will have to take a long hard look at their prepay model to see if it is sustainable in the post-MTR world.
So what can the networks do to offset the loss of MTR revenues?
In a saturated market like the UK, it will be hard to raise tariffs for voice given the intense competition to win and keep subscribers.
Raising the price of data has been suggested as an alternative. The problem here is that although the demand for data is growing exponentially, competition between the networks is already so intense that none of them dare raise prices too much without the fear of people switching to cheaper networks.
What we might see though, is new pricing models with different tariff bands where users are charged higher amounts for taxing the network infrastructure more heavily. For example, customers who stream a lot of HD video will pay more than customers who are just checking Facebook.
The big networks are threatening to introduce charges for receiving calls, which is how it works in the US. Culturally, that will be a real tough sell in the UK, and it is doubtful Ofcom would tolerate such a move.
A more likely scenario is that the networks will cut subsidies on ‘free’ phones, asking customers to pay a (higher) proportion of the handset’s price upfront. They might even move to a situation where they cut handset subsidies entirely.
Two downsides to that: if customers are paying full price for their phones, they won’t change them so often and manufacturers won’t like that; the networks will be pleased to avoid coughing up millions in subsidies, but if customers are no longer tied into contracts because they are on Sim only deals, churn rates will rise massively as customers are free to seek out the best deals.
The big four may grumble and gripe, but the real problem is the mobile phone industry has matured to the point where the boom years of expansion and big profits are over. The operators do not have a great deal of room for manoeuvre if they continue their present business model.
It is worth noting the big networks’ argument that if the Government wants UK plc to have a fast and efficient mobile phone and mobile broadband service, it needs to ensure that the networks have sufficient revenues to invest in keeping the infrastructure up to scratch.
Stinging the networks for huge sums over 3G licences and then again potentially for 4G leaves them with less money to invest in the next generation of infrastructure. Cutting MTRs, they argue, also impairs their ability to find sufficient funds for future investment, especially now their traditional revenue streams from voice and text are declining. UK businesses will lose out to those countries able to invest in upgrades to their mobile infrastructure.
Whether this argument will cut any ice with the Government or Ofcom remains to be seen. Given Ofcom’s proposals to cut MTRs to 0.5p, it looks like the regulator wasn’t impressed by the networks’ pleas. But then Ofcom’s job is to look after the consumer first.
So where does that leave the networks and the gaping hole in their revenue?
It seems the only real option to offset the cuts in MTRs and the continuing decline in traditional voice and text revenues is to seek other revenue streams, which of course they are doing.
Fixed line and broadband, mobile advertising, m2m in a wide variety of industries such as energy, transport, banking, education, health and contactless payments for general retailing, are all in the works. Like every industry, the mobile one is having to adapt to changing times.
Whether these changes will see consumers ending up with cheaper bills is debatable at this point. Tariffs for voice, text and data are more competitive than they’ve ever been. And consumers who complain about being locked into 24 month contracts, have after all, made that choice voluntarily because they wanted that ‘free’ handset.
It’s also worth noting that MTRs have come down from 23p per minute in 1995 to the point where they are the fifth lowest in Europe anyway. Bills could, therefore, come down a bit, but consumers may find that they end up paying more for texts, or data, or more for handsets if subsidies start to be cut.