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Termination rates set to fall as Belgium leads the way

Ian Streule Partner, Consulting

On 3 February 2010, the Belgian regulator (the BIPT) announced a landmark decision to reduce wholesale mobile termination rates (the charges that operators levy to connect calls to their networks). The proposed reductions – to around one euro cent in 2013 for all three operators – are the first to be based on the European Commission’s (EC’s) recent recommendation on the treatment of mobile (and fixed) termination rates.1

Underpinning the BIPT’s proposal is a detailed cost model of the three existing mobile operators and a hypothetical efficient operator, built by Analysys Mason during 2008–2009. This cost model implements the costing method which the EC is expecting all European regulators to follow. In particular, the EC recommends that termination rates are set according to:

  • the economic costs that would be saved in the long run if the volume of wholesale termination traffic were removed from the network – as the last ‘increment’ of traffic
  • no mark-ups being applied for common overheads or intra-traffic common costs.

In essence, this means that mobile termination rates will comprise only those costs incurred directly from terminating calls on a network.

Figure 1: Calculating the cost of the wholesale termination increment [Source: Analysys Mason]

Figure 1: Calculating the cost of the wholesale termination increment
[Source: Analysys Mason]

The outcome of the EC’s new recommendation – when applied in Belgium – is a pure long-run incremental cost (LRIC)2 per minute that is significantly below all current European mobile termination rates. This is in contrast to existing termination rates, many of which use an average traffic incremental cost and include common cost mark-ups.

Belgium is heavily populated and has relatively limited mountainous regions by European standards, and its mobile networks cope with a high density of users without complex topographical coverage constraints. In sparsely populated and hard-to-cover countries, the mobile network cost function will be less sensitive to changes in traffic load arising from removal of the wholesale termination increment – i.e. will incur lower incremental costs in carrying incoming traffic from other networks. Therefore, in such countries, the EC’s recommended method of costing mobile termination is likely to result in costs per minute that are even lower than those recently introduced in Belgium.

There will, however, be a limit to how low costs go, because in today’s mobile networks:

  • deployments in major cities are always heavily traffic driven, meaning that a significant proportion of urban network costs can be avoided with the application of the wholesale termination traffic increment
  • GSM networks often carry the majority of voice traffic – and GSM networks are more traffic sensitive than the higher-capacity third-generation deployments.

It would require migration to a mobile technology with the ability to carry significantly higher traffic volumes for the costs of a mobile network to be relatively insensitive to the voice traffic load: LTE could bring this about in the future if the potential capacity increase results in voice traffic becoming a negligible driver of cost.

Putting the calculations aside, what will be the outcome? The largest effect of the BIPT’s proposed regulation will be lower revenues for mobile operators from fixed networks. Will this translate directly into lower fixed-to-mobile call prices? This depends on market reactions and supplementary regulation that might apply. In Belgium, pass-through obligations on the fixed incumbent should enable these lower prices.

The proposed reduction in rates may also increase competition. Small operators such as BASE in Belgium will face lower off-net mobile-to-mobile charges to counterbalance their reduced fixed-to-mobile revenues, while other mobile operators may find it harder to compete in a national communications market with reduced fixed-to-mobile revenues.

Since the BIPT’s announcement, UK regulator Ofcom has also announced proposals to reduce mobile termination rates, on a similar LRIC basis, to 0.5p (real terms) per minute by 2015: other national regulators are likely to make announcements through the course of this year.

But what will be the effect of this recommended costing approach in fixed networks? In next-generation core networks, it is a different picture, as the avoidable cost of the 100kbit/s voice-over-IP streams in the presence of significant DSL and other data volumes is very small. The network is sized to carry hundreds of Gbit/s of peak load, and voice termination is only a tiny percentage of this load. This means that regulators seeking the LRIC of voice termination in a fixed network will not find large incremental costs in the area of traffic conveyance. Instead, the LRIC of fixed termination traffic will be due to VoIP platforms, IP call servers and other types of dedicated voice equipment which are located at the periphery of the NGN.

Analysys Mason has been working on fixed and/or mobile regulatory costing – including pure incremental costs – for regulatory bodies in seven European nations.

1 Commission Recommendation of 7.5.2009 on the Regulatory Treatment of Fixed and Mobile Termination Rates in the EU, 7 May 2009.

2 LRIC is the cost caused by the provision of a defined increment of output, assuming that costs can be varied and that some level of output is already produced.