Ofcom To Cut Mobile Termination Rates

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Ofcom’s decision will mean lower costs for fixed line operators, while mobile carriers will feel the pain

Ofcom on Tuesday moved to slash the cost of mobile phone calls between networks, instituting a charging system that will see mobile termination rates (MTRs) fall sharply each year.

Ofcom decided to base MTRs on long-run incremental costs (LRIC), which are lower than the LRIC+ rates that operators such as Vodafone, O2, T-Mobile and Orange had asked for.

Limiting costs

The LRIC model is based on the incremental costs of providing call termination to other communications providers, and has been recommended by the European Commission as the basis for fixed and mobile termination rates. BT, H3G, politicians and the Terminate The Rate lobby group also supported the use of LRIC.

LRIC+, on the other hand, also includes a mark-up for other costs, such as the spectrum used by the network. Mobile operators had argued that LRIC+ allocated costs efficiently, allowed full cost recovery and was well established.

The system will in most cases lead to a single wholesale charge on different networks, Ofcom said. It comes into force on 1 April this year and will run until 31 March 2015.

“This simpler regime will benefit consumers by promoting competition, and make it easier for operators to comply,” Ofcom said in a statement. “On the basis of charges set using pure LRIC, MTRs would, by 2015, be less than half of the charges calculated on a LRIC+ basis.”

Consumers and fixed-line operators such as BT will benefit from the decision, while mobile operators will foot the bill, according to Ovum analyst Matthew Howett.

Fixed line bundling

“This will allow fixed-line operators such as BT to bundle minutes to mobiles within their call packages, which up until now has been prohibitive given the cost,” Howett said in a research note. “Those that will feel the most pain will be the mobile network operators. These charges account for a significant proportion of their revenues (as much as 15 percent), and they may look to raise subscription charges to offset this.”

Howett said that having the cost of terminating a call in the mobile network at a level similar to that in the fixed network will allow operators to choose from a range of alternative charging mechanisms after 2015, such as “bill and keep”, where call termination is priced at zero.

“Capacity-based interconnect could be another option, which becomes a lot more relevant in a world where data is king and the minute is no longer a relevant cost driver,” Howett wrote.

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