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UK Mobile Rate Cut Includes 3G Costs

Michelle Donegan
LR Mobile News Analysis
Michelle Donegan
3/27/2007

U.K. regulator Ofcom set a European precedent today in its decision to cut mobile termination rates in the country. For the first time, and against the European Commission 's wishes, a national regulator has taken into account the high costs mobile operators paid for their 3G licenses, which in the U.K. totaled £22.5 billion (US$44 billion) in 2000.

In the face of strong objections from the European Commission, Ofcom went through with its decision to include 3G license costs in its cost analysis for determining the rate cuts for mobile termination.

Now, Germany's regulator is also considering whether to include these license costs in its analysis of the mobile termination market later this year.

"3G license costs should be taken into account in the countries where these were significant," says Eirini Zafeiratou, director of GSM Europe, the European interest group of the GSM Association (GSMA) . "It's only logical and fair to take these costs into account. We wish that other regulators also take this factor into account."

While the European Commission officially said it welcomed Ofcom's announcement, it will review this decision, because it is understood that a fundamental disagreement remains regarding how these costs were calculated.

"The European Commission can do absolutely nothing," says Zafeiratou.

The European Commission disagrees with the way in which Ofcom calculated the 3G license costs. The concern is that by including the 3G license costs from 2000 this will lead to an over-estimation of operators' costs and not enough reduction in mobile termination rates.

In response to the Commission's objections, Ofcom lowered its originally proposed rate from 5.3 pence per minute to 5.1 pence per minute.

In today's decision, Ofcom cut the rates that operators charge to terminate traffic on their 2G and 3G networks by 20 percent for T-Mobile (UK) and Orange UK , and by 10 percent for Vodafone Group plc (NYSE: VOD) and Telefónica Europe plc (O2) . The new call termination rate is set at 5.1 pence per minute and will apply for the next four years from April 1.

And for the first time, 3G-only operator Three UK will have a regulated termination rate of 5.9 pence per minute, which Ofcom estimates is a 45 percent cut on what the operator is currently charging.

"Enough calls are terminated on 3G networks to warrant 3's inclusion," says an Ofcom spokesman.

Altogether Ofcom estimates these cuts will result in an average annual reduction in wholesale termination charges of £400 million to £500 million ($787 million to $983 million) over four years. Ofcom expects the wholesale price cuts to be passed on to the consumer in lower mobile prices.

"Although we wouldn't expect such a good outcome in every other state, this is definitely supportive of a more optimistic stance on the mobile top line which has been such a drag recently," says the Dresdner Kleinwort analyst team in a research note.

The German Federal Network Agency may indeed pick up on Ofcom's first move to consider 3G license costs. "We want to initiate a dialogue with other regulators so that we decide in the same way," says a spokesman for the regulator.

— Michelle Donegan, European Editor, Unstrung

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