What are mobile termination rates (MTRs)?
An MTR charge is incurred when a mobile phone call is transferred from one mobile network to another mobile network or from a landline to a mobile network.
There is a real cost for transferring a call from one network to another, but it is minimal. However, each network has to be build, maintain and continually upgrade its base stations, mobile masts, switching stations, routers and so on.
The argument goes that if you move onto someone else’s infrastructure, why should you get that for free? You are in effect hiring their base stations and network, so you should pay a charge. The networks decided that wrapping that charge up within the user’s phone bill is the simplest way of paying that cost. Others argue that the charges far outweigh the actual cost of transferring a call and are not transparent to customers.
Why did MTRs come into existence?
In the early days of the mobile phone industry, the networks were not generally subject to price control, either of their termination rates or of their outgoing call prices.
As a result, they were able to charge termination rates which far exceeded the actual costs of transferring a call to another network by a considerable margin.
Governments generally allowed the nascent mobile industry to charge high MTRs as a way of generating extra income to allow them to invest and grow. It was seen as a way of enabling them to compete more effectively against the giant established fixed-line operators like BT, which dominated the market in the UK.
However, following the huge growth of the mobile industry over the last two decades and their emergence as real competitors to BT, it is argued that the economic justification for MTR no longer applies. Some argue, (BT in particular) that the situation has actually gone into reverse.
What has the UK telecoms regulator Ofcom done about MTRs?
The UK telecoms regulator, Ofcom, has put pressure on mobile operators over the last few years to bring MTRs down gradually, using so-called glide paths, but the rates still exceed costs by a large margin.
At the end of 2009, Ofcom set the MTR at 4.7 pence for each call made to a mobile phone. This is compared with 0.3 pence for phoning landlines via a mobile. This price is set to stay in place until April 2011. It is worth noting that the UK had the fifth lowest termination charges in the EU at that point.
However, in 2010, Ofcom put the MTR situation up for review and published a consultation document, which proposed to gradually reduce MTRs to 0.50 pence per minute by 2015.
Why do Three and BT want MTRs scrapped?
In 2009, Vodafone, O2, Orange, T-Mobile (now Everything Everywhere) made a big profit from the charges, raking in around £2 million in income per day, or £750 million a year between them.
Three’s problem is that it is much smaller than the big four operators. It has far fewer customers, so it is more than likely that its customers will be ringing people on other networks on a regular basis than they will customers on Three.
Three also has fewer pre-pay customers than its rivals. Prepay customers tend to receive far more calls than they make outbound. So Three’s predominantly postpay customers make far more outbound calls and receive fewer inbound calls, meaning Three has to pay the other networks more than it gets back. So it has an unfavourable cost balance.
Three has admitted that if the MTRs were scrapped it would be a relief for the company, as it paid out ‘£200 million to the big four’ in 2009, money which it feels would be better paid to its customers. Three argues that if termination rates were reduced to zero it would be able to offer cheaper prices to its customers.
As for BT, it is the dominant fixed line provider, so its customers get burned by MTRs each time they call a mobile phone. To receive a mobile call on a BT fixed line costs a fraction of a penny, but BT is charged around 4.5p to transfer a call from its fixed line onto a mobile operator’s network. BT says, given the size of the mobile operators now, this is not fair.
Why do Vodafone, O2 and Everything Everywhere oppose cuts in MTRs?
The big mobile networks argue that if the Government and its customers want all the opportunities a mobile network can provide – especially high-speed, high capacity data allowances – then they need the money to invest in upgrading and maintaining their networks to make that possible.
The big networks also point out that there is still a real cost to transferring a call, as it costs to build, maintain and upgrade their mobile network infrastructure. If you remove the charge, there is still a cost to be met, which has to be found elsewhere – either through higher tariffs, or charging more for handsets.
They argue that their voice and text revenues are in decline and that while data revenues are climbing, they are not enough to offset the fall in traditional revenues (yet). Cuts in MTRs, they claim, harm their revenues even further and make it more difficult for them to find the money necessary to invest in the next generation of high-speed networks necessary to provide customers with the experience they want when accessing the internet on their smartphones.
The big networks also argue that the removal of MTRs would hit low income groups and elderly people, who are mostly on pre-pay tariffs. These people mostly use their phones to receive calls, but they don’t make many calls. So operators don’t make much money, if any, out of these people making calls, but they do get revenue through termination charges. At present, the operators say, they are able to cover the cost of having this kind of pre-pay customer through termination charges.
The big operators claim that if MTRs are removed this kind of customer could become uneconomic. Operators would have to charge them more – either for the handsets, or by ensuring they spent a minimum a month on pre-pay. The danger is that many of those customers would then say – this is too expensive for me now, I won’t have a phone anymore. This, they say, goes against the inclusivity the government is trying to promote through its Digital Britain initiative.
What’s the situation now?
Following the consultation on its proposals, Ofcom published its decision on the future of MTRs on Tuesday 15 March 2011. It will cut MTRs by 80%, slightly less than it originally proposed.
The current rates for O2, Vodafone and Everything Everywhere of 4.18p per minute and Three’s rate of 4.48p will be cut to 0.69p in 2014/15.
The new rate for 2011/12 will be 2.66 pence per minute for all networks, which will drop to 1.70p in 2012/13; 1.08p in 2013/14; and finally 0.69 in 2014/15.
Ofcom argues that ‘as termination rates only apply to calls rather than data, over the four year charge control period, they are likely to become a less significant element of mobile companies’ revenue’.
Ofcom stated that: ‘Data revenue increased by 90% between Q4 2007 and Q4 2009 and Ofcom expects continued data revenue growth in the future. Therefore, Ofcom expects that investment in the UK mobile sector will be driven increasingly by the growing appetite for data services, smartphones and mobile broadband. Ofcom does not expect lower mobile termination rates to materially change this trend.’
O2, Vodafone and Everything Everything have all expressed their disappointment at the d