Analyst Angle: The challenges of mobile termination rates

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Mobile termination rates, the price a mobile operator charges to complete calls on its network, have been gradually decreasing over the last several years. However, MTRs still vary widely across countries and regions of the world, reflecting the disparate regulatory treatment MTRs often receive. Although there is a general trend toward bringing MTRs more in line with the actual cost of completing a call, in many countries MTRs are still significantly above-cost and there is little incentive in most cases for mobile operators to decrease them, since a substantial amount of their revenues are often derived from such rates.
MTRs are more or less important depending on the type of mobile service charging scheme a country uses. In countries like the United States – or other countries such as Canada and Singapore – where the receiving party pays (RPP) system is used, MTRs are not a significant factor in retail pricing or overall competition. With RPP, operators pay little or nothing to other operators to terminate their calls, providing them more flexibility with their tariff structures. Instead, subscribers “pay” to receive (terminate) the call, in the sense that incoming calls are counted against any applicable monthly rate plan or prepaid credit. In fact, U.S. mobile operators have gradually reduced or even eliminated the practice of charging subscribers separately for incoming calls. For example, they offer free incoming “on-net” (calls originating within the network, e.g., one Verizon mobile subscriber to another) and free incoming “off-net” (calls originating from another network, e.g., an AT&T subscriber making a call to a Verizon mobile subscriber) calls during off-peak hours and more recently, unlimited flat-rate pricing that includes calls to numbers on any domestic mobile or fixed network.
This kind of pricing flexibility is not available in most other countries, where the calling party pays (CPP) system is employed. Under CPP, the MTR affects the price of outgoing calls since operators must pay to have calls terminated on another network. These costs are then passed back to the originating callers, raising the effective prices that consumers pay for their mobile service. CPP operators cannot offer an unlimited pricing plan, because subscribers would be able to make unlimited off-net calls, generating considerable termination fees that the originating carrier would owe to other operators.
Countries vary in whether and how they regulate MTRs. In certain countries, such as in Africa and Latin America, MTRs are unregulated and operators are left to negotiate among themselves. This has often led to disputes between small operators and larger ones or fixed carriers and mobile operators. In other countries, including members of the European Union, mobile termination rates are controlled, with the regulator usually capping them at a cost-oriented rate. The ground for regulation is often based on a finding that each mobile operator has a monopoly in the market for terminating calls on its network.
One regulatory challenge is determining the cost of mobile call termination. This is frequently perceived by regulators and operators as a complex, acrimonious process. Some countries have adopted a rate cap based on international benchmarks, while others use various cost models. In 2009, the European Union adopted a recommendation calling for the MTR to be based on a theoretically “efficient” operator and that the rate only incorporate costs associated with call termination. This can be conceptualized as the difference between the total costs of an operator’s network to support its own subscribers less the incremental costs to terminate calls originating from outside its network.
Although the actual cost of termination does not vary significantly according to where a call comes from, some countries have different MTRs depending on whether the call originates on a fixed or mobile network or whether the call comes from within or outside the country. One illustration of this asymmetry familiar to U.S. consumers is the surcharge for calls to mobile phones abroad, which is due to the imposition of a higher MTR on calls originating on overseas networks. The Federal Communications Commission looked into this issue several years ago, but no final decision was issued, and the proceeding is still pending. Another example of asymmetry in MTRs is the practice of permitting smaller operators or new market entrants to charge a higher rate. These asymmetries tend to distort the cost of termination and create inefficiencies. The European Union hopes to see symmetrical rates in all member countries by the end of 2012. A growing number of EU members already have symmetrical rates but in many non-EU countries asymmetries continue to exist.
In a recent study, TMG found that the average MTR around the world in 2009 was 8.4 U.S. cents per minute, a decrease of 16% over the previous year and 34% since 2005. The study also found that there is great diversity in MTRs between and within regions around the world. The Latin America-Caribbean and European regions have the highest average MTRs at over 10 U.S. cents per minute. By contrast, the Asia-Pacific and Middle East and North Africa regions have the lowest MTRs with an average of around five U.S. cents.
Due to ongoing regulatory intervention to align MTRs with costs, it is expected that MTRs will continue to drop with the world average reaching approximately four U.S. cents in four years.
The push to decrease MTRs by regulatory authorities is an important measure to stimulate competition and consumer usage as TMG’s study found a close link between MTRs and mobile phone usage. The highest level of usage is found in RPP countries or countries where MTRs are very low. The ongoing reduction of MTRs around the world is thus good news for consumers who should be able to benefit from being able to talk more for less.
Michael Minges is Senior Market Analyst for Telecommunications Management Group, Inc. (TMG). Minges researched and wrote TMG’s Mobile Termination Rate Update 2010, available at http://reports.tmgtelecom.com/mtr2010. Minges can be reached directly at minges@tmgtelecom.com. Jeffrey Bernstein is Senior Business and Policy Analyst for TMG. Bernstein can be reached directly at jeff@tmgtelecom.com.