Ofcom could face a legal challenge from operators if its proposals to cut termination rates become law.
At the start of this month, Ofcom proposed a reduction on termination rates from around 4.3p per minute to 0.5p per minute by March 2015.
The move has met open opposition from all the networks apart from 3. The big four operators will lose revenues they make from the charges, while smallest network 3 is currently the company that has to pay out the most.
Orange, T-Mobile, Vodafone and O2 are currently challenging Ofcom’s proposals, saying that the cuts are too substantial. They have until 23 June to respond to the consultation. If their needs are not met before then, they are likely to launch a legal challenge, sources indicated.
Network chiefs have also indicated that cuts are likely elsewhere in their businesses as they struggle to find a way to recoup the charges.
One network source said: ‘Negotiation might change what the current proposals are. We can’t say if there will be a legal challenge until a decision is made, but if the rates remain the same, it is possible.’
Another added that investments such as next generation broadband are a risk if the proposals are maintained. He said: ‘The investment needs to be found from somewhere and it’s currently funded from termination rates – subsidies and pay-as-you-go may increase.’
Meanwhile, Strategy Analytics analyst Phil Kendall said: ‘We are talking about knocking the best part of 4p per minute off a call. It’s hugely beneficial to 3 but not to the other operators.’
Ofcom said: ‘The consultation sets out our proposals for a new MTR regime, running from 1 April 2011 to 31 March 2015.The consultation on the rates closes on 23 June 2010 and we plan to conclude the market review with a statement in the second half of 2010.’
However, 3 says the four year waiting period ‘is not soon enough’, and it will campaign to have the timeline reduced.
3 UK director of regulatory affairs Stephen Lerner said: ‘The cut in termination rates will lead to a reduction in prices for consumers – there is no reason to wait until 2015. These prices are excessive and they should come down sooner.’
MVNOs cautious over impact of MTR cuts on revenues
Ofcom’s recommendations to lower termination rates could give a welcome boost to smaller MVNOs.
MVNOs have been more cautious in responding to the proposed changes than the operators, with some unsure how the decision will affect them.
However, for ethnic MVNOs, the move could be a boost for business. Ethnic market MVNO Nomi Mobile’s head of commercial and corporate sales, James Buckley, said: ‘Our focus is around the international calling market, but we also have a home calling service.
The reduction in MTRs will make things much more convenient for users.
‘It will provide an opportunity for users to use services in the UK. It is positive all round because our main aim is to provide low cost telephony for users. We will try to create more accessible bundles to be used in the UK.’
However, others are still trying to work out how the decision will affect them. Virgin is in a ‘unique’ position in the market, as one of the UK’s biggest landline providers and operating a successful MVNO on T-Mobile’s network.
MVNOs may also be waiting to hear from the operators they use. Industry sources have suggested that operators were surprised at how low the recommendations from Ofcom were.
Strand Consult CEO John Strand said: ‘Wholesale prices might not decline as fast as they would have had this had not happened.’
Termination rate cuts benefit 3
3 will substantially reduce its costs as a result of Ofcom’s slashing of termination rates.
The network’s CEO, Kevin Russell, said last week that 3 will start to aggressively grow its customer base.
Russell (pictured) said the changes outlined by Ofcom, which will see the rates cut to 0.5p over the next five years, meant he could focus on the mobile operator’s market share.
3 is expecting its retail prices to be cut by 25%. 3 UK director of regulatory affairs Stephen Lerner said: ‘For us, we are a net outpayer and at the same time we are a net recipient. The effect on our bottom line is increased profitability – we will be able to go after share more.’
He added that the voice market will become ‘like the data market’, which will be ‘good for consumers’.
The existing charges have impacted on 3, which is still to report a profit since its launch in 2003, because it has a small customer base.
With a base of just over five million, 3 pays out more in charges to rivals than it receives for connecting calls to its network.
However, the reduction in termination rates will allow 3 to make more from voice calls and aggressively target new customers with competitive rates.