While consumers under each payment system may envy aspects of the other, there is deeply ingrained resistance to change.
One key difference between national mobile markets is which party pays for a mobile call. The USA, Canada and several Asian countries use the mobile party pays (MPP) system, in which mobile callers pay their network for originating the call, and called parties on mobile phones pay their network for receiving the call.
The rest of the world uses the calling party pays (CPP) system, in which the caller pays the entire cost of the call, and his or her network pays the receiving network for terminating the call. The question is: which system is better?
If we examine how the mobile network costs are recovered, under CPP the caller pays the entire cost of the call, but under MPP, the caller pays only the cost of originating the call. Turning to the called party, under CPP the called party does not pay any of the costs, while under MPP the called party must pay for receiving the call. This may result in significant differences between mobile usage and penetration levels, which we explore in turn below.
Mobile usage is primarily impacted by the price to the calling party of making a call. Since the calling party pays for the entire cost of the call under CPP, not surprisingly the cost of calling for the calling party is generally higher in CPP countries, and the usage is correspondingly lower. This is particularly true since operators can afford to offer large bundles of minutes in MPP countries, often including unlimited off-peak calls, charged at a flat monthly rate, because they do not have to pay other networks for terminating the calls. As a result, consumers, having paid the price of the bundle, effectively have no charge for making calls within the bundle or off-peak. The impact of this is demonstrated in Figure 1. The European operators exhibit higher calling costs per minute and lower usage, while the North American operators have lower calling costs per minute, and higher usage.
Figure 1: Revenue per minute versus average monthly use in selected European and North American countries (Source: company reports, Analysys, 2006)
On the other hand, while the price of an outgoing minute has a significant impact on usage, the price of an incoming minute has a corresponding impact on penetration. Specifically, under CPP it is affordable to purchase prepaid mobile that can primarily be used for free incoming calls, requiring little upfront financial commitment and allowing close control of costs. Indeed, looking at Exhibit 2, one sees that the USA and Canada (which both have MPP) have lower penetration than the European countries, and that much of the difference in penetration results from the higher levels of prepaid subscriptions evident in Europe.
Figure 2: SIMs per capita and prepaid/postpaid penetration in selected European and North American countries (Source: company reports, Analysys, 2006)
While consumers under each payment system may envy aspects of the other, there is deeply ingrained resistance to change. Customers in MPP countries would not be enthusiastic about increased calling rates under CPP. Similarly, customers in CPP countries are not likely to embrace the concept of paying for incoming calls, especially prepaid customers who could not benefit from the large bundles that are available to postpaid customers in MPP countries. Nonetheless, change may be afoot. Several European mobile operators have begun to offer unlimited calling bundles to their customers – while they are mainly restricted to on-net or fixed calls, some of them do allow unlimited calls to other networks during off-peak times. At the same time, fixed packages are beginning to move to flat-rate national bundles, in particular for VoIP services.
This results in two questions. Firstly, will competitive pressure resulting from unlimited bundles create a movement to reduce outgoing termination payments, to make the bundles more feasible? Secondly, will this in turn create pressure to recover the cost of receiving calls from the called party, which would effectively result in MPP? While this would increase mobile usage for postpaid customers, it may be difficult to overcome objections from prepaid customers who would not benefit from the bundles.
