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Carriers Cash In on Termination

Mobile operators in Europe have been accused of quietly pocketing a whopping €38 billion (US$43 billion) in excessive termination charges on fixed-to-mobile network calls over the past five years, taking advantage of a uniform lack of regulatory controls in the region (see Mobile Ops Win on Rates).

Termination charges -- the price mobile operators charge for connecting callers from rival networks -- have been under intense scrutiny recently, following high-profile efforts by U.K. regulators to slash them (see UK Probes Termination Charges).

A joint report from WIK Consult, Cerna, and the University of Warwick Business School is the first attempt, however, to elucidate the massive amounts of cash these charges are generating for Europe’s wireless carriers.

According to the report, wireless players in the U.K., France, and Germany alone have benefited from €19 billion ($22 billion) in fixed-to-mobile call charges, as the operators set termination rates “which greatly exceed estimates of actual termination costs.”

“There is no doubt mobile carriers have been charging above costs,” says Martin Cave, report author and professor at Warwick Business School. “This money then either goes towards subsidising handsets or is simply added profit for the carriers.”

Cave asserts that the majority of wireless carriers have been able to set excessive charges due to the apathetic nature of local authorities. “Where regulators have found a mobile operator to have significant market power, they have had the power to impose cost-based terminations under the 1998 regulatory arrangements, but have generally not done so.”

The professor is particularly concerned about the impact such inaction is having on the health of the fixed network market, claiming that the charges are distorting levels of competition between fixed-line carriers -- such as Colt Telecom Group plc (Nasdaq: COLT; London: CTM.L) and Cable & Wireless (NYSE: CWP) -- and Europe’s mobile carriers.

“The effect of all this is to injure fixed networks and their customers,” he comments. “In order to recover the excessive fixed-to- mobile charges set by the wireless carrier, fixed networks have been forced to set expensive tariffs in an effort to recover some of those costs. This is unfair to customers, because they are paying more for calls, and harmful to the network because call volumes will fall, affecting the bottom line. As a result, investment and competition in fixed networks has faltered in the past few years.”

Cave remains optimistic, however, that the Office of Telecommunications (Oftel)’s success in the U.K. last month will help kick other European regulatory bodies into action (see Carriers Lose Termination Fight). “Over the next 18 months we expect to see mobile termination rates become more heavily regulated and for pricing policies to become healthier. This would, in theory, even up the balance between the fixed and mobile sectors.”

— Justin Springham, Senior Editor, Europe, Unstrung

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