Ofcom Lowers Mobile Termination Rates

Mobile termination rates, the prices charged by one telecom provider to another to complete a dialed call, have been falling in most countries for some time, a development that creates the possibility, and in most cases, the reality, of retail price declines for users of mobile services. For mobile service providers, the trend means a drop in income, whether the lower costs are fully passed on to consumers or not. 

Telecommunications Management Group noted in 2010 that mobile termination rates had declined 34 percent since 2005, with the average global mobile termination rate amounting to 8.4 U.S. cents in 2009. TMG predicted then that termination rates would continue to drop due to ongoing regulatory intervention to align interconnection rates with costs, with the world average reaching around 4 U.S. cents by 2013.

That certainly seems to be the case. Ofcom, the U.K. regulator, recently announced its own plans to simplify and reduce mobile termination rates in that country. The older system of approved rates in the United Kingdom will expire on March 31, 2011, and Ofcom has proposed lower and more-uniform rates under the new rules to take effect on April 1, 2011. 

"In most cases, the outcome will be a single wholesale charge for MCPs on different networks, falling sharply each year," says Ofcom.

In a nutshell, the Ofcom rules represent a key background factor for providers of communication services globally. Namely, regulatory activity now trends very much in the direction of driving inter-carrier voice prices with retail and end-user implications ever lower. At the same time, more attention is being paid to stimulating and promoting broadband access in various ways. In the United States, the Federal Communications Commission is proposing to shift much of the traditional support for rural and high-cost universal service support away from voice, and to broadband. 

Intercarrier compensation, a contentious issue for much of the past two decades, is on the table again, with the larger carriers pressing for lower charges, while many local access providers want the existing regime to remain in place. The issue is highly contentious because small and rural telcos derive so much of their total revenue from intercarrier compensation. 

In some cases in the past, for example, a small telco earns 85 percent of its non-traffic sensitive costs through payments from the larger carriers that carry most of the U.S. long distance traffic, for example. After the AT&T (News - Alert) divestiture, and the growth of competition in the long distance market, the Federal Communications Commission shifted the support program from a strict "per-minute" reimbursement program to a flat "subscriber line charge plus per-minute reimbursement for traffic-dependent costs.

Rural carriers still were allowed to recoup the costs of their overhead and fixed costs from the per-minute fees paid by "long distance" carriers, though. 

With the emergence of the competitive local exchange carrier segment of the business, a new "reciprocal compensation" system was set up to govern the exchange of traffic between local carriers. Since about 2000, the Federal Communications Commission has been attempting to drive such payments toward "actual cost." 

As use of mobile phones became more widespread, yet another arrangement was created allowing mobile providers to interconnect using a "bill and keep" format that essentially operates on the principle that the terminating carriers don't pay each other. Also known as "net payment zero," bill and keep allows two telecommunications networks to exchange traffic without payment. That arrangement works best, as you can imagine, when the amount of traffic delivered or terminated by each carrier is roughly equivalent. 

IP-based "information services" are completely exempted from any intercarrier compensation rules. As you also can imagine, the rules have created a hodge-podge where similar operations  operate under dissimilar rules. Perhaps perversely, the maintenance of some of the existing rules also creates a huge financial disincentive to switch from legacy TDM to all-IP networks, as that move would take away the revenue the existing system now provides to smaller and rural carriers, for example. 

It isn't yet clear what new framework the FCC (News - Alert) would propose for adoption, though it is preparing to try. Local exchange carriers can earn between 10 percent and 30 percent of revenues, and an arguably greater proportion of free cash flow from such intercarrier compensation mechanisms, so the changes will be closely scrutinized and fought about. 

Ofcom's rules, though, are indicative of the broader trend, which is a lessening of intercarrier compensation mechanisms over time.