Plans on Termination Rates: No Good News

The commission presented yesterday, to a selected number of representatives of NRAs, a plan for a new recommendation on Termination Rates.

Commission's objective is to achieve a coherent harmonized approach to ex-ante regulation of termination rates. They realized that, despite a common approach (LRIC) there is still 'inconsistent application of remedies' and that there are 'different levels of termination rates across Europe'.

The good news is that the commission is supported by ERG experts on this matter and that they plan to have a transitional period to achieve symmetrical termination rates.

I believe that symmetrical termination rates should be the objective of each NRAs, if we consider an efficient operator there's only one 'efficient' termination rates. Ideally one per country, but potentially, as expected by the commission in the long run, one per the entire European continent.

The bad news is that the commission is still in trouble defining the 'ideal' parameter and approach. At this stage of the process, I would argue that no recommendation is better that a bad 'recommendation" and that the fasted and less painful solution would be a kind of Bill & Keep solution with a level of cap, a trash hold, of about 10-15% above where symmetrical (ideally low) termination rates are charged.

The reason is simple, to prevent destructive retail tariffs, "Free calls to operator's A customers", so that I gain new customers and the costs of these customers are burden by the largest operators that have to increase capacity to its network.

What do you think on this issue? And what about fixed to mobile termination rates? Will it be the old / new problem of next year?

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Lower Termination Rates for All: A New Hope

European smaller mobile operators have changed their strategies on regulated mobile termination rates.



In the last ten years smaller operators have always argued that size and market's entry matters when speaking about termination rates. Smaller operators due to lack of economies of scale and scope and the market's situation would have the right to ask for premium rates for terminating calls on their networks.

The Mobile Challengers Group (Italy's Wind, Poland's Play, Turkey's Avea, Bouygues Telecom, E-Plus, Base and 3 Europe) is promoting a change of course. They argue that, since termination rates based on LRIC are way above costs, Regulators imposing these pricing methodologies are promoting the position of a handful of large operators to the detriment of new entrants.

The Mobile Challengers Groups realized that "network economy matters", they terminate less calls that they send. They are net payers to large operators. For example, 3 has large outflows of cash due to terminations.

Their solution looks 'simple', reducing termination rates at 'marginal' costs.

They did not present, however, solid evidences on the level of reductions necessary to solve the problem and, as support, a cost model reproducing an efficient marginal cost for termination. The lack of evidences and weak/faulty arguments do not facilitate the regulator's work.


Picture Source: http://www.flickr.com/photos/63878179@N00/956430203/

NGN Regulatory and Commercial Aspects

Commercial aspects of NGN interconnection should be not underestimated when setting wholesale rates.

We know that in wholesale there are two main groups of services that will be interconnected: regulated and not regulated. We can include also two other categories more common in the retail market, services that are perfectly homogeneous and 'status' goods.

What I intend with this?

Perfectly homogeneous a.k.a. commodities: The firm in this case is a passive actor with absolutely no power over the market for its products. This is a key feature of the ‘perfect competition’ model of the market place, in which the individual firm is a price-taker (e.g. voice services).

Premium (Veblen goods): The firm has a power on the market of this product. Elasticity for these products can be positive or neutral.(e.g. Euro2008).

We should consider all these elements when we decide the pricing mechanism we want to choose for our wholesale product.

Analyzing the issue I realized that there are a multitude of pricing mechanisms that are not always compatibles with retail. If we run a compatibility test between pricing and charging principles we see that they are almost always only directly compatible (for example, QoS at wholesale with QoS at retail).

In my study I have identified the implications at retail level of applying indirect relashionships. It might seems absurd but the less destructive methodology remains the per minute charging. I am not saying that it should be always used, but that there should be a direct relationships between wholesale charging and retail if we want to reduce market's distortion.

This would suggest that ….

1- there isn’t a best way to price products where there are a multitude of diverse services, but there’s a multitude of options.
2- Therefore it depends on several environmental factors e.g. product, market and regulation.
3- However combinations of models are not infinite or without constrains.
4- the importance of costs of wholesale products to assure innovation, fair competition and flexibility in the market.