The long-running battle between Oftel and the mobile industry looks a long way from over after Vodafone announced it would seek a judicial review over Oftels termination charge-cutting proposals.
The networks claim they stand to lose between 1.5 billion and 2 billion as a result of the regulations.
Vodafone UK chief executive Gavin Darby told Mobile News: It is a bleak day for the industry. There is no question that this will result in the removal of whatever subsidies are left in pre-pay handsets a reduction in subsidies for contract and a slow-down in the reduction of tariffs.
By taking the matter to judicial review Vodafone could only argue that the procedures and methods used by both Oftel and the Commission were wrong.
Oftel director-general David Edmonds said: It is like a football team losing a match and then complaining about the referee and complaining that the rule book is wrong.
He added: The Commission is an independent body and it has found in our favour almost 100 per cent. Consumers are being overcharged for calls to mobile phones and the mobile operators must reduce their charges to a fair level.
Overcharged
Last Wednesday Oftel announced that independent review body the Competition Commission had agreed with its view that consumers are being overcharged by as much as 40 per cent for calls to mobile phones and that the mobile operators must cut their termination charges for these calls.
But the Commission went beyond Oftels original proposition of a 12 per cent reduction in termination charges for each of the four years from 2001-2. It ordered a 15 per cent cut in call termination charges for all mobile operators by July 25 and further reductions of 14 per cent for Orange and T-Mobile and 15 per cent for O2 and Vodafone for the three years to 2005-6.
It also found that callers to mobile phones from landlines unfairly subsidise mobile phone users and the charges lead to higher call costs which suppress demand for calls to mobile phones.
The proposed regulations would see termination charges coming down by 50 per cent. This would have the affect of cutting the cost of calls from fixed-line-to-mobile by 40 per cent by the end of three years.
The Commission said this would bring about a consumer saving of around 190 million this year rising to 570 million in 2006. Despite such a loss of revenue the Commission believes operators will still get a fair return from termination charges and there will be no threat posed to their financial viability.
The Commission added that each operator has a monopoly for terminating calls on its network so callers have no choice but to use the network chosen by the receiver of the call and accept the networks termination charge.
The Commission also found that customers dont take into account termination charges when choosing a network. It also believes that the competitive pressures that exist in the marketplace are insufficient to constrain the termination charges.
In terms of practical savings the Commission found that the networks have been overcharging customers around 400-500 million a year and that the immediate result of the first 15 per cent reduction would mean that the price of a two-minute peak-rate call from a BT landline to a Vodafone customer would come down from 40p to 35p.
That the networks are prepared to take their challenge a step further shows the level of their displeasure. The networks have already had to stump up over 2 million for Oftels legal and consultancy fees as well as substantially more than that for their own counsel to contest the matter.
According to Edmonds the enforced price cuts would not have an adverse effect on the operators business plans and they would be able to make a fair return on terminating calls to their networks.
Oftel chief economist Peter Culham added that call costs should not rise as a result of the ruling.
O2 stated that it would implement a range of actions to recover lost revenue and protect operating margins. These would include deferring planned reductions in outgoing charges reductions in handset subsidies and a delay in the planned launch of commercial 3G services until the second half of 2004.
According to Darby it isnt just the networks that are going to suffer. Networks will call into question their distribution policies.
More marginal users will become even less profitable and networks will have to decide whether they want these customers. It is something all operators will have to look at he said.
Darby also suggests that the proposal will affect handset manufacturers. If networks remove the subsidies they give out on handsets then how attractive will new handsets be? All of a sudden a lot of people who would have upgraded will be thinking twice about getting that new handset.
He added: I cant talk for the other networks but Vodafone will recover the costs elsewhere.
What we are seeing is fixed-line users benefiting at the expense of the mobile users. What Oftel didnt mention in any of its announcements is that the Competition Commission openly stated that revenues lost as a result of the regulations would be offset by mobile users. Mobile users will pay more. It is as simple as that.
Darby is also annoyed that termination charges had been falling before the recent action and points out that over the past four years the charges have come down by 44 per cent.
What Oftel is suggesting isnt in the interests of anyone in the mobile industry. What is more frustrating is that the conclusion has been come to through flawed analysis. This is why we have no option but to seek a judicial review.
Orange executive vice-president John Allwood described the report as odd noting that the Competition Commission recognised that the mobile industry is highly competitive has produced substantial benefit and is not yet adequately profitable; yet it recommends interference.
The interference it directs would produce no net consumer benefit since the Commission envisages mobile operators putting up prices to offset lost revenues. At the same time the Commission has failed to ensure the fall in fixed-to-mobile call costs would in fact flow through to the benefit of the fixed-line customer. It has also failed to specify how its directives will work given the changes in regulatory structures in both the UK and Europe he said.
The consequence is that Orange will have to implement the Commissions directives minimising the adverse impact on our customers and trading partners and ensuring that the charges are financially neutral for Orange. At the same time we are considering requesting a judicial review to ensure that the Commissions report does not unfairly penalise mobile customers.
Oftels Culham questioned Allwoods conclusion however saying that while he expected a certain amount of rebalancing this should not mean an increase in call costs. But even with a rebalancing of costs Culham believes the impact of the reductions would be a saving of between 325 million and 700 million on behalf of the customer over the next four years. Furthermore the reduction in termination charge should stimulate call volumes.
Networks have argued that the ruling would force an increase in other call costs a reduction in the level of handset subsidies and most importantly a delay in the roll-out of 3G services.
Monopoly
Edmonds countered: Both Oftel and the Competition Commission looked very closely at the operators arguments about future technological change and the nature of mobile calls. They did not convince either of us that this monopoly position would erode quickly.
A few years ago the operators spent 22 billion on 3G licences and subsequently further billions on building their network infrastructure. It seems the antithesis of business to suggest they would hold off trying to recoup the investment because of the Commission especially with the existence of a new competitor in 3.
Interestingly Oftel said the proposed termination reductions would not apply to calls made on 3G networks. We are not regulating 3G because regulation in a new marketplace would be wrong. Lets wait and see over the next four or five years. With four or five players I expect it will be a competitive market.
Edmonds also said there was no justification for the networks to tax callers to 2G phones to fund 3G roll-out.
As to the fact that all telecoms regulations lapse in 2003 Edmonds said that the European Commission has been impressed by the method of the investigation and agreed that Britain had one of the highest termination charges in Europe.
As part of the judicial review Vodafone will ask a High Court judge to sit and review some elements of the approach the Competition Commission took.
National Consumer Council acting chief executive Gill Bull has called for the savings to be passed on to the customer.
Consumers have no alternative but to pay these so-called call termination charges. They are excessive and especially unfair on those who use fixed lines to call mobiles – often the elderly or those on low incomes.
Now we want to ensure that these cheaper wholesale charges feed through as soon as possible into customer bills. Call termination charges account for two-thirds of the final charges to consumers so the impact on bills ought to be dramatic. We will be looking for an assurance from the operators that they will play fair on this.
(See Comment P14)
