Massive regulatory tariff cuts for UK carriers could have serious impact on network investment

June 27, 2003

2 Min Read
Carriers Lose Termination Fight

The U.K.’s four primary wireless carriers have been rocked with a huge financial blow that threatens to affect future network investment in this tiny island perched on the edge of Europe (see UK Court Rebuffs Carriers).

Vodafone Group plc (NYSE: VOD), Orange UK (London: OGE), and T-Mobile (UK) have lost their long-running battle with British regulator Office of Telecommunications (Oftel) and the Competition Commission over plans to slash "termination charges" -- the price mobile operators charge for connecting callers from rival networks (see UK Probes Termination Charges).

MmO2 plc opted not to join the legal challenge launched by its three competitors, but it faces the same outcome.

A court ruling has dictated that the carriers are currently charging excessive amounts for these services and must cut termination charges 15 percent by July 25. Similar reductions will follow in the next three years.

Income from call terminations account for around 23 percent of revenues of U.K. mobile carriers, and an even higher proportion of their profit. It is estimated that today’s measures will cost the carriers billions of euros in revenues.

Analysts are concerned that the cuts could have a huge impact on the financial health of U.K. carriers, harming levels of future network investment in next-generation technology.

“The fact that three of the four mobile operators decided to take action demonstrates how important this ruling is,” comments IDC’s Paolo Pescatore. “Their revenues are going to be hit hard. They are either going to have to cut investment or increase prices elsewhere. They may argue that they just don’t have the money for infrastructure and have no choice but to delay 3G rollout.”

“It is a pretty big kick,” agrees Phil Kendall of Strategy Analytics Inc. “A 15 percent cut could see a loss of 2 to 3 percent of ARPU [average revenue per user]. That doesn’t sound much but is a decent amount -- remember that anything above a fraction of a percent increase is usually regarded as impressive. This could be one heck of a dent.”

In January this year Peter Erskine, chief executive of mmO2, expressed his anger at the potential impacts such regulation could have on future network rollout (see O2 Reacts to UK Regulator). “As part of this we will review all of O2 UK's investment programmes, and in particular the scale and timing of our 3G rollout,” he said at the time. The carrier has since delayed its planned launch of commercial 3G services until the second half of 2004 (see 3G Farce Stings mmO2).

— Justin Springham, Senior Editor, Europe, Unstrung

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